Five years ago, I received three near-identical leather wallets as gifts on my birthday. I was sure these would last me for years to come. Though I continue to use one of those leather wallets, I have lost count of how many more e-wallets I have opened in the years since.
With “fintech” – or technology based financial services – being the new craze in India, we are in the middle of a mania over the e-wallet, which allow your to store money and transact digitally. And since November 9, when the government invalidating high-currency notes, effectively demonetising 86% of the currency in circulation, e-wallet companies have had a dream run. As the country reels under a massive cash crunch as a result of the demonetisation, e-wallets have doubled up as saviors for those who have access to and familiarity with such services. Tapping into this opportunity, companies have been marketing aggressively and offering more discounts and cashback offers.
However, though convenient and attractive, one has to approach offers on e-wallets much as they would approach a “flat 40% off” sign outside a store – go in knowing that there may be plenty of strings attached.
Caps on cashback
In India, the major players in this segment are e-wallet startups such as Paytm, Freecharge, PayUMoney, Mobikwik and OxiGen. However, other e-commerce businesses such as restaurant finder Zomato, cab aggregator Ola and BookMyShow have also come up with their own e-wallets for ease of use on their platforms. As if this was not enough, almost every mobile operator and bank in India has launched its own e-wallet service as well.
One big incentive to use e-wallets over, say, debit cards or credit cards are the cashback offers they often have, which is a percentage of the money spent on something being sent back to the e-wallet after the transaction has been completed (as opposed to a discount). This amount can be used for future transactions using the service.
However, most cashback offers prominently advertised by e-wallet firms come with a rider – a minimum purchase amount that you have to meet to cross to get money back. For mobile phone recharges or bill payments, this threshold may not be too high, but it is essential to see the fineprint.
For instance, DBS Bank’s digiwallet advertises a 5% cashback, but a closer look at the terms and conditions reveals that users shall get only 1% cashback on purchases up to Rs 5000, after which the 5% cashback kicks. Many offers offer a high percentage of cash back, but there is almost always an asterisk putting a cap to the amount – which one does not see until careful examination. For instance, Paytm recently offered a 25% cashback on Uber rides, but specified a cap of Rs 50 per ride. This means that those who use the service for journeys that cost more than Rs 200 will effectively get a lesser percentage back.
An attractive cashback may be accompanied by combination of a minimum purchase threshold and a cap on the amount which effectively nullifies the deal. For instance, in August, Freecharge advertised a 100% cashback on mobile recharges for a minimum bill payment of Rs 100 and with a maximum cashback cap of Rs 50. This effectively meant that it was impossible to get a cashback worth more than 50% of your recharge amount.
On most e-wallets and websites today, the most attractive offers and often also the most prominently advertised ones, can be availed of only by first-time users. Also, many e-wallets impose usage restrictions on the number of transactions that can be made with a coupon code (which is to be keyed in to make use of a particular offer). This is especially common for offers relating to movie tickets, which either specify that they can be availed of just once or twice, or restrict the number of tickets that can be booked in a single transactions.
As in the earlier examples, these riders are usually seen only during a careful read and consumers need to be aware of these limitations before being jumping on a deal.
Some e-wallets even offer unbelievably high cashback of up to one lakh rupees – but in the form of a lucky draw. New users need to be circumspect of these offers because the cashback is not assured and the odds of winning such a contest or a lucky draw are miniscule. Some offers even encourage you to spend more by offering prizes on the highest spenders at a particular time.
Most e-wallets allow users to only up to Rs 10,000 every month if the accounts have been created after verifying only the email address and mobile number – the Reserve Bank of India has raised this amount to Rs 20,000 post demonetisation. However, if a user wants to use their e-wallet for all their transactions over a month, this may not be enough for a whole month. So, especially if they tend to have heavier expenditures, users should complete their Know Your Customer verification with the e-wallet to ensure the limitation does not apply to them.
Due to the fierce competition between e-wallets, thankfully, this process is quite simple. E-wallet companies arrange for an agent to visit the user’s home or workplace to pick up copies of the documents needed (typically, PAN card and identity proof) for the KYC verification. DBS Bank even allows customers of its digiwallet to upgrade to a savings bank account called digisavings by simply authenticating their Aadhar data using a fingerprint recognition device at a Cafe Coffee Day outlet. Doing so even gets you a free cappuccino at the cafe!
While tax authorities in other countries, such as the United States, have addressed the issue of taxation of cashbacks, Indian authorities have not specified this. Financial experts caution that section 56 of the Income Tax Act, which applies to levies on income from other sources, may be applicable to cashbacks in India. This means that it could levy tax if the an individual’s “income received without any consideration” through cashbacks exceeds Rs 50,000. The tax treatment is also likely to differ depending upon whether the purchase was for a business purpose. Hence, those who have received significant amounts through such offers should to discuss the issue with their tax advisors.
Sagar Godbole is an associate at Trilegal. Views expressed here are personal.