Return filing for AY 2026-27 (income of FY 2025-26) is governed entirely by the Income-tax Act, 1961 — the Income Tax Act, 2025 applies only from Tax Year 2026-27 onward and has no bearing on this filing season. Under Section 285BA read with Rule 114E (SFT-005), each bank or card issuer must report to the department any credit card bill payment exceeding ₹10,00,000 in a financial year through non-cash modes, or ₹1,00,000 in cash — but this aggregation is done by each reporting bank separately, across the cards that bank itself has issued to the person, not across other banks' data. Spend spread thinly across several banks' cards, each below the threshold, may therefore not trigger a standalone SFT-005 entry at all — though it remains fully explainable, and discoverable, the moment any inquiry is opened for any other reason. This data lands directly in the taxpayer's Annual Information Statement (AIS). A client who declares taxable income of ₹5,00,000 for AY 2026-27 while running ₹25,00,000 through credit cards — including the now-common practice of swiping for others to earn reward points and cashback — presents exactly the kind of mismatch this reporting architecture exists to catch. Where the spend cannot be satisfactorily explained, the exposure is not a modest query: it is an addition as unexplained expenditure under Section 69C, taxed at a flat 78% under Section 115BBE, with a further 10% penalty under Section 271AAC — and, above a threshold, prosecution exposure under Section 276C.
1. Introduction
A pattern that has become routine in the last few years: someone with a premium credit card offers to "swipe" a friend's, relative's, or vendor's bill — a wedding hall booking, a family member's flight tickets, a shopkeeper's bulk purchase — purely to earn the reward points, air-miles, or cashback the card offers, on the understanding that the actual beneficiary will settle the amount separately, often in cash or informally. The person swiping rarely thinks of this as anything more than a smart way to earn rewards. But every rupee of that spend sits on their own PAN, in their own AIS, against their own declared income — regardless of whose money actually paid the bill.
This note is built around a live example from practice: a client filing the return for AY 2026-27 with a taxable income of ₹5,00,000, against credit card spending of roughly ₹25,00,000 during the same year, a meaningful part of it arising from exactly this kind of pass-through swiping. The gap between the two figures is precisely what the department's third-party reporting architecture is designed to surface, and precisely the kind of case where a well-documented explanation is the difference between a closed AIS query and an addition under Section 69C.
2. Which Law Governs This Return — a Point Practitioners Must Get Right
Because the Income Tax Act, 2025 has been in the news through 2026, it is worth being precise: the new Act applies only to income earned from 1 April 2026 onward (Tax Year 2026-27). Income earned during FY 2025-26 is assessed in AY 2026-27 and remains governed entirely by the Income-tax Act, 1961 — including its assessment, reassessment, penalty and prosecution provisions. A client filing for AY 2026-27 today is filing under the old Act, with its old section numbers: Section 68/69/69A/69B/69C, Section 115BBE, Section 271AAC, Section 143, Section 147/148, and Section 276C. This note uses those section numbers throughout, deliberately, because they are the ones that actually apply to this filing.
3. How the Department Finds Out — Rule 114E, SFT-005 and the AIS
Every bank and credit card issuer is a "reporting entity" under Section 285BA of the Income-tax Act, 1961, and is statutorily required to file a Statement of Financial Transactions (SFT) in Form 61A, under Rule 114E of the Income-tax Rules, 1962. Credit card payments are captured under the code commonly referred to as SFT-005.
A banking company or co-operative bank, or any other company or institution issuing credit cards, must report payments made by any person against one or more credit cards issued to that person, aggregating to ten lakh rupees or more in a financial year where payment is made by any mode other than cash, or one lakh rupees or more where any part of the payment is made in cash.
Two features of this rule matter in practice, and the first is one practitioners need to state precisely rather than loosely. Rule 114E requires "the reporting person" — i.e., each individual bank or card issuer — to aggregate transactions "recorded in respect of that person" before checking the threshold. A bank can only aggregate what it itself has recorded: the cards it has issued to the cardholder. It has no visibility into what the same person is spending on a different bank's card, and the rule does not require it to find out. This means the ₹10,00,000 threshold is checked bank-by-bank, not across banks — a person with five cards from five different banks, each carrying ₹9,00,000 of spend (₹45,00,000 in total), crosses no individual bank's threshold, and none of the five is obliged to file an SFT-005 entry at all. Section 9 of this note examines exactly this scenario and why it is not the safe harbour it appears to be.
Second, this reporting is entirely mechanical: the bank does not know, and does not ask, whose money actually funded the spend. It reports the cardholder's name and PAN against the total, and the burden of context falls entirely on the cardholder at the return-filing or assessment stage.
| Trigger | Reporting Threshold (Per Bank, Per Year) |
|---|---|
| Credit card bill paid by cheque, net-banking, UPI, or any non-cash mode | ₹10,00,000 or more, with that one bank |
| Credit card bill paid in cash (any part of it) | ₹1,00,000 or more, with that one bank |
| Where reported, once triggered | AIS — Part B: TDS/TCS & SFT Information, and pre-filled into Form 26AS |
| Aggregation across different banks | Not performed by the SFT mechanism itself — see Section 9 |
4. From an AIS Entry to a Notice — the Escalation Ladder
A card-spend entry in AIS does not, by itself, mean a notice is coming. It becomes a problem only when it is read against the return actually filed, and the gap is large enough to be flagged by the department's risk-based selection filters. In practice, the escalation generally follows this sequence:
- e-Verification / Compliance Portal query — a non-statutory, portal-based prompt asking the taxpayer to confirm, explain, or disagree with a specific AIS entry, typically the first and mildest point of contact.
- Section 133(6) notice — a formal call for information, which can be issued even before a return is picked up for scrutiny, asking the taxpayer (or, separately, the bank) to furnish details of the transaction.
- Section 142(1) notice — issued once a return is under inquiry, requiring the taxpayer to produce accounts, evidence, or a written explanation of specific items, including credit card spend.
- Section 143(2) scrutiny — full scrutiny assessment, where the AIS mismatch becomes one of several issues examined, and where an unexplained portion can be formally added to income.
- Section 147/148 reassessment — if the mismatch is discovered after the original assessment is complete (or after the return goes unpicked for scrutiny), and the Assessing Officer has reason to believe income has escaped assessment.
A client who was never actually enriched by the swipe — who genuinely spent someone else's money and was reimbursed — is not automatically safe. The addition under Section 69C is not about who benefited; it is about whether the person in whose name the expenditure appears can offer a satisfactory explanation of its source, supported by evidence. "I was just helping a friend for the reward points" is an explanation the client believes; it is not, by itself, evidence the Assessing Officer is bound to accept.
5. Section 69C — Unexplained Expenditure, the Substantive Provision
Where, in any financial year, an assessee has incurred any expenditure and offers no explanation about the source of such expenditure, or the explanation offered is not, in the opinion of the Assessing Officer, satisfactory, the amount of such expenditure, or part thereof, may be deemed to be the income of the assessee for that financial year. Such expenditure shall not be allowed as a deduction under any head of income.
Credit card spending is squarely "expenditure" for this purpose. The provision places the burden on the taxpayer, not the department, to explain the source — and the standard is "satisfactory," in the opinion of the Assessing Officer, which in practice means documented, verifiable, and consistent with the taxpayer's own disclosed financial position, not merely a plausible-sounding story.
- Spend matched against disclosed salary, business, or professional income already reflected in the return, with a clear bank trail from income to card payment
- Spend funded from opening cash-in-hand or bank balances that were themselves disclosed in an earlier year's return or balance sheet
- Spend funded by a documented loan or gift, ideally received through banking channels, with the lender/donor identifiable and their own capacity to lend/gift demonstrable
- Genuine reimbursements for spend incurred on behalf of another person — but only where the reimbursement itself is traceable (bank transfer, not cash) and can be tied to a specific transaction, not asserted in general terms
- Business expenditure genuinely incurred on behalf of an employer or client, with a reimbursement policy and paper trail to match
6. Why "Swiping for Someone Else" Is Riskier Than Clients Assume
The reward-point economy has made third-party swiping common enough that many clients do not register it as a tax issue at all. It is worth separating the layers of risk involved, because they are distinct and often not all considered together.
First, the spend appears entirely against the cardholder's own PAN in AIS. There is no field in the SFT data that records "swiped on behalf of another person" — that context exists only in the cardholder's own records, if they were kept at all.
Second, if the reimbursement was received in cash, or informally through an unrecorded transfer, the cardholder now has two unexplained items rather than one: the outgoing card spend, and — if the reimbursement itself is later deposited or otherwise surfaces — an unexplained credit that can separately attract Section 68 or Section 69A. A cash-based reimbursement arrangement, ironically, is the least protective way to structure exactly this kind of accommodation.
Third, where the arrangement is habitual and involves converting a third party's cash into card spend at scale — rather than an occasional favour for a family member — it starts to resemble an accommodation arrangement for someone else's unaccounted money, which carries its own, separate exposure for the cardholder as the facilitator, independent of whatever the actual source of funds turns out to be.
None of this means occasional swiping for a family member is inherently dangerous. It means the protection lies entirely in documentation: a bank-to-bank reimbursement with a clear narration, ideally close in time to the card payment, and — for larger or recurring amounts — a simple written acknowledgment of the arrangement. A verbal understanding that "he'll pay me back" leaves no trail an Assessing Officer is obliged to believe.
| Sl. | Pattern | Section 69C Exposure |
|---|---|---|
| 1 | Personal/business spend fully within disclosed income, paid from own bank account | Minimal — routine documentation suffices |
| 2 | One-off swipe for a family member's expense, reimbursed by bank transfer with clear narration | Low — defensible with the transfer record |
| 3 | Swipe for a family member's expense, "reimbursed" in cash with no trail | High — reimbursement itself is now also unexplained |
| 4 | Regular, large-value swiping for unrelated third parties purely for reward points, funded by their cash | Very high — resembles accommodation of another person's unaccounted money |
7. Section 115BBE — the Tax Cost Once the Spend Is Treated as Unexplained
Where the total income of an assessee includes any income referred to in Section 68, Section 69, Section 69A, Section 69B, Section 69C, or Section 69D, the income-tax payable shall be the aggregate of tax computed on such income at the rate of sixty per cent, and no deduction in respect of any expenditure, allowance, or set-off of any loss shall be allowed against such income.
The 60% base rate carries a mandatory 25% surcharge (calculated on the tax, not the income) and 4% Health & Education Cess on top of tax plus surcharge, taking the effective rate to 78% of the unexplained amount. This applies whether the taxpayer discloses the amount voluntarily in the return or the Assessing Officer determines it during assessment — the 78% rate is the same either way; what changes with voluntary disclosure is the penalty exposure discussed next.
| Component | Rate |
|---|---|
| Base tax under Section 115BBE(1)(i) | 60% of unexplained amount |
| Surcharge (on the tax) | 25% of tax |
| Health & Education Cess (on tax + surcharge) | 4% |
| Effective tax rate on the unexplained amount | ≈ 78% |
8. Section 271AAC — the Additional Penalty
Where the income determined by the Assessing Officer includes any income referred to in Section 68 to Section 69D, and taxed under Section 115BBE, the Assessing Officer may direct that the assessee shall pay, in addition to tax under Section 115BBE(1)(i), a penalty computed at ten per cent of the tax payable under that clause. No penalty under this section is levied where the income has already been included by the assessee in the return furnished under Section 139, and tax under Section 115BBE has been paid on it.
This is the single most important line in this note for advisory purposes: the penalty is avoidable, the tax is not. If the client discloses the unexplained portion in the return itself and pays tax on it under Section 115BBE, the 10% penalty under Section 271AAC does not apply. If the same amount is instead detected later — through an AIS query that goes unanswered or a scrutiny assessment — the 10% penalty attaches automatically, with no separate finding of intent required.
9. When It Escalates Further — Section 276C
Section 276C of the Income-tax Act, 1961 (as it stands for AY 2026-27, unamended by the newer Act) punishes a wilful attempt to evade tax. Where the amount of tax sought to be evaded exceeds ₹25,00,000, the punishment is rigorous imprisonment for a term between six months and seven years, along with fine. Where the amount is ₹25,00,000 or less, the punishment is rigorous imprisonment for a term between three months and two years, along with fine — there is no monetary floor below which prosecution is ruled out entirely, though in practice, prosecution is reserved for cases showing clear, deliberate concealment rather than a defensible dispute over documentation.
Courts have consistently required proof of a genuinely wilful act for Section 276C to apply — an honestly maintained but incomplete record of a family reimbursement is not, by itself, the kind of deliberate concealment the provision targets. But a pattern of habitual, undocumented third-party swiping, especially where cash reimbursements are involved, is precisely the fact pattern that can support a wilful-evasion finding once the tax sought to be evaded is quantified.
10. Five Cards, Five Banks, Each Below ₹10 Lakh — Does It Still Get Traced?
This is one of the most common practical questions clients ask, and the honest answer has two parts that need to be given together, not separately.
Part one — via SFT-005 specifically, generally no. As explained in Section 3, each bank checks the ₹10,00,000 (or ₹1,00,000 cash) threshold only against the cards it has itself issued to the person. If a client holds five cards from five different banks and spends ₹9,00,000 on each — ₹45,00,000 in total — no single bank crosses its own threshold, and none is statutorily required to file an SFT-005 entry. On the SFT mechanism alone, this spend is unlikely to generate a standalone AIS credit-card entry that a risk-scoring filter would pick up.
Part two — that is not the same as being safe, for four separate reasons:
- One breach opens the door to all of them. If even one of the five cards independently crosses its bank's threshold — or if the client's overall financial profile draws attention for an unrelated reason (a property purchase, a large mutual fund investment, a cash deposit) — the resulting Section 133(6) or 142(1) notice is not limited to the entry that triggered it. An Assessing Officer conducting an inquiry can call for statements of all bank accounts and cards, at which point the full ₹45,00,000 becomes visible regardless of how it was originally reported, or not reported.
- Section 69C does not require an AIS trigger. The obligation to satisfactorily explain expenditure exists independently of whether that expenditure was ever reported under SFT. If the spend surfaces through any other channel — a bank scrutinising the account for a different reason, information shared under an information-exchange agreement, a search or survey, or simply the taxpayer's own disclosure during an unrelated proceeding — Section 69C applies exactly as if the SFT threshold had been crossed.
- Deliberate splitting can work against the taxpayer, not for them. If a pattern of spend just under each bank's threshold, across multiple banks, is ever examined and found to be a conscious structuring exercise rather than a coincidence, it tends to support rather than rebut a finding of wilful conduct — relevant not just to penalty exposure under Section 271AAC but potentially to a Section 276C prosecution assessment as well.
- The card issuers still hold complete records. The absence of an SFT filing does not mean the transaction data disappears — it means only that the bank was not statutorily obliged to proactively report it. The data remains fully retrievable the moment it is sought through any formal channel.
Advise clients against treating "stay under ₹10 lakh per bank" as a compliance strategy. It is, at best, a reason a particular spend pattern may not independently surface through the SFT/AIS channel this year — it is not a defence to Section 69C if the spend is ever examined through any other route, and a client who structured spend this way deliberately has, if anything, made their position on intent weaker rather than stronger.
11. Practical Computation — the Client's Actual Numbers
The client declared taxable income of ₹5,00,000 for AY 2026-27. Total credit card spend for the year was ₹25,00,000. On reconciliation, ₹10,00,000 of the spend could be satisfactorily traced to disclosed income, opening bank balances, and one documented reimbursement received by bank transfer. The remaining ₹15,00,000 — largely undocumented third-party swiping settled informally — could not be explained to the Assessing Officer's satisfaction and was added under Section 69C.
| Computation Step | Amount (₹) |
|---|---|
| Total credit card spend during the year | 25,00,000 |
| Portion satisfactorily explained (disclosed income, opening balance, documented reimbursement) | (10,00,000) |
| Unexplained expenditure added under Section 69C | 15,00,000 |
| Tax @ 60% under Section 115BBE(1)(i) | 9,00,000 |
| Surcharge @ 25% of tax | 2,25,000 |
| Health & Education Cess @ 4% on tax + surcharge | 45,000 |
| Total tax under Section 115BBE | 11,70,000 |
| Penalty under Section 271AAC @ 10% of tax u/s 115BBE(1)(i) | 90,000 |
| Total tax and penalty if litigated and lost | 12,60,000 |
| As a proportion of the unexplained amount (₹15,00,000) | ≈ 84% |
| If the same ₹15,00,000 had instead been disclosed voluntarily in the return and taxed under Section 115BBE | 11,70,000 (no 271AAC penalty) |
The illustration excludes interest under Sections 234A/234B/234C, which would add further cost, and excludes any separate exposure the actual beneficiaries of the swiped spend might face for their own unexplained cash. The arithmetic makes the advisory point plainly: on litigation, roughly 84 paise of every rupee of unexplained credit card spend is lost to tax and penalty — and the only lever available to reduce that figure at all is voluntary disclosure before detection, which removes the 10% penalty but not the 78% tax.
- Credit card payments crossing ₹10,00,000 (non-cash) or ₹1,00,000 (any cash component) per year are mandatorily reported under Rule 114E/SFT-005 — but this threshold is checked bank-by-bank, not aggregated across different banks by the reporting mechanism itself; spend split thinly across several banks' cards may not independently surface via SFT, though it remains fully subject to Section 69C the moment it is examined through any other route
- AY 2026-27 returns (FY 2025-26 income) are governed entirely by the Income-tax Act, 1961 — the Income Tax Act, 2025 has no application to this filing season
- Unexplained spend is added as income under Section 69C, taxed at an effective 78% under Section 115BBE, with a further 10% penalty under Section 271AAC unless voluntarily disclosed in the return and taxed before detection
- "Swiping for someone else" does not shift the exposure off the cardholder's PAN — the burden of a satisfactory, documented explanation always falls on the person in whose name the card spend appears
- Cash-based reimbursement arrangements are the riskiest structure, since they can leave two unexplained items — the spend and, later, the reimbursement itself
- Prosecution under Section 276C is a real exposure above ₹25,00,000 of tax sought to be evaded, and remains possible (three months to two years) below that threshold, though reserved in practice for clearly deliberate concealment
- The single most effective advisory step is upstream: reconciling the client's AIS against actual card spend before the return is filed, not after a query arrives
12. What Clients Should Actually Do
- Pull the AIS before filing, not after — reconcile every SFT-005 entry against actual spend and its source, well before the due date.
- Route pass-through spend through the bank, not cash — any amount swiped on behalf of another person should be reimbursed by bank transfer, with a narration that ties it to the specific transaction and date.
- Keep a simple written record for recurring or large-value arrangements — even a WhatsApp confirmation of "I'll transfer ₹X for the Y booking" is far better evidence than nothing, though a bank trail remains the strongest proof.
- Disclose, don't ignore — if a genuine unexplained gap exists and cannot be fully documented, voluntary disclosure in the return under Section 115BBE avoids the Section 271AAC penalty; silence until a notice arrives does not.
- Respond to Compliance Portal queries promptly — an e-Verification query left unanswered is what typically converts a routine data-matching flag into a Section 133(6) or 142(1) notice.
13. Final Practitioner Takeaway
The reward points saved on a swiped bill are, almost without exception, a trivial fraction of what is at stake if the underlying spend cannot be explained. Between the Section 69C addition, the 78% tax under Section 115BBE, and the 10% penalty under Section 271AAC, an unexplained ₹15,00,000 of card spend can cost the client more than the entire amount itself — before interest or prosecution risk is even considered.
For advisory purposes, the discipline that matters is the same one that applies across every AIS-driven risk area: review the client's SFT footprint against their declared income before the return is filed, and be direct about the difference between spend that is genuinely explainable and spend that merely feels explainable to the client.
Reward-point and cashback arrangements are only going to become more common as card issuers push higher spend-based benefits, and AIS matching is only going to get sharper. The clients most exposed are not the ones deliberately concealing income — they are the ones who never thought of a favour for a friend as a tax event at all, and consequently never built a paper trail for it.
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