How Aggressive Reward Hunting Can Attract Income-Tax Notices

Credit cards, if used properly, can mean a lot of rewards. However, if you are earning disproportionate rewards, you may come under income tax scrutiny.

How Credit Card Rewards May Trigger Income Tax Notices 

Income-tax scrutiny is most likely where credit card rewards move beyond routine personal use and begin to resemble income.

“Large and frequent cashbacks credited to bank accounts, reward points converted into cash or vouchers and then monetized, referral or sign-up bonuses received repeatedly, and rewards linked to business or professional spending are all transactions that can attract the attention of the Income Tax Department. At that stage, rewards are no longer seen as mere discounts but as taxable receipts,” says Raheel Patel, partner, Gandhi Law Associates.

What typically triggers red flags is a pattern of use, not a single transaction. Repeated high-value redemptions, use of multiple cards to maximize bonuses, routing substantial business expenditure through personal cards, or a clear mismatch between declared income and spending behavior reflected in card data are common triggers.

“With increasing information sharing between banks, card issuers, and tax authorities, such patterns are now easier to identify,” says Patel. 

“Thus, unusually high spending or expenses that do not match a person’s declared income can raise eyebrows and red flags with the Income Tax Department. Such gaps may lead to scrutiny notices or reassessment proceedings,” says Mrugakshi Joshi, advocate, D.M. Harish & Co.

Unusually high spending or expenses that do not match a person’s declared income can raise eyebrows and red flags with the Income Tax Department. Such gaps may lead to scrutiny notices or reassessment proceedings.

How To Avoid Such Notices

The practical way to avoid notices is to keep reward usage within personal consumption limits. Rewards should not be regularly converted into cash or traded. Any rewards arising from business or professional spending should be properly accounted for.

“Where rewards are significant or fall in a grey area, voluntary disclosure and proper records showing them as discounts or loyalty benefits can substantially reduce risk. When used in a routine and transparent manner, credit card rewards generally do not raise tax issues,” says Patel.

“It is advisable to be cautious against such aggressive usage of credit cards (only for the purpose of earning reward points), without real spending, as this may create compliance issues,” says Joshi.