Updated on January 3, 2024
Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What is Rebate?

A rebate is a cashback or refund given to the customers against the purchase, which acts as an incentive to complete the transaction. Unlike discounts allotted before the actual sale, rebates are offered after the sale. It is a form of marketing strategy provided to the client to facilitate future transactions.


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The writing off during the yearly filing of income tax for taxpayers also is facilitated by the government as an income tax rebate for specific entries in their file. In its truest essence, it is a write-off given to customers as a flat rate on their purchases or as a conditional rebate like “buy two, get two free”.

How Does Rebate Work?

A rebate is a form of cashback against the purchase of the goods given to the buyer by the manufacturer or the seller of that respective goods after they sell them. From the sellers’ point of view, it helps them attract more buyers for their goods. Sometimes, the buyers lose the receipt of payment which prevents the seller from paying the rebate. On the other hand, from the buyer’s point of view, it acts as an incentive or a cashback against their purchases which is a profitProfitThe profit formula evaluates the net gain or loss of an organization in a particular accounting period. It is computed as the difference between the total sales revenue and the overall expenses incurred by the company.read more.

It is a sales promotion technique used by the seller to attract more customers to purchase their goods. The buyer uses it to get a cashback or incentive against the goods purchased. It alters the good’s pre-rebate price or actual price in the buyer’s favor.

The usage of rebate tax and its other forms is prevalent in multiple markets. For instance, when an investor short-sells a stocks, they pay a rebate fee to the investor who lent them the stock for trading.

It is also a common facet in automobile sales where new vehicles are given a certain percentage of cash back. These write-offs are usually borne by the manufacturer instead of the dealer who sells them to the end customer.

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Let us understand the concept of conventional rebates and income tax rebates with the help of a couple of examples. These examples shall help us understand the intricacies of the concept and its related factors.

Example #1

Suppose a store named YZ selling widgets is giving a flat 5% rebate on the widgets’ purchase. A buyer, Mr. X, purchases a widget pricing $10,000. When he purchases that widget, he is provided with a 5% instant rebate receipt. The widget price was $10,000, but the 5% instant rebate costs $9,500, and Mr. X earns a profit of $500 on his purchase.

Rebate Example 1

Let us see what shall be the invoice cost in this case.

Invoice Cost can be calculated as follows –

Example 1.1jpg

Invoice Cost = Product Cost- Instant Rebate Amount

  • = $10,000- $500
  • Invoice Cost = $9,500

Example #2

The winters in most parts of England get extremely cold and citizens find it extremely difficult to manage the financial aspects of keeping themselves warm. Therefore, the government has allowed almost a million households to avail of a 400-pound rebate on their energy bills during winter.

However, taxpayers living in park homes, or living off-grid, have not seen a single penny from the scheme and feel left out. They have to additionally apply for the rebate and wait for it to be processed instead of getting it directly credited to their account.

The government, after hearing their pleas has allocated a separate section on their portal which makes it easier for unconventional households to avail these benefits from the government.


Let us understand the different types of rebate taxes and credits through the discussion below.

Types of rebate

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The regulations for rebate work differently based on geographical location. Moreover, relating to products, it is up to the manufacturers or dealers to set their schemes to attract more customers by providing them with additional benefits.

However, the United States, Connecticut, states the rebate regulations in the country according to section 42-110b-19(e). The following are the main regulations –

  • Sufficient Time for the Buyers: The buyers with the rebate coupon must be given sufficient time to submit the coupon and the payment proof.
  • Favorable Price: The price offered for the goods should not be the post-rebate price which means the rebate price shouldn’t be included.
  • Flexibility with the Buyer: The seller must be flexible with the buyer, so the seller can’t be too strict about asking for coupons or proof. Even if the buyer gives a photocopy of the payment receipt, the seller must accept it.


Let us understand the benefits of an income tax rebate and other types through the explanation below.

  • Increased Purchasing Power: It helps the customers earn a profit against the goods they have purchased by providing them with cash back or refund, which increases their purchasing power.
  • Increase in the Sale: Due to the availability of cashback or refund on the purchase, rebates attract customers, increasing the sale for the retailer.
  • Free Advertisement: It encourages customers to purchase by giving them a fair deal. When a customer gets a fair deal, they don’t keep it to themselves but encourage others to try, which helps the retailer advertise without cost.

Rebate Vs Discount

Companies strive to increase their sales by implementing sales and marketing strategies of different types. Two of the most popular types are rebates and discounts. However, there has been a common confusion between the two. Let us understand their differences through the comparison below.


  • It is an amount paid back by the seller to the buyer when the quantity purchase reaches or breaches a specific limit set by the latter.
  • It is provided to the buyer when the payment is made in full.
  • It is a sales promotion strategy.
  • It is open to a specific group of customers and is not provided to all customers, unlike other marketing strategies like discounts.
  • One of the major differences is that it is provided only when the purchase reaches a specific limit. Therefore, customers buy a little extra to be eligible for the rebate from the seller.


  • A deduction or a reduced price provided to the buyer from the seller as a means of marketing or other purposes.
  • It is provided by the seller when a customer pays on time or makes advance payments.
  • It is a marketing strategy.
  • Discounts are available for all customers irrespective of their frequency or ticket size.
  • It is provided on each item or product purchased by the customer.

Recommended Articles

This has been a guide to what is a Rebate. Here we explain its examples, types, regulations, and benefits, and compared them to discounts. You can learn more about it from the following articles –