credit card settlement

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

19 October 2010 hi,
if credit card dues are settled in one time settlement option how to show that in the income tax and under which head the balance amount is adjusted.
is that income and is there any tax on the same

CA Shiv

CA Shiv (Expert)
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19 October 2010 Yes the differnece will be treated as income and liable for tax. charge it to p&L account and offer for tax

Querist : Anonymous

Querist : Anonymous (Querist)

02 March 2011 hi there,
kindly clarify whether the interest and other charges debited in the a/c due to late payment, renewal charges, foreclosure charges etc etc are to be subtracted from the p&l a/c and under which section the amount has to be deducted.

thanks in advance.

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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20 July 2024 Settling credit card dues through a one-time settlement (OTS) option can have implications for income tax and financial reporting. Here’s a detailed explanation:

### Income Tax Treatment:

1. **Tax Implications**: When credit card dues are settled through a one-time settlement, any waiver of dues by the credit card company is considered as a benefit or income in the hands of the cardholder.

2. **Nature of Income**: According to the Income Tax Act, 1961, Section 28(iv), any sum received by an assessee as a benefit or perquisite, whether in money or otherwise, arising from business or profession is taxable under the head "Profits and Gains of Business or Profession".

3. **Calculation of Taxable Income**: The taxable amount would generally be the difference between the original dues and the amount settled under the OTS. For example, if you owed Rs. 100,000 and settled for Rs. 80,000, the taxable amount would be Rs. 20,000.

4. **Interest and Charges**: Interest, late payment fees, renewal charges, foreclosure charges, etc., typically form part of the total dues. If these charges are waived or reduced in the OTS, the difference would be treated as income for tax purposes.

### Treatment in Profit and Loss Account (P&L):

1. **Adjustment in P&L**: In the P&L account, any amounts related to interest, charges, etc., which are waived or reduced in the OTS, should be adjusted. These adjustments would reflect as either income (if waived) or reduction in expenses (if reduced).

2. **Deductions**: These waived or reduced amounts should be deducted from the relevant expense line items in the P&L account. For example, if there were interest and charges totaling Rs. 20,000 waived, this amount should be deducted from the respective expense account.

3. **Tax Deductibility**: Deductions for expenses are generally claimed under Section 37 of the Income Tax Act, which allows deductions for any expenditure (not being capital expenditure or personal expenses) laid out or expended wholly and exclusively for the purposes of business or profession.

### Important Considerations:

- **Taxation of Waived Amount**: The waived amount is considered taxable income unless specific exemptions apply (which are rare in such cases).

- **Reporting**: Proper documentation and reporting of the settlement and its tax implications are crucial to comply with income tax regulations.

- **Consultation**: It's advisable to consult with a tax advisor or chartered accountant who can provide specific advice based on your financial situation and the terms of the settlement.

In summary, settling credit card dues through a one-time settlement may have income tax implications where any waived amount is taxable as income under the head "Profits and Gains of Business or Profession". Ensure proper accounting treatment in your P&L account and consult with a tax professional for accurate guidance tailored to your circumstances.