Credit Card Mistakes Which May Lead You to Face Income Tax Audit

As we all know, a credit card is a very useful financial tool if it is used wisely and with caution. This financial instrument not only enables a user to pay the latter but also offers additional benefits like discounts, cashback, and a lot more. 

Another important aspect of using a credit card is that it helps increase one’s overall credit score. All you need to do is pay all your dues on time with full settlement. The same practice helps to increase the credit score, and eventually, you will be easily qualified to avail of a personal loan with a lucrative rate of interest. 

Though it is very useful, frequent usage of credit cards for high-value transactions may drive the attention of the IT Department. Of course, making these transactions are seamlessly lawful if you are accurately filling the IT returns and paying due income tax. 

The IT department will make sure that people making high net-worth transactions using credit cards are reporting the same in their ITR and paying them regularly without any tax evasion. In this post, we will discuss different types of credit card transactions; every taxpayer should be careful. 

• Hefty Expenditure Made on Foreign Travel

Making hefty expenditures raises red flags, which indicate significant wealth. The disparity might be a cause of concern for the authorities. If you spend more than 2 lakh INR on foreign travel in a financial year and your annual income is only 5 lakhs, consider it a matter of concern. The IT department will raise questions about the real source of the funds. 

• Big Investments in Mutual Funds, Shared or Bonds

Investing amounts of more than 10 lakh in a fiscal year in different types of financial instruments, such as shared, bonds, mutual funds, etc., can be considered a serious concern to the IT department. Again, the reason is simple: such large investments do not align with the declared income and eventually will trigger scrutiny from the governing authorities of the Income Tax department. 

• Using Multiple Credit Cards to Circumvent Reporting Limits

Some people try to split high spending across several cards to avoid crossing the per-card reporting threshold. However, if the overall spending still far exceeds your income level, tax authorities may still pick up on the discrepancy. So, even if you have multiple credit cards, do not split the expenses and make sure to report everything properly. 

• Buying property Over 30 Lakh

If you are buying property over 30 lahks and somehow you have used your credit card, make sure to get under the scrutiny of the Income Tax department. It is in the public domain that all purchased properties are reported to the Income Tax Department under real estate transaction rules. Professionals from the finance DSA app also suggest making investments thoughtfully and staying protected from any legal implications. 

• Getting Loans and Repaying Using Credit Cards

Repaying loans or any other debt using a credit card through a balance transfer feature, which is tantamount to a sum of 5 lakh or more, will bring you under the scanner of the investigating authorities.

Repaying loans using credit cards clearly indicates tax evasion or any form of undisclosed income. It is so as it may suggest that you are utilizing the money without declaring the actual sources. A reliable loan agent always recommends paying off all your due loans through cash or bank transfer, but not using credit cards. 

• Donations or Charitable Contributions of Higher Amounts

If you donate 2 lakh or more in a financial year, the chances are high that the financial officials may revise your file. Hefty donations or charitable contributions made trigger the finance governing department to check whether the contributions made are genuine and are property reported. Many people tend to use their black money to make charitable contributions and make them white. 

Tips to Avoid Income Tax Audit

• Keep your transactions transparent

Make sure to use bank transfers or digital payments to inform about all crucial purchases as well as investments. 

• Don’t Forget to Disclose All Your Income

All the income you disclose or declare must align with your overall spending and investment patterns throughout the year. 

• Get in Touch with a Professional Tax Expert

To stay protected from any form of income tax notice, contact a professional tax expert, such as a Chartered Accountant. This will ensure that you are adhering to the compliance standards. 

• Maintain Records

Get hold of all the bills, receipts, and documents for all sorts of investments and expenses. This will help you make a positive decision on the final assessment. 

If you are mindful of the transactions and maintain financial transparency, the chances are higher that you will not suffer any legal implications from the IT department. Also, you can avoid the mistakes and eventually will not get under the scrutiny of the Income Tax department.