Should you pay your taxes using a credit card?

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On June 7, the Central Board of Direct Taxes (CBDT) launched the new e-filing portal for Indian taxpayers. One of the new features that got significant attention is the addition of payment options like UPI (Unified Payments Interface), RTGS (Real-Time Gross Settlement), NEFT (National Electronic Funds Transfer) and credit cards. This is yet another move to encourage non-cash transactions in the country.

More payment options

Until now, limited options were available to make tax payments. Net banking and debit cards were the only modes of paying taxes online and only a few banks with direct API Integration were allowed to process these transactions. Often, people would request their CAs or friends to make payments on their behalf. With the new portal, CBDT aims to bring flexibility in terms of payment options for the taxpayer.

“Adding more digital payments will absolutely be seen as a welcome move over the current net banking and debit card payment options available with specified banks. This move can also be viewed as an attempt to bring Income tax at par with GST since the options to pay through RTGS/NEFT are already available for payment of GST,” Shailesh Kumar, Partner, Nangia & Co LLP, said.

Is credit card a good option?

Paying off taxes via credit cards seems too luring. However, experts suggest to remain highly cautious while opting for the same.

“Credit cards have been a great facilitator in making payments as it allows a person to pay without the necessity of having funds while making the payment and repay to the credit card issuer on a later fixed date. It is more like a short-term credit facility that may be extended to the payer wherein in the normal point of sale transaction a convenience fee is charged from the vendor/merchant which ranges between 2-4%. It could cater to short term fund requirements of the payer,” Shailesh Kumar said.

However, according to tax expert Gauri Chaddha, “If you always pay credit card dues on time, this option is good for you but if not, it will prove to be a costly affair. If you decide to pay off taxes through credit cards, ensure that you have auto-debit facility enabled and your bank account has sufficient balance.”

The annual percentage rate, which is the interest amount charged in case of default, on credit cards starts with 3% a month. This can also go up to 4% in some cases. While the government is charging 1% per month from the taxpayer on non-payment of taxes, credit card companies charge interest on interest.

Costlier affair

Consider this: If you have delayed paying tax worth Rs 80,000 for 3 months, and there’s a 1% penalty each month, you will end up paying Rs 2,400 extra. However, this figure will definitely spike up in the case of credit cards where the interest charges are much higher, assuming you don’t pay the bill on time.

“In the case where an assessee has a card limit of, say, Rs 25 lakhs which is used in entirety to pay off tax liability, no credit card issuing company would want to extend such credit facility without any charges. In such cases, even if credit cards are introduced as an option for payment, the convenience charges shall more likely be recovered from the taxpayer itself. All in all this shall land up on heavy cost in the hands of the taxpayer to enjoy such facility,” Shailesh Kumar asserted.

Is it worth risking?

So, is your credit card repayment capacity worth risking to pay taxes? Well, credit cards only defer the payment for a period whereas in UPI, NEFT, RTGS, net banking, and debit cards, payment is deducted from a bank account in real-time.

“Non-payments and defaults in credit card along with heavy interests have a direct impact on the CIBIL scores of the individuals which may cause problems to avail other credit facilities. Further, the risk of cybersecurity/cybercrime is by large present in all digital payment options,” Kumar pointed.

Therefore, it is better to avoid using credits while paying taxes. However, the option is open and you have a choice to make.