As Dhanteras kicks off the Diwali festivities, the allure of credit card shopping beckons many. However, navigating the world of taxes on credit card payments can be perplexing. Here’s a breakdown to help you understand how tax is calculated on your Diwali purchases made with a credit card.
Purchases made through a credit card attract Goods and Services Tax (GST). GST rates vary across different items, ranging from 5 percent to 28 percent or even higher for luxury goods. To calculate the tax amount, multiply the GST rate by the cost price of the product and divide the result by 100.
For example, if you buy a product costing Rs. 5000 with a GST of 10%, the tax amount would be calculated as “(10 × 5000) ÷ 100,” equaling Rs. 500. Hence, on a product worth Rs. 5000 with a 10% GST, you’d be paying Rs. 500 in taxes.
While credit card shopping comes with perks like cashback or rewards, it’s essential to note that taxes apply to these benefits as well. Cashback and rewards are considered forms of income, necessitating their inclusion in your annual income tax return. The tax amount varies depending on the nature and value of the rewards.
Moreover, when a credit card bill remains unpaid or a balance is carried forward, interest is charged. While interest itself is not taxed, high-interest rates can lead to increased expenses. Understanding the Monthly Percentage Rate (MPR) of your card is crucial in managing these expenses.
