Income Tax on Interest Income

Interest-bearing investments such as savings accounts, fixed deposits, and recurring deposits are go-to options for risk-averse investors. Just like any other income, interest income also attracts income tax. Interest income from these investments is taxable as income from other sources. Lets take a look at some of the most popular interest-bearing investments and how they are taxed in India-

Savings Bank Account – Interest Income

Every quarter bank credits interest to your savings account. Interest that gets accumulated in your savings bank account is considered as your taxable income under the head “Income From Other Source.” And it must be declared in your tax return. Saving account interest is taxable at your slab rate. Do note that bank does not deduct TDS on savings bank interest. While incomes from the fixed deposit and recurring deposit are taxable, interest from the savings bank account and post office deposits are tax-deductible to a certain extent.

How is savings interest taxable?

  • The interest component which is earned on saving account is considered as ‘Income from other Sources’.
  • This interest income will be declared in your Income Tax Return and will be taxable as per the applicable slab rate.
  • As per Section 19A of the Income Tax Act, 1961, TDS is not to be deducted on interest on a savings account.
  • For NRIs, tax is deducted at source (TDS) at 30% on interest on Non-Resident ordinary accounts. No tax applies to interest on Non-resident External (NRE) accounts.
  • Savings interest income of up to INR 10,000 in a financial year is eligible for tax deduction under Section 80TTA of the IT Act.
  • Interest on a savings account up to INR 10,000 is technically treated as a deduction. For example, if your gross total income is INR 10 lakh and you have savings account interest of INR 25,000 a deduction of INR 10,000 will be made from your gross total income.

Deduction Under Section 80TTA

Section 80TTA of the Income Tax Act was introduced in order to allow a deduction of up to INR 10,000 on savings interest. 80TTA deduction was introduced to encourage taxpayers to generate more savings. It is available to individuals and HUFs other than senior citizens.  Section 80TTB is applicable in the case of a senior citizen.

If interest income from all the saving accounts is less then INR 10,000 then the entire amount is deductible. If total interest from saving accounts exceeds INR 10,000 then the maximum of INR 10,000 will be deductible and the remaining amount will be taxable

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FD Interest Income

Fixed deposits have been a popular investment option for many investors, it allows you to exploit complete potential of Section 80C to deduct ₹1.5 lakh from your taxable income. However, interest received on FD is taxable. Income tax on interest on fixed deposit is chargeable under the head ‘Income from Other Sources‘. Hence, the income is added to the total income of the taxpayer.

How is Interest Income from Fixed Deposit Taxable?

Interest received from Fixed Deposits is fully taxable and the tax liability is as per the income tax slab. Add it to your total income under the head ‘Income from Other Sources’ in your Income Tax Return. Tax is Deducted at Source by the bank at the time they credit the interest to your account, and not when the FD matures. You will receive the amount net of tax. You then have to add the gross amount to your income and adjust TDS against your final tax liability.

How income tax on interest on Fixed Deposit is calculated?

Many taxpayers got messages and emails from Income Tax Department regarding a mismatch in the interest income data available with the tax department and what was shown in the Income Tax Return (ITR) filed by taxpayers. Therefore you need to add your interest income to your total income and calculate your tax liability accordingly to avoid any such notices. You can follow the following steps to calculate tax liability on interest on FD to your ITR:

  • Add the interest income under the head Income From Other Sources.
  • See which tax slab rate you fall into.
  • Match it with the yearly TDS deduction in your Form 26AS.
  • Bank does not deduct TDS for annual FD interest below INR 40,000
  • The Income Tax Department will adjust the TDS (which has already been deducted) against your final tax liability.
  • Even when no TDS is deducted include the interest income in your total income and pay tax on it.

Suppose you wait until the maturity of your FD when interest is actually received– your total interest income may push you up to a slab and you may end up paying the higher tax.

Let us understand this by way of an example:

Anish falls in the 20% tax bracket. He has 2 FDs with a bank of INR 1,00,000 each for a period of 3 years at 8% interest per annum. In the first year, Anish’s interest income is INR 8,000 from each of the FDs, total interest accrued is INR 16,000 in the first year. Bank does not deduct TDS for annual FD interest below INR 40,000.

Another example: Arjun has a fixed deposit of INR 8 lakh at an interest rate of 8% p.a. He receives an annual interest of INR 64,000. The bank deducts TDS on the whole of INR 64,000. The prescribed rate of TDS is 10%. However, for the FY 2020-21 (from 14 May till 31 March 2021) the TDS is deductible at 7.5%.

When to pay income tax on interest on Fixed Deposit?

If there is any tax liability after the inclusion of your interest income in your total income tax on that should be paid before 31st March of that FY i.e. before the end of the Financial Year. You may also be liable to pay quarterly advance tax, if your total tax liability is more than INR 10,000

ITR Form to File to Report Income from FD Interest

Taxpayers must file ITR 1 and report the income from FD interest under the income from other sources head. This is in the case where the taxpayer is only receiving income from FD interest.

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TDS in relation to FDs

  • When does the bank not deduct TDS
    • If total interest income from all FDs with a bank is less than INR 40,000 in a year, the bank cannot deduct any TDS.
    • The limit is INR 50,000 in case of a senior citizen aged 60 years and above.
    • Prior to Budget 2019, the limit of TDS on interest income was INR 10,000.
  • When does the bank deduct TDS @ 10%
    • When the interest income for the year from all the FDs with the bank exceeds INR 40,000 (INR 50,000 in the case of senior citizens) there would be a 10% TDS deduction from such interest income .
  • The TDS Deduction will be 20% if you don’t provide your PAN to the particular bank. So do make sure that the bank has your PAN details.
  • However, if your income is below the exempted limit, you can file Form 15G/15H to avoid TDS. Form 15H for senior citizens and 15G is for other than senior citizens. Submit these forms at the beginning of each financial year to avoid additional TDS deduction and subsequent refund from the IT Department.

Interest Income of senior citizens

Senior citizens receiving interest income from FDs, savings account and recurring deposits can claim a deduction of up to ₹50,000 annually under Section 80TTB. If the senior citizen’s interest income from all FDs with a bank is less than ₹50,000 in a year, the bank cannot deduct any TDS.

FAQ

How will I receive the interest amount?

If you have deposited your money under the traditional scheme, the interest is credited to the given Savings Account on a monthly or quarterly basis.
If you have opted for the reinvestment scheme, a compounded interest is added to the principal amount every quarter and this is reinvested.
You can choose to receive the interest amount on a monthly, quarterly or annual basis.

What is the exemption limit for FD?

If an individual opts for old/existing tax regime, then under Section 80C of the Income-tax Act, you can claim deduction for investments up to INR 1.5 lakh in a financial year by investing in tax-saving fixed deposits (FDs)

How much money can I lock in a Fixed Deposit?

The lower limit and upper limit vary according to the bank.

REIT : Real Estate Investment Trust

Real estate is one of the vital sectors of the Indian economy. REIT is an investment vehicle that enables individual investors to earn income via the underlying real estate property. They do this without directly owning the property. It is similar to the concept of a mutual fund. Where a fund pools small sums from individuals and institutions and invests in stocks. The investments take place through a trust directly or via Special Purpose Vehicles (SPV). In REIT, the trust puts money in property. REITs own many types of commercial assets ranging from office spaces to hospitals, shopping centers, hotels, and warehouses.

Types of REIT

  • Equity

It is the most popular type of REIT. The majority of REITs are publicly traded equity REITs. Equity REITs own or operate income-producing commercial properties. The common source of income here is rents.

  • Mortgage

Commonly known as mREITs, it mostly involves itself with lending money to proprietors and extending mortgage facilities. REITs provide financing for income-producing real estate by purchasing or originating mortgages and mortgage-backed securities and earning income from the interest on these investments. Mortgage REITs also generate income in the form of interest accrued on the money they lend to proprietors.

  • Hybrid

Investors can diversify their portfolio by parking their funds in both mortgage REITs and equity REITs. Hence, both rental income and interest income are the sources of income for this particular kind of REIT.

  • Public non-listed REITs (PNLRs)

Public non-listed REITs (PNLRs) are registered with the SEBI. However, they are not tradable on the National Stock Exchange. These options are less liquid. Also, they are more stable as they are not subject to any market fluctuations.

  • Private REITs

Private REITs are are exempt from SEC registration and whose shares do not trade on National Stock Exchanges. These trusts function as private placements, which caters to a selective list of investors.

REIT – Criteria’s to Comply With

REITs need to meet the below criteria for their qualification as per SEBI guidelines 2019:

  • The company must have an asset base of at least 500 Crores
  • For an Asset to qualify as SPV (Special Purpose Vehicle), REIT shall hold controlling interest and at least 50% of the total nominal value of equity in that SPV
  • Distribution of 90% of net distributable cash flow to unit-holders in the form of interest/dividend
  • 80% of the investment should take place in income-generating assets. Furthermore, only 20% of the total investment can take place under-construction assets
  • In the case of REIT, section 115(O)(7) should be readable with section 115BBDA to establish the taxability of dividends received from SPVs

Advantages of Investing in REIT

Following are the benefits of investing in REIT:

Option to Divesify

As REITs are usually traded on stock exchanges, it gives the investors the benefit of diversifying their real estate portfolio.

Dividend Income and Capital Appreciation

Individuals investing in REIT get the benefit of steady and substantial dividend income and over the long term, it also allows steady capital appreciation.

Liquidity

As REIT are mostly traded on stock exchanges, it becomes very easy to buy and sell them, hence adding the benefit of quick liquidity.

Risk Adjusted Returns

REIT offers its investors the advantage of earning risk-adjusted returns that help in generating a steady force of income for them. During the time of high inflation, investing in REIT can help in having a steady source of income.

Taxability

Taxability of REITs

  • REITs have a pass-through status u/s 10(23FC) w.r.t interest receivable from an SPV or dividend that refers to in section 115(O)(7) of the Act
  • Any income of a business trust by way of renting or leasing of any real estate asset directly owned by the trust does not form part of total income u/s 10(23FCA)
  • The total income of a business trust consists of interest and dividend income from SPVs, rental income if it holds rent generating assets, investment income from funds/FDs where surplus money is available, capital gains under section 111A and 112
  • According to the sections 111A and 112 of the Income Tax Act, the total income of a business trust shall be chargeable to tax at a Maximum Marginal Rate
  • As per section 115(O)(7), no tax shall be chargeable on dividends declared by a specified domestic company to a business trust out of its current income on or after a specified date
  • If there is any declaration, distribution or any dividend payment by the specified domestic company out of its accumulated profits and current profits up to the specified date, in such cases no tax shall be chargeable

In the hands of Unit Holders

  • Section 115UA of the Income Tax Act governs the taxability of unit-holders
  • Income distributed by business trust to its unit holders shall be treated of the same nature. The treatment shall be in the same proportion as it is receivable by the trust
  • Unit-holders receiving any income distributed by trusts such as interest or dividend shall be treated as income of the unit-holder for that previous year subject to provisions of the Act
  • Whereas if trust repays principal to unit-holders, it shall be treated as capital receipts in the hands of unit-holders and not “income” since section 56(2)(x) read with section 115UA implies that the income received without consideration shall be taxable under section 56(2)(x) and section 115UA contains the words “income distributed by a business trust”
  • Since unit-holders are the beneficiaries of units held by them in the trust, the amount of principal received for units is not without consideration; henceforth section 56(2)(x) shall not apply
  • Transfer of units by unit-holders shall be chargeable to Capital Gains Tax at applicable rates
  • Any short-term capital gains arising on the transfer of units shall be chargeable to tax at 15 percent. Long-term capital gain is taxable at 10% if the amount exceeds INR 1 lakh

How to Invest in REIT?

Just like any other stock, investors can buy shares in a particular REIT in three ways:

Stocks: Individuals who are looking for investing in a direct way in REIT go for this option.

Mutual Funds: Investors who wish to have a diversified portfolio invest in REIT through mutual funds.

Exchange-Traded Funds: This option is for those investors who want to avail indirect ownership of properties and also want to benefit from its diversification.

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FAQ

Is REIT dividend taxable?

The dividend received was earlier tax-free in the hands of the investors. However, Finance Minister Nirmala Sitharaman in Budget 2020-21 scrapped the dividend distribution tax for companies and shifted the burden on investors. While nothing changes for SPVs and the trusts as they still won’t pay tax, unitholders of REITs are no longer exempt.

What is the impact of Covid on the REIT?

-Concern over the demand for office space as some companies are planning to continue with the work from home (WFH) model adopted to battle the covid-19 infection attributes to fall the value of REIT.
– Also, the change in the income tax law, making dividend income taxable in the hands of some investors, will make REITs less attractive.

Agricultural Income – Tax Treatment

In India, agricultural income refers to income earned from sources that include farming land, renting agricultural land and selling agricultural  produce. As India is basically an agrarian economy, several incentives and perks are there, for those making a living through agriculture. Farmers are, for instance, exempt from paying any tax on their agriculture income under the income tax laws in India. However, not all income generated from agricultural land, qualify as agricultural income. Therefore, it’s pertinent to know the difference between incomes that fall in the agricultural category and the non-agricultural category

What is Agricultural Income?

Agricultural income as per section 2(1A) of the Income Tax Act, 1961 is as follows.

According to this Section, agricultural income generally means:

  • Rent or revenue derived from land:
    • Any rent or revenue derived from land which is situated in India and is used for agricultural purposes
  • Income derived from such land by agriculture operations:
    • The meaning of agriculture though not covered in the Act has been laid down by the Supreme Court in the case CIT v. Raja Benoy Kumar Sahas Roy where agriculture has been explained to consist of two types of operations:
      • Basic operations – The basic operations would include cultivation of the land and consequently sowing of seeds, planting, etc wherein human effort involved in producing crops
      • Subsequent Operations – The subsequent operations are operations for growth and preservation of the produce like weeding, digging soil around the crops grown etc. Also, those operations make the produce marketable like tending, pruning, cutting, harvesting, etc
  • Income from sale of agricultural produce:
    • Where the produce does not undergo ordinary processes to become marketable, the income arising on sale would generally be partly agricultural income and part of it will be non-agricultural income. The Income Tax has prescribed rules to bifurcate agricultural and non agricultural produce for various products
  • Income derived from saplings or seedlings:
    • Any income derived from saplings or seedlings grown in a nursery shall be agriculture income too. Moreover, No tax liability arises on the income generated through sale of products grown in a nursery provided:
      • Assessment of land revenue by the local
      • The land should not be within the jurisdiction of a municipality or a cantonment board where the revenue is not not subject to local rate
  • Income attributable to a farm house
    • Any income attributable to a farm house subject to satisfaction of certain conditions specified in this regard in section 2(1A).
      • The building should be on agricultural land or in immediate vicinity of the agricultural land, or
      • The land should not be located within the following region:
Aerial distance from municipality* Population as per last preceding census
Within 2 kms 10,000 to 1,00,000
Within 6 kms 1,00,000 to 10,00,000
Within 8 kms > INR 10,00,000

*Municipality includes municipal corporation, notified area committee, town area committee, town committee and cantonment board.

Note: Even where the local population is < 10,000, the land should also not be situated within the jurisdiction of the local municipality or cantonment board.

Non-agricultural income

As mentioned earlier, certain agriculture-related works and the income thus generated, is categorized as non-agricultural income and is taxable.

  • Heavy processing: 
    • When an agricultural produce undergoes a process to become marketable, the final product is categorised as non-agricultural. For example, the production of tea, coffee, rubber, etc. Also, if a farmer sells processed items without carrying out any agricultural or processing operations, the income would be categorised as business income
  • Breeding of livestock: 
    • This includes dairy animals, fishery and poultry farming on agricultural land
  • Tree plantation: 
    • Trees grown on farmland only to be used as timber, fall in the non-agriculture category, as no active agricultural business has been concluded in the entire process
  • Trading: 
    • Those who earn their income by trading agriculture produce, have to pay standard taxes on their income
  • Export: 
    • Income earned from the export of agriculture produce, could be exempt from IT if certain conditions are met

Tax Calculation with Agricultural Income

Income from agriculture is exempt from tax under section 10(1) of the Income Tax Act, 1961. However, the Income-tax Act has laid down a method to indirectly tax such income. This method or concept may be called as the partial integration of agricultural income with non-agricultural income. This method is applicable when the following conditions are met:

  • Income from agriculture should be more than INR 5,000.
  • Also, Total income for the financial year, excluding agriculture income, should exceed INR 2,50,000. This limit will increase to 3,00,000 in case of individual who is above 60 and less 80 and will be 5,00,000 for individual who is above 80.

Calculation of Agricultural Income

In case, Agriculture income exceeds INR 5,000 and there are other sources of income too, then, the tax liability for that year is to be calculated following the procedure as under:

  • Compute income tax on the aggregate income (i.e. agricultural income + other income) as per the prevailing income tax rates.
  • Compute income tax on sum of amount of basic exemption limit plus agriculture income as per the prevailing income tax rates.
  • Now, Compute (1) – (2) to arrive at the tax liability for the year.

Example

Suppose, taxpayer has 4,00,000/- as interest income and 90,000/- as agriculture income for the assessment year 2019-20. The computation shall be as follows:

  • Calculate tax on total income of INR 4,90,000
Particulars Amount (INR)
Tax on INR 2,50,000 Nil
Tax on remaining INR 2,40,000 @ 5% 12,000
Total Tax 12,000

 

  • Calculate tax on basic exemption limit + agriculture income i.e.
Particulars Amount (INR)
Tax on INR 2,50,000 Nil
Tax on remaining INR 90,000 @ 5% 4,500
Total Tax 4,500*

The tax liability, in this case, shall be Rs. 7,500 (a-b) i.e. INR 12,000 – INR 4,500 and there’s no extra tax payable owing to the extra income of agriculture.

Section 54B: Capital Gain on Transfer of Land used for Agricultural Purpose

Section 54B of the Income Tax Act, 1962, provide relief to individuals who sell their agricultural land and buy another agricultural land from that sale. The following conditions must be met in order to claim benefit under section 54B:

  • This benefit can only be claimed by individuals or HUF.
  • The agricultural land must be used specifically for agricultural purpose.
  • The individual or his/her parents must use this land for agricultural purpose for at least two years immediately preceding the date on which the exchange of land occurred. In the case of HUF, any member of the HUF must use this land for agricultural purpose.
  • After selling agricultural land, the assessee will have to buy another agricultural land within two years from the date of selling.
  • In case of compulsory acquisition, the period of acquiring new agricultural land will be assessed from the date of receipt of compensation. 
  • The entire amount of capital gains must be utilized for the purchase of agricultural land if not then the difference will be termed as capital gains and the tax will be computed accordingly.
  • The new agricultural land must not be sold within the period of 3 years from the purchase.

Which ITR is applicable for Agricultural Income

If the aggregate agricultural income of the assessee is up to Rs. 5,000 disclose the agricultural income in the income tax return (ITR) 1. But if the agricultural income exceeds Rs. 5,000, then form ITR 2 applies

Moreover, Agricultural income exceeding Rs 5 lakh is to be reported separately for each agricultural land under the ‘exempt income schedule’ along with additional details such as the name of the district with pin code, measurement of land, whether owned or leased, and whether irrigated or rain-fed.

FAQs

Is agricultural income wholly exempt from income tax?

If income of assessee is less than 5000 and total income, excluding agriculture income is less than the basic exemption limit then only agricultural income exempt from income tax.

What is not considered as agricultural income in India?

Following are not considered as agriculture income
1. Breeding of livestocks
2. Dairy farming
3. Fisheries
4. Poultry farming

Does the income from business of growing tea is an agriculture Income?

In case of growing of tea 40% income is taxable as business income and balance will be exempt as agriculture income.

Income Tax on Cashback

Cashback is a reward for a customer on the purchase of goods or services. The calculation is a percentage of the purchase amount. Cashback is different from Discount. While the discount is a deduction from the purchase amount, cashback is a reward as a percentage of the purchase amount which the customer can utilize on the next transaction. Under this article, you can read about Income Tax on Cashback in different situations.

Types of Cashback

  • Instant Cashback

Instant cashback is a cashback offered immediately once the customer pays for the transaction. For example, if you book a movie ticket on an online app under an offer of 10% instant cashback. If the movie ticket is for INR 500, You are liable to pay INR 450 only (500 – 10% cashback).

  • Deferred Cashback

Deferred cashback is a cashback that the customer can utilize on the next transaction. For example, if you book a movie ticket on an online app under the referral offer and you refer the app to a friend, you will receive a cashback. You can utilize this cashback on your next transaction.

Income Tax on Cashback – Business Expense

Cashback is a reward or benefit that a customer receives on the purchase of goods or services. It is also a discount since it reduces the cash outgo on the same or next purchase of the customer. Thus, it is considered as an income and is taxable. Let us understand when such cashback is treated as an income and the taxes on cashback.

Revenue Expense for Business

If a business purchases goods or services (not a capital good) and earns a cashback, it can claim the purchase amount reduced by cashback as a revenue expense. Alternatively, the business can claim the purchase amount as an expense and report cashback as an income.

Example

ABC Enterprises purchased online stationery worth INR 5,000 and received an instant cashback of INR 1,000. They can claim net amount of INR 4,000 as an expense. Alternatively, they can book INR 5,000 as an expense and INR 1,000 as an income.

Capital Expense for Business

If a business purchases goods or services (capital good) and earns a cashback, it can treat the purchase amount reduced by cashback as an asset (capital expense) and claim depreciation on the same. Alternatively, the business can claim the entire purchase amount as an asset, report cashback as an income, and pay tax on it.

Example

ABC Enterprises purchased a laptop worth INR 50,000 and received an instant cashback of INR 5,000. They can claim the net amount of INR 45,000 as an asset and claim depreciation expense on the same. Alternatively, they can report INR 50,000 as an asset, report INR 5,000 as an income and pay tax on it.

Income Tax on Cashback – Personal Expense

If an individual purchases goods or services for personal use and earns a cashback, it is as a gift as per Section 56(2) of the Income Tax Act. As per Section 56(2), if a taxpayer receives any sum of money without any consideration that exceeds INR 50,000, it is taxable at slab rates.

Therefore, if the aggregate cashback during a financial year is up to INR 50,000, it is an Exempt Income. The taxpayer should report such cashback as an Exempt Income in the ITR filed on the Income Tax Website.

If the aggregate cashback during a financial year exceeds INR 50,000, it is a taxable income under the head Income From Other Sources and taxable at slab rates. The taxpayer should report such cashback as IFOS income in the ITR.

If the taxpayer has received aggregate cashback and has other gifts during the financial year, the aggregate amount of gifts and cashback exceed INR 50,000, cashback would be taxable.

Example

Mr Mehta recieved a gift from his distant relative on his birthday worth INR 35,000 and over the financial year he had an aggregrate cashback of INR 18,000. The total being INR 53,000 which is above the limit of INR 50,000, the enire amount will be taxable in the hands on Mr Mehta under income from other sources.

FAQs

How is Cashback different from Discount?

Discount is a deduction from the purchase amount and the customer pays the net amount only. Under cashback, the customer pays the full amount and then receives a cashback. Discount is offered instantly and cashback may be offered instantly or after a specified time period.

Should I report Cashback in my Income Tax Return?

Yes. It is advisable to report cashback income in the Income Tax Return. If the aggregate cashback during the financial year exceeds INR 50,000, taxpayer should report it as Income From Other Sources (IFOS) and pay tax at slab rates. However, if the aggregate cashback is up to INR 50,000, taxpayer should report it as Exempt Income in the ITR.

Is Cashback received on Credit Card / Debit Card Offers taxable?

Taxation of cashback on credit card/debit card offers is similar to any other cashback. If the taxpayer receives cashback on a personal expense, it is taxable if aggregate cashback exceeds INR 50,000 during the financial year. If the taxpayer receives cashback on a business expense, he/she should claim an expense for the net amount (purchase – cashback).

Income Tax on winning lottery, crossword puzzles, game shows, horse race

Income from winning awards and prizes such as lottery, puzzles, online gaming or TV game shows, card games etc are considered as income from other sources under the head IFOS of Income Tax. The winner may receive such income in cash or kind. The tax rate is flat 30% as per Section 115BB of the Income Tax Act.

  • Winning from Lottery
  • Crossword Puzzle
  • Races including Horse Race
  • Card Games
  • Gambling
  • Betting
  • Game Shows
  • Any other income of similar nature

Income Tax on Awards & Prizes

Such incomes may be earned in form of cash or kind in forms of awards or prizes. The tax treatment depends on multiple factors.

  • Awards
    • If the Award of public interest is approved by the Government, it is exempt from tax. Awards such as National awards, Nobel prize, Arjuna award, Bharat Ratna award, etc notified by the government under Sec 10(17A) is exempt from tax in the hands of the receiver.
      Awards such as filmfare, ICC Cricket awards, etc are taxed as IFOS income since they are not approved by the Government
  • Prizes
    • Prizes earned are taxable in the hands of the winner as Income from Other Sources income (IFOS) as per Sec 56(2) of the Income Tax Act. Income from betting, gambling, sports events, horse race etc are all taxable incomes

Tax Rate on winning lottery, puzzle, game show, horse race

Tax on lottery winning, crossword puzzles, card games, etc is at flat rate of 30%. After adding the health & education cess of 4%, the effective tax rate is 31.2%. The income would be taxed at flat 30% without considering tax slab rates. If the prize is received in kind, tax is calculated at the market value of the item received.

Example

Divya won a lottery and received INR 5 lakh in cash and a diamond ring worth INR 1 lakh. She also has Fixed Deposit Interest income of INR 1 lakh. She has invested INR 1.5 lakhs in Section 80C and also paid INR 25,000 as medi-claim. Calculate the tax liability.

Particulars Amount (INR)
Income from Other Sources  
Fixed Deposit Interest  1,00,000
Winning from Lottery 6,00,000
Gross Total Income 7,00,000 
Deductions under Chapter VI-A (1,00,000)
Total Income 6,00,000
Tax at slab rate NIL
Tax at special rate (30%) 1,80,000
Total Income Tax 1,80,000
Health & Education Cess @4% 7,200
Total Tax Liability 1,87,200

TDS on prizes & winnings

TDS under Section 194B is applicable on income from lottery, betting, gambling etc. If the income exceeds INR 10,000 during the financial year, the prize distributor is liable to deduct TDS at 31.2% at the time of making the payment.

TDS under Section 194BB is applicable on income from activity of owning and maintaining horse races. If the income exceeds INR 10,000 during the financial year, the horse race organiser is liable to deduct TDS at 31.2% at the time of making the payment.

ITR Form & Due Date

  • ITR Form: Winnings from lottery, puzzles, betting etc is treated as Income from Other Sources. The taxpayer should file ITR-1 (if income is upto INR 50 lacs) or ITR-2 (if income exceeds INR 50 lacs) on the Income Tax Website.
  • Due Date – 31st July of the Assessment Year. For eg: Due Date to file ITR of FY 2020-21 (AY 2021-22) is 31st July 2021.

Special Provisions for tax on winning lottery, puzzle, game show, horse race

If a taxpayer has income from winning a lottery, puzzle, card game, gambling, etc, here are important provisions applicable:

  • The taxpayer cannot claim deductions under chapter VI-A such as Sec 80C, 80D, 80G etc for such income
  • The taxpayer cannot claim any expenses against such income
  • Income Tax on such income is at a flat rate of 31.2% and thus the taxpayer cannot claim benefit of basic exemption limit and slab rates
  • The taxpayer cannot claim any refund of the TDS deducted on such income
  • Loss from owning and maintaining horse race cannot be set-off against any income except horse race income. Taxpayer can carry foward the remaining loss for 4 years

FAQs

I have won a lottery. Should I pay taxes on lottery income?

Income from winning a lottery, card game, competition, betting, gambling etc is a special rate income. Tax rate on such income is 31.2% as per Section 115BB of Income Tax Act. Taxpayer cannot claim benefit of slab rates or the basic exemption limit. The prize distributor would have deducted TDS at 30% before making the payment to winner.

If the prize is paid in cash or kind, how should tax be calculated?

Income Tax on winning lottery, puzzles, card games, etc should be calculated at 31.2% (30% plus 4% cess) of the total prize money. If the prize is paid in kind such as car, jewellery, holiday trip, etc the tax should be calculated on the market value of the prize.

Do I have to pay tax if I withdraw my winnings on Dream11?

Income on Dream 11 is considered as a betting income. Dream 11 tax is calculated at 31.2% (30% plus 4% cess). If your net winning from a contest exceeds INR 10,000, they would deduct TDS at 30% and credit the remaining amount to your account. You can then withdraw the funds without paying any additional tax.

Income from Other sources and Taxes – IFOS : Guide

What is Income from Other Sources or IFOS?

Income from Other Sources is the residual head of income. Hence, any income which is not specifically taxed under any other head of income will be taxed under this head. Further, there are certain incomes that are always taxed under this head. These incomes are as follows:

  • Dividends from companies.
  • Winnings from lotteries, crossword puzzles, races including horse races, card games, and other games of any sort, gambling or betting of any form whatsoever.
  • Income by way of interest received on compensation or on enhanced compensation shall be chargeable for tax under the head “Income from Other Sources”.
  • Gifts are also taxed under this head.
  • Family pension.
  • Different interest incomes (eg. interest income from post office savings account, bank savings account, bank fixed deposit, etc.).
  • Interest received from IT Dept. on delayed refunds.
  • Insurance commission.
  • Income from letting out of machinery, plant, or furniture.
  • Income from royalty.
  • Any sum received under a Keyman Insurance Policy including bonus.
  • Director’s commission for standing as guarantor to bankers.
  • Remuneration received by Members of Parliament.
  • Income from sub-letting of House Property by a tenant, etc.

This is an inclusive list and not an exhaustive list. Please note that Agricultural income is exempt from tax so it will not fall under any of the heads of income. It will be mentioned as exempt income while e-filing the Income Tax Return.

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In addition to the above, the following incomes are charged to tax under this head, if not taxed under the head “Profits and Gains of Business or Profession.”

  • Any contribution to a fund for the welfare of employees received by the employer.
  • Income from
    • Interest on securities.
    • Letting out or hiring of plant, machinery or furniture.
    • Letting out of plant, machinery or furniture along with building where both the lettings are inseparable.
  • Any sum received under a Keyman Insurance Policy including bonus.

Taxability of Income from Other Sources or IFOS

Taxability of incomes falling under this head may differ as per their nature. Let’s have a look at the tax treatment on some of these incomes:

Taxability of Gifts under Income from Other Sources

Gifts can mainly be classified under following categories:

  • Monetary gifts.
  • Movable properties received without consideration or without adequate consideration.
  • Immovable properties received without consideration or without adequate consideration.

Gifts will be completely taxable under the head income from other sources with the following exceptions:

  1. Some of the money received as gifts will be exempt if the aggregate value of such received during a financial year does not exceed INR 50,000.
  2. Any property received without consideration and total fair market value of such properties received throughout the year does not exceed INR 50,000.
  3. Gifts received from relatives*
    • On the occasion of the marriage.
    • Under will/by way of inheritance.
    • In contemplation of death of the payer.
    • From local authority.
    • A fund, foundation, university, other educational institution, hospitals, or any trust or institution defined in Section 10(23C).
  4. Amount received from a charitable trust registered under Section 12AA.

*Relatives for this purpose means:

1. Spouse of the individual 2. Brother or sister of the individual
3. Brother or sister of the spouse of the individual 4. Brother or sister of either of the parents of the individual
5. Any lineal ascendant or descendent of the individual 6. Any lineal ascendant or descendent of the spouse of the individual
7. Spouse of the person referred to in (b) to (f)

 

Tax Treatment of Amount received from Life Insurance Policy

Any amount received under Life Insurance policy, including any bonus amount, is exempt from tax under section 10(10D) of the Income Tax Act. A few important points to be noted with regards to this exemption:

  • Exemption is available only in respect of amount received from Life Insurance policy.
  • Exemption is available only if amount of premium paid on such policy for a particular financial year does not exceed 20% (10% in respect of policies taken on or after 1st April, 2012) of the actual capital sum assured. Please note that any amount received on death of the policyholder will continue to be exempt without any conditions.
  • While calculating the actual sum assured, any premium amount agreed to be returned or any of the benefits by way of bonus shall not be considered.

Example

Pratik has taken a Life Insurance policy on 15th December 2014. The total sum assured is INR 50,00,000 and the annual premium is INR 82,000. The policy will mature in the year 2026 and the maturity amount will be INR 10,00,000.

  • Now in the event of Pratik’s death, the amount sum assured of INR 50,00,000 received by the nominee will be completely exempt.
  • In any other case, the amount received from the policy will be exempt if the annual premium of the financial year does not exceed 10% of the capital sum assured. Here the capital sum assured is INR 50,00,000 so 10% of 50,00,000 comes to INR 5,00,000. The annual premium paid by Pratik is only INR 82,000 so nothing will be taxable if money is received in an event other than death.

Tax Treatment for Dividend Income

  • Dividend income is chargeable under this head. However, it will be completely exempt if it is received from a company that was applicable to dividend distribution tax under section 115O of the Income Tax Act.
  • This exempt dividend will be mentioned under exempt income while e-filing the Income Tax Return.
  • Dividend received from co-operative societies or foreign companies will be completely taxable.

Tax Treatment for Interest Income

Taxability of interest income may vary, depending on the nature of interest income.

  • Although Interest on the savings bank account is taxable, deduction u/s 80TTA is available for a maximum limit of INR 10,000.
  • Interest earned on tax-free bonds is completely exempt.
  • Interest on Fixed deposit and recurring deposits is completely taxable. If the total interest income from such sources exceeds INR 10,000, then the banks will deduct the TDS @ 10%. (@ 20% if the PAN is not provided).
  • Interest on Public Provident Fund (PPF) account is completely exempt.
  • Any interest earned on the post office saving bank account is exempt upto a certain extent. In case of Individual account, interest is exempt upto INR 3500 & in case of Joint account, interest is exempt upto INR 7000.
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Can I claim any expenses from Incomes from Other Sources or IFOS?

Yes, the following are some of the deductions available from income chargeable to tax under the head Income from Other Sources or IFOS:

  • Any commission or remuneration paid for realizing dividend (taxable dividend) or interest on securities.
  • Any current repairs, insurance premium, and depreciation in respect of plant, machinery, building, and furniture are deductible from the rent income earned by letting out of such plant, machinery, building, and furniture.
  • In the case of family pension, the deduction is allowed for the lower of INR 15,000 or 1/3rd of such amount received in the nature of family pension.
  • Please note that no personal expenditure shall be allowed to be deducted from income chargeable under the head ‘Income from Other Sources’.

What tax deduction cannot be claimed under Income From Other Sources?

According to section 58 of the Income Tax Act, the following are deductions that cannnot be claimed during the computation of Income from Other Sources;

  • Amount mentioned as per section 40A
  • Any personal expenses
  • Amount paid towards wealth tax
  • Expenses associated with winnings from lotteries, races, crossword puzzles, games, gambling, or betting
  • A salary that is payable outside India on which tax is not deducted at the source
  • Any interest subject to tax that is payable outside India

FAQs

Is gift taxable as other income?

Gifts from relatives are exempt and any gifts received from non relatives are exempt upto an aggregate of Rs. 50,000 in a Financial year. Total value of gifts over and above Rs. 50,000 will be taxable under the head ‘Income from Other Sources’. Gifts received on the occasion of marriage are exempt from thax. Read here to know more about Gifts and thier taxability.

Can I claim any deductions on family pension?

As per Income Tax Act, you can claim a standard deduction of 1/3rd of the amount of family pension received subject to maximum of Rs. 15,000 annually.

Is lottery prize taxable?

Yes, lottery winnings are liable to flat rate of tax at 30% without any basic exemption limit. Thus in such a case the payer of prize money will generally deduct tax at source (i.e., TDS) from the winnings and will pay you only the balance amount.

Tax on Gift: Rules and Exemptions As per Income Tax Act in India

What is Gift as per Income tax Act?

Gift as per Income tax act means property (both movable and immovable) and money (cash, cheque, draft, etc) received without consideration or against inadequate consideration. Let’s understand what movable and immovable property include on which income tax provisions apply:

  • Immovable property: Land or building or both (it does not include agricultural land in rural areas)
  • Movable property: Shares, securities, jewellery, archaeological collection, drawing, painting, any work of art, bullion, vehicles, etc.

When are Gifts taxable?

  • Gifts received are taxable if the monetary value of all gifts received without consideration by the recipient exceeds INR 50,000. The whole amount would be taxable. For Example, Rohan received Gifts of monetary value INR 7000 from each of his 10 friends, the whole INR 70,000 will be taxable since the monetary value of all gifts received exceed INR 50,000.
  • However, when a gift is received against inadequate consideration, it will be taxable when the shortfall of the consideration received, exceeds INR 50,000. In such a case, the whole amount of shortfall will be taxable. For Example, Nisha received INR 10,000 each from her 10 friends. She contributed back INR 1000 to each of her friends. In this case, the shortfall of INR 70,000 will be taxable in the hands of Nisha.
  • The gift would be taxable if it is in the nature of capital assets in the hands of the recipient. Any gifts in the nature of stock, raw materials, or consumables that can be used by the recipient in his/her business operation, will not be considered as a capital asset and thus will not be taxable.
  • The gift would be chargeable to tax under the head “Income from other sources” and at normal slab rates.

When Gifts received are exempt from tax?

Under the following situations, gifts received are non-taxable in hands of recipient irrespective of monetary value:

  • Gift received :
    • from relatives*
    • On occasion of the marriage,
    • Under will/by way of inheritance.
    • In contemplation of death of the payer.
    • From local authority.
    • A fund, foundation, university, other educational institution, or other medical institution, hospitals, or any trust or institution defined in Section 10(23C), any trust or institution registered under section 12AA.

Relative*

  • Spouse of the individual
  • Brother and sister (including their respective spouses) of both individual and his/her spouse
  • Brother and Sister (including their respective spouse) of an individual’s father and mother
  • any lineal ascendant or descendant (including their respective spouses) of the individual
  • any lineal ascendant or descendant (including their respective spouses) of the spouse of the individual

Here is the summary of all the scenarios for better understanding:

Gift Consideration Amount taxable
Money (cash, cheque, draft) Nil If money > 50,000; whole amount taxable
Immovable property Nil If Stamp duty value > 50,000; Stamp duty value would be taxable
Immovable property (as defined above) Received which is less than stamp duty value by an amount exceeding Rs 50,000 [Stamp duty value – consideration] would be taxable
Agricultural land in rural area Nil/received Nil
Movable property (as defined above) Nil Fair market value > 50,000; Fair market value would be taxable
Movable property (as defined above) Received which is less than Fair market value by an amount exceeding Rs 50,000 Fair market value – consideration > 50,000 Fair market value would be taxable
Property/money on the occasion of marriage Nil/received Completely exempt irrespective of value
Any gifts not included in definition above Nil/received Completely exempt irrespective of value

Provision Relating to Stamp Duty for Gift Tax

In order to calculate gift tax for immovable property, stamp duty value must be considered. There is a possibility that the stamp duty can be higher for reasons like time gap between the agreement fixing the consideration and date of registration. Hence, for calculating gift tax stamp duty value as on the date of agreement fixing the consideration must be taken into consideration if the following conditions are satisfied:

  • If the consideration is paid either fully or partially via account payee cheque, bank draft or digital mode on or before the date of agreement for the transfer
  • Date of the agreement and the date of registration is different
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FAQs

Are monetary gifts received from friends liable to tax?

Gifts received from relatives are not charged to tax.
Friend is not a relative as defined in the list and hence, gift received from friends will be charged to tax (if other criteria of taxing gift are satisfied).​

Is gift in cash taxable?

Gift of money: Aggregate value of cash gifts received without consideration during a financial year would be taxable as Income from Other Sources in the hands of the recipient. However, if the aggregate value of such gifts is less than Rs 50,000, then it would be exempt from tax