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Tata Capital > Blog > Generic > Are credit card fees tax-deductible in India?

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Are credit card fees tax-deductible in India?

Are credit card fees tax-deductible in India?

A credit card is an essential financial tool for making instant, hassle-free payments. It also offers a convenient credit facility for any emergency use. A credit card makes life easy. There is no need to carry cash anywhere. It is convenient, with no need for a smartphone or internet connection. The credit facility also provides a financial cushion for any significant expense. As long as card payment is made on time, the credit line is money given for free, without any interest charged! While many digital payment tools are available today, a credit card scores above them.

Credit cards are akin to short-term personal loans available without paperwork. Credit card usage also earns reward points and monetary benefits. Card payments can be made as per the borrower’s fund requirements. EMI facility is also offered by many card-issuing companies to pay the card dues in installments.

A credit card is an excellent tool for business owners to fund their short-term funding requirements. While personal and business loans are available, a credit card limit is an add-on facility. A new business or startup may not have a credit score or considerable profits in the initial years. A credit card is a quick way to meet immediate day-to-day business needs.

Apart from all the above benefits, there is a lesser-known benefit that a credit card offers. It is nothing but tax deductions. Every taxpayer must know the tax benefits they can avail themselves of. Tax-deductible expenses reduce a taxpayer’s tax liability and add money to the pocket. Credit card fees are a tax-deductible expense.

Which credit card fees are tax-deductible for Indian businesses?

There are different types of fees levied on credit cards:

  • Annual fee

An annual fee is a recurring fee for card issuance and usage. Some card issuers waive the yearly fee for specific customer segments.

  • Interest charges

Credit cards offer free credit for a certain number of days. If payment is not made within the free credit period, interest must be paid on the credit amount used. The interest rate varies from bank to bank.

  • Balance transfer fee

Card companies allow users to transfer any balance on their previous credit card to a new one. This balance transfer attracts a processing fee.

  • Late payment charges

Every time a payment is made beyond the due date, a late payment fee is charged on the card.

  • Cash advance charges

Any cash withdrawal on a credit card attracts a fee.

  • Overseas transaction charges

Some card issuers charge a fee for any foreign currency transaction on credit cards.

Who can claim tax deductions on credit card fees in India?

Credit card fees on cards for personal use are not tax deductible. Only businesses can claim tax deductions for credit card charges. The user must substantiate that the credit card was used for business purposes. The expense needs to be validated with proper proof. Any fee for business transactions is then deducted from business tax liability. The annual fee for such a card is also tax deductible.

Few points to remember for claiming tax-deductible card benefits:

  • It is vital to keep personal expenses and business expenses separate. A personal expense paid on a business credit card cannot be claimed for deduction. Therefore, having different credit cards for personal and business use is advisable. It makes accounting and segregation of tax-deductible expenses easier. It is also advisable to make payments from a business account to keep transactions strictly for business purposes.
  • If a business owner uses a business credit card for personal use, the expense cannot be claimed for tax benefit. Even such a card’s annual fee tax deduction must be validated. Hence, clear segregation of cards, transactions, and payments is critical.
  • A user should not claim deductions for a card used largely for personal and occasional business expenses.
  • A business card expense deduction should not be claimed in a personal tax return.
  • An expense on a business card is not directly related to business. All tax-deductible claims need to be validated.
  • Some businesses use credit card machines to accept payments from their customers. Merchants pay a fee to the card networks, e.g. Visa or Mastercard. They also pay a fee per transaction to the card company for payment via their credit card. All these charges and processing fees can be filed as business expenses and claimed as tax deductible in tax returns.

Tax on credit card transactions in India: What you need to know?

In India, tax on credit card transactions applies to the charges levied by banks and card issuers, not to the purchase value itself. One of the first types of taxes is GST. The seller charges GST on the sale price when you buy goods or services using a credit card.

In addition, banks charge GST at 18% on fees related to credit cards. These include annual fees, joining fees, interest on outstanding amounts, late payment charges, and cash withdrawal fees. It is possible to claim deductions on these charges if the credit card is used for making business-related transactions. However, you cannot claim tax deductions on personal credit card expenses.

It is important to maintain clear records, such as credit card statements and invoices, to track charges and the taxes you’ve paid. Understanding these taxes helps you manage costs and avoid surprises.

How to maximize credit card tax deductions for businesses?

To maximize credit card tax deductions, businesses should use a separate credit card for business expenses. This helps clearly distinguish business costs from personal spending. You should properly record in the accounts all eligible expenses paid with a credit card. These include expenses on travel, office supplies, and utilities.

Businesses should also keep credit card statements, invoices, and payment receipts as proof. Interest, annual fees, and service charges on business-related credit cards may be claimed as deductions if they are directly linked to business activities. Late fee charges are not tax-deductible. Thus, you must make credit card payments on time. Make sure you review your statements regularly to ensure compliance. A tax professional can also help maximize allowable deductions.

Types of credit card charges: Deductible vs. non-deductible expenses

Credit card charges can be divided into deductible and non-deductible expenses, depending on their purpose.

  • All payments made for business or professional expenses are deductible charges. They may include annual fees, joining fees, interest, and service charges if the credit card is used only for business purposes. GST paid on these charges can also be claimed as a business expense.
  • Non-deductible expenses include charges related to personal spending, such as shopping, dining, or entertainment. Late payment fees, penalties, and interest on unpaid personal expenses are also not allowed as tax deductions.

Mixing personal and business expenses on the same card can make it difficult to claim deductions. Using a separate business credit card and keeping proper records helps ensure correct tax treatment.

Documents required for claiming credit card tax deductions

The documents you require for claiming credit card tax deductions:

  • Bank payment receipts showing settlement of credit card dues
  • Invoices and bills for expenses paid using the credit card
  • Credit card statements showing business-related transactions clearly
  • Proof that the expenses are related to business or professional activities
  • Accounting records reflecting credit card expenses correctly
  • GST invoices, if GST input credit or expense claims are involved

Common mistakes to avoid when claiming credit card tax deductions

Once you’ve understood the answer to ‘are credit card fees tax-deductible’ in India, it is essential to learn about the common mistakes to avoid while claiming tax on credit card transactions. These are:

  • Using the same credit card for both personal and business expenses
  • Failing to provide credit card statements and proper invoices
  • Claiming deductions for late payment fees or penalties
  • Claiming personal expenses as business deductions
  • Not matching expenses with actual business use
  • Ignoring GST treatment on credit card charges

Conclusion

To conclude, credit cards are convenient and safe for making payments. Business owners, sole proprietors, partnership firms, and companies can claim credit card fees as business-related expenses. Credit cards provide not only instant free credit but also tax deductible benefits. It makes credit cards an attractive payment and credit option. Keeping business and personal expenses is easy through separate credit cards. Banks and Financial Services companies offer different types of credit cards. Tata Capital offers a wide range of credit cards to meet discerning needs. Whether it is quick money for personal or business expenses, Tata Capital has a bank of card offerings.

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FAQs

Can you claim tax deductions on all credit card fees in India?

No, you cannot claim tax deductions on personal credit card fees. Only credit card fees related to business or professional use may be deductible.

Who is eligible to claim a tax deduction on credit card fees in India?

Freelancers, self-employed individuals, and businesses are eligible to claim deductions for tax on credit card transactions. However, the credit card must be used for business or professional expenses.

Is credit card interest tax-deductible under Indian law?

Yes, you can claim tax deductions on credit card interest if the expense is for business or professional purposes. The transaction must also be recorded properly in the accounts.

What tax is applicable on credit card transactions in India?

Card companies apply 18% GST on credit card fees, interest, and charges.

What documents are required to claim a credit card fee deduction in India?

You need credit card statements, proof of business use, invoices, and proper accounting records to claim a credit card fee deduction in India. These documents help to support the deduction claim during tax filing.

Are late payment charges or personal card expenses tax-deductible?

No. Under the Indian income tax laws, late payment charges or personal card expenses aren’t tax-deductible.

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