Credit cards are more than just a convenient payment tool — They are a short term loan facility provided by the banks. If used properly, credit card your buddy. If used carelessly it may damage your financial health, credit score, affect your tax situation, and even invite scrutiny from tax authorities.
In this post, we’ll cover:
- How to use credit cards responsibly
- The link between credit cards and your CIBIL score
- Tax implications of credit card usage
- Sections 148 & 115BBE of the Income Tax Act and their relevance
- Key dos and don’ts when lending your card to others
Let’s dive in.
1. How to Use a Credit Card the Right Way
A credit card is essentially a short-term loan from your bank. If used wisely, it can help you build your credit history and earn rewards. If misused, it can trap you in debt and damage your creditworthiness.
Smart Usage Tips:
- Choose the right card – Pick one based on your needs (cashback, travel, low-interest).
- Understand your credit limit – Never exceed its limits and try to restrict it to 70% of its limits to avoid penalties and reduction in CIBIL score.
- Track your spending – Use mobile apps or online banking to monitor purchases in real time.
- Pay your bills on time – Even one late payment can hurt your credit score and attracts higher rate of interest. The interest shall be levied from the date of its usage and not from the statement date.
- Pay more than the minimum – This reduces interest costs and debt faster. People tend to pay minimum amount but it is always suggestible that, give first priority to credit card payment and pay as much amount as possible. This will reduce your interest cost and you can clear the dues and get out of the burden at the earliest.
- Keep credit utilization low – Use less than 30% of your available limit.
- Use rewards wisely – Don’t overspend just for points.
- Protect your card details – Watch out for fraud and phishing attempts.
Pro Tip: If you travel often, look for cards with travel insurance, lounge access, and flight discounts.
2. Credit Card Impact on Your CIBIL Score
Your CIBIL score (ranging from 300 to 900) is a key factor in getting loans approved. Here’s how credit card usage affects it:
Positive Effects:
- On-time payments (35% weightage) – Builds trust with lenders.
- Low credit utilization (30%) – Signals financial discipline.
- Long credit history (15%) – Shows consistent reliability.
- Healthy credit mix (10%) – Having both loans and credit cards improves your profile.
Negative Effects:
- Late payments – Even a 30-day delay can hurt your score.
- High utilization – Spending close to your limit regularly is risky.
- Multiple new applications – Each one causes a hard inquiry, lowering your score temporarily.
- Closing old cards – Reduces your credit history and available limit.
Quick Tip: Keep utilization under 30% and pay before the due date — even better, pay in full.
3. Tax Implications of Credit Card Usage
Most personal credit card expenses don’t have direct tax benefits. But for business users, there are opportunities — and for everyone, there are rules to watch out for.
For Business Owners:
- Interest on business expenses paid via credit card can be deductible.
- GST input tax credit (ITC) can be claimed for eligible purchases if you have proper invoices.
For Everyone:
- Rewards & cashback – Generally not taxable, but large high-value redemptions may have gift tax implications.
- GST on fees & interest – GST applies on annual fees, late payment charges, and certain transactions.
Watch Out For:
- Large unexplained spends may trigger questions from the Income Tax Department.
- Transactions over ₹10 lakh in a year are reported to authorities under anti-money laundering rules.
4. When Credit Card Spending Attracts Tax Notices
Two sections of the Income Tax Act are important here:
Section 148 – Reopening of Assessment
The tax department can reopen your assessment if:
- You spend far exceed your declared income – This will trigger to explain your source of income to these spends under section 69. The rotation of credit card amounts, usually income tax department don’t accept. You have to prove the usage of credit card, proof that the swiped amount received in your bank account and the same is used for payment of credit card dues. The entire transaction should have a direct link. In many cases people get cash for swiping the card, deposit the same in their bank account to pay the credit card dues. This will trigger additional problem for source of cash and swiping card and get cash is not a valid proof.
- High-value purchases are unexplained – This will trigger to explain your source of income to high-value purchase under section 69. It is suggestible to purchase high value items through loans than using of credit cards.
- Others are paying your card bills without disclosure as gifts/loans – This generally happens when your credit cards are used by your friends or relatives and they pay before due date. Which is risky for you and your friends or relatives also. In these cases you both are under scrutiny to explain both of yours relation, source of income to justify the usage as out of own sources of funds
Process:
- You receive a notice.
- You must file a revised return and provide proof of income sources.
- Authorities verify bank/credit card statements.
- Authorities verify the sources of income and genuine of persons who used your cards/make payments
- They accept or re-assess your income and levy taxes, interest and penalties which may be upto 200% of the tax amount if needed.
Section 115BBE – Unexplained Income
If you can’t explain the source of credit card repayments or purchases:
- The income can be taxed at 60% + surcharge + cess + Interest + Penalties.
- This often applies in cases involving hidden or unreported earnings.
5. Lending Your Credit Card — Think Twice
It’s tempting to let a friend or family member use your card, but it can backfire.
Risks:
- You are legally liable for all charges.
- Late payments hurt your credit score.
- Misuse or fraud can cause financial and relationship damage.
- High usage can lower your available limit and increase utilization.
Safer Alternatives:
- Prepaid cards
- Add-on cards with limits
- Virtual cards for specific transactions
6. Key Takeaways
✅ Do:
- Pay on time, in full
- Keep utilization below 30%
- Use for planned expenses you can repay
- Keep records for large purchases
- Avoid using for larger purchases instead use No cost EMI loans
❌ Avoid:
- Lending your card without safeguards
- Applying for too many cards at once
- Ignoring your monthly statements
- Relying on credit for everyday living expenses
Final Word
Credit cards can be powerful tools for building credit, earning rewards, and managing cash flow — if used wisely. But careless usage can harm your credit score, create tax headaches, and even lead to legal trouble.
Stay disciplined, keep good records, and treat your credit card as a financial tool — not free money.
If you need assistance in Income tax notices, tax planning and tips for usage of credit cards you can reach us at support@bqadvisors.in | +91 9704866655
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Pramodini T
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