Pune, 10th November 2023: Dhanteras has initiated the onset of Diwali. On this occasion, if you are planning to do shopping with a credit card, then you should definitely know how tax is calculated on the payments made through a credit card.
Purchasing using a credit card levies certain taxes on the goods you buy. The tax is in the form of Goods and Services Tax (GST). GST rates differ from item to item. Luxury goods can possess a GST rate ranging from 5 percent to 28 percent or even more. In order to calculate the tax amount out of a given rate, you need to multiply the GST rate with the cost price of the product, and divide the whole by 100.
For instance, if you purchase a product costing Rs. 5000, and the applicable GST on the same is 10%, then the amount of tax you will be paying is calculated as “(10 × 5000) ÷ 100”, which equals to Rs. 500. Thus, you will be paying a tax amount of Rs. 500 on the product costing Rs. 5000 with a 10% GST levied on it.
Shopping with a credit card also gives the buyers the benefits of cashback or reward. Nevertheless, tax has to be paid on these benefits as well. This is because the received cashback or reward is considered as a form of income. The same has to be reported when you file your annual income tax return. Again, tax is calculated based on the rewards. This means the tax amount can differ from reward to reward.
Also, when a bill on the credit card is not paid or some amount is saved for other expenses, then interest is charged on it. Tax is not levied on the interest but if the interest is high, it can lead to increased expenses.
Therefore, you must also understand the Monthly Percentage Rate (MPR) of your card.