The “Free Points” Trap

In the quest to earn more reward points than what your income would earn you, this is how it starts:

You watch that influencer on YouTube who comes to a podcast and discloses a strategy to fund the entire travel journey for free.

Note that I’m referring to majority of Indians who do not earn enough to cover their entire hotel expenses (assuming 5-star property as what is mostly quoted) – let’s assume for 2 rooms (you and your spouse) and your in-laws, or let’s say just the two of you for now.

Let me come to that a little later.

To explain it to you, Imagine the Dominos near your college canteen brings up a new promotional offer on a new Mexican pizza: for every pizza you purchase, you get a novelty gold coin on your Dominos App. If you collect 500 of such gold coins, you get a free iPhone.

You come up with a plan. You tell your classmates, “Hi Friends, you give me your cash and I will buy you a pizza for you through my credit card on the Dominos App.”

In 6 months, you successfully accumulated 500 gold coins to unlock a new iPhone without spending your own money, while your friends get their respective pizzas.

But in the real world of Credit Card and Income Tax law in India, this genius plan can lead to serious trouble with the tax department.

The “Big Brother” is watching (The AIS)

You may think, “Who cares if I buy an iPhone from my cousin or a TV for my neighbour?”

The Income Tax department cares, They have a super-computer system (kind of like an AI spy). It tracks everything.

Every time you pay your credit card bill, if the total amount goes over a certain limit (usually ₹10 lakhs in a year), your bank automatically sends a “Secret Report” to the Income Tax Department. This report is called the SFT (Statement of Financial Transactions).

This shows up in your AIS (Annual Information System). Think of the AIS as your “Financial Report Card”. The government can see exactly how much you spent.

The “Pocket Money” math problem

Here is the nuance (the tricky part) that gets people in trouble.

Let’s say you have a job and you earn ₹20 lakh a year. That is your “declared income”. But, because, you are buying things for all your friends to get extra reward points, your credit card bill for the year is ₹30 lakh.

The Income Tax computer looks at this and gets confused:

· Income: ₹20 lakh

· Expenditure: ₹30 lakh

The computer asks: “Where did the extra ₹10 lakh come from?”

To the government, it looks like you are earning secret money (Black Money) and you aren’t paying tax on. They don’t know your friends paid you back in cash or UPI. They just see you spending money you shouldn’t have.

The Dangerous Rule: Section 69C

If the computer flags you, you might get a legal notice asking you to explain. This falls under a scary law called Section 69C of the Income Tax Act.

This section is basically the “unexplained Expenditure” rule. It says, “If you spent money, but you can’t prove exactly where you got it from, we will assume it is illegal income.”

You might say, “But I can explain! My friend Manish send me the money on UPI!”

Here is what the explanation often fails:

· The Proof Problem: Do you have a written contract with Manish? Do you have a bill for every single coffee or flight ticket you bought for him? If you did this 50 times, do you have 50 proofs?

· The Business Trap: If you do this too much, the tax officer might say, “You’re helping a friend; you are running a business of buying things for people.” If you are running a business, then you need to pay different kind of tax which you probably didn’t pay.

The Punishment: The “Super Fine”

If you cannot convince the tax officer, they won’t just ask you to pay normal tax. They will hit you with Section 115BBE.

This is the “Super Fine”.

· Normal tax: usually 10% to 30%

· The Section 115BBE tax is 60% flat tax rate

· Plus surcharge: they add another 25% on top of the tax

· Plus Cess: Another 4%

The total tax damage: approx. 78%.

Example: if you spent ₹10 lakh for friends and can’t explain it perfectly: the government will take roughly ₹7.8 lakhs from you as a fine. You are left with almost nothing, and you still have to pay the credit card bills.

Final Thoughts

· Don’t be a mule: don’t carry other people’s spending on your back

· Reward Points aren’t free money: they are tiny bonuses (majority of the times, may be 2%, 3% or 4%). The risk of losing 78% of your money in fines is not worth earning 3% in points.

· Keep it personal: Use your credit card to buy only for things you buy with your earning capacity.