Income from Other Sources refers to any income that does not fall under the specific heads of income such as Salary, House Property, Business or Profession, or Capital Gains. It is a residual category that includes various types of income that do not have separate provisions for computation under specific heads. The basis of charge for income from other sources is determined by the provisions of the Income Tax Act, 1961 in India. Here are some key aspects related to the basis of charge for income from other sources:
- Inclusion of Income: The income from other sources includes various types of income such as interest income, rental income from assets other than house property, dividend income, income from fixed deposits, income from savings accounts, winning from lotteries, gifts, and certain allowances and perquisites not covered under other heads.
- Accrual or Receipt Basis: Income from other sources can be charged to tax either on an accrual basis or receipt basis, depending on the nature of the income. Under the accrual basis, income is taxable when it is earned or becomes due, irrespective of whether it is received or not. Under the receipt basis, income is taxable when it is actually received.
- Computation of Income: The computation of income from other sources generally involves deducting any expenses incurred for earning that income. Certain deductions or exemptions may be available based on specific provisions of the Income Tax Act. For example, in the case of interest income, deductions may be available for certain expenses directly related to earning that interest income.
- Taxation of Gifts: Gifts received in cash or kind above a specified threshold are taxable as income from other sources, subject to certain exceptions. However, certain gifts received from relatives, on occasions like marriage, or under certain specified circumstances may be exempt from tax.
- Taxation of Dividend Income: Dividend income received from domestic companies is taxable under the head “Income from Other Sources.” However, certain dividends may be exempt from tax based on specific provisions and thresholds.
- Disallowance of Expenses: Certain expenses or allowances incurred for earning income from other sources may be disallowed or subject to specific restrictions. For example, expenses incurred for earning exempt income or personal expenses are generally not allowed as deductions.
Dividend income refers to the earnings received by individuals or entities in the form of dividends from investments in shares or mutual funds. Dividends are typically distributed by companies to their shareholders as a share of the profits. The taxation of dividend income in India is governed by the provisions of the Income Tax Act, 1961. Here’s a detailed explanation of the taxation of dividend income in India:
- Dividend Distribution Tax (DDT): Historically, in India, companies were required to pay a Dividend Distribution Tax (DDT) on the dividends declared and distributed to shareholders. Under the DDT regime, the tax liability was on the company, and the dividend income received by shareholders was tax-free in their hands.
- Removal of DDT and Introduction of New Regime: From the financial year 2020-21 (assessment year 2021-22), the DDT regime was abolished, and a new tax regime for dividend income was introduced. Under the new regime, dividend income is taxable in the hands of the shareholders, subject to certain exemptions and deductions.
Taxation of Dividend Income for Individuals and HUFs: For individuals and Hindu Undivided Families (HUFs), dividend income is taxed as follows:
- Dividend Income from Domestic Companies: Dividend income received from domestic companies is included in the total income of the individual or HUF and is subject to tax at applicable slab rates as per the income tax brackets. The income is treated as “Income from Other Sources” and is taxed as per the individual’s income tax slab.
- Dividend Income up to INR 5,000: Dividend income up to INR 5,000 received during the financial year is eligible for a deduction under Section 80TTA. This deduction is available for individuals and HUFs and is in addition to the basic exemption limit.
- Dividend Income above INR 5,000: Dividend income exceeding INR 5,000 is taxable at the applicable slab rates without any specific deductions.
- Taxation of Dividend Income for Companies and Firms: For companies and firms, dividend income is taxable as per the applicable income tax rates. Dividend income received by companies and firms is considered as part of their total income and is taxed at the applicable corporate tax rates.
- Tax Deducted at Source (TDS) on Dividend: Under the new regime, companies are required to deduct tax at source (TDS) at the rate of 10% on dividend income exceeding INR 5,000 paid to residents. However, certain exemptions and lower TDS rates are applicable in specific cases, such as when the shareholder’s total dividend income is below the threshold of INR 5,000 or when the shareholder submits a valid declaration under Form 15G/15H.
- Taxation of Dividend from Mutual Funds: Dividend income received from mutual funds is taxable in the same manner as dividend income from domestic companies. The dividend received from mutual funds is included in the individual’s or HUF’s total income and taxed as per the applicable slab rates.
Interest on Securities
Interest on securities refers to the income earned by individuals or entities from investments in various types of securities such as government bonds, corporate bonds, debentures, fixed deposits, and other interest-bearing instruments. The taxation of interest income on securities in India is governed by the provisions of the Income Tax Act, 1961. Here’s an explanation of the taxation of interest on securities in detail:
- Classification of Interest Income: Interest income earned on securities is generally classified as “Income from Other Sources” and is taxable under this head.
- Inclusion in Total Income: The interest income earned from securities is included in the total income of the individual or entity and is subject to tax at the applicable income tax rates.
Taxation for Individuals and Hindu Undivided Families (HUFs):
- Taxation of Interest Income from Government Securities: Interest earned from government securities, such as bonds issued by the Central or State Government, is taxable as per the individual’s income tax slab rates. It is considered as “Income from Other Sources” and forms a part of the individual’s total income.
- Taxation of Interest Income from Corporate Bonds and Debentures: Interest income earned from corporate bonds and debentures is also taxable as per the individual’s income tax slab rates. It is treated as “Income from Other Sources” and forms a part of the individual’s total income.
- Tax Deducted at Source (TDS) on Interest Income: In many cases, the payer (such as a bank or financial institution) deducts tax at source (TDS) on the interest income paid to individuals or HUFs. The TDS rate varies depending on the type of securities and the amount of interest income. Taxpayers can claim credit for the TDS deducted while computing their final tax liability.
- Taxation for Companies and Firms: For companies and firms, interest income from securities is treated as part of their total income and is taxed at the applicable corporate tax rates.
- Deductions and Exemptions: Certain deductions or exemptions may be available to individuals and HUFs on interest income earned from specific types of securities. For example:
- Deduction under Section 80TTA: Individuals and HUFs can claim a deduction of up to INR 10,000 on interest income earned from savings accounts with banks, co-operative societies, or post offices. This deduction is available under Section 80TTA.
- Deduction under Section 80TTB: Senior citizens (aged 60 years and above) can claim a deduction of up to INR 50,000 on interest income earned from deposits with banks, co-operative societies, or post offices. This deduction is available under Section 80TTB.
- Exemption for Interest on Government Savings Bonds: Interest income earned from specified government savings bonds, such as the Senior Citizens Savings Scheme (SCSS) or National Savings Certificates (NSC), may be eligible for specific exemptions or deductions as per the provisions of the Income Tax Act.
Winning from Lotteries
Winning from lotteries refers to the prize money or rewards received by individuals from participating and winning in lottery games or similar contests. In India, the taxation of lottery winnings is governed by the provisions of the Income Tax Act, 1961. Here’s an explanation of the taxation of winning from lotteries in detail:
Classification of Lottery Winnings: Lottery winnings are generally classified as “Income from Other Sources” and are taxable under this head.
Inclusion in Total Income: The winnings from lotteries are included in the total income of the individual and are subject to tax at the applicable income tax rates.
Taxation for Individuals and Hindu Undivided Families (HUFs):
- Tax Rate: Lottery winnings are taxed at a special flat rate of 30% (plus applicable surcharge and cess) on the total amount won. This rate is applicable regardless of the individual’s income tax slab rates.
- Tax Deducted at Source (TDS): The organization or entity conducting the lottery is required to deduct tax at source (TDS) at a rate of 31.2% (including surcharge and cess) on the prize money exceeding INR 10,000. The TDS is deducted at the time of payment of the winnings.
- Reporting in Income Tax Return: Lottery winners need to report their winnings in their income tax return under the head “Income from Other Sources.” The TDS deducted on the winnings should also be appropriately mentioned in the tax return.
Set-Off and Carry Forward of Losses: In the case of lottery winnings, no set-off or carry forward of losses is allowed against the winnings. This means that losses from other heads of income cannot be offset against lottery winnings for tax purposes.
Deductions and Exemptions: There are no specific deductions or exemptions available against lottery winnings under the Income Tax Act. The tax liability is calculated based on the total amount won and the applicable tax rate.
Gift Tax Implications: It’s important to note that if an individual receives lottery winnings as a gift from another person, the gift tax provisions may apply. As per the gift tax rules, if the total value of gifts received during a financial year exceeds INR 50,000, the recipient may be liable to pay tax on the excess amount.
Crossword Puzzles and Similar Activities: If you earn income from participating in crossword puzzles or similar contests, the income is generally taxable as “Income from Other Sources.” The income earned is added to your total income and taxed at the applicable income tax rates.
Horse races, Card games etc.
Income earned from horse racing, including winnings from betting or participating in horse races, is also considered as “Income from Other Sources.” The income is included in your total income and taxed at the applicable income tax rates. It’s important to note that specific provisions and rules may exist for professional horse race participants or those engaged in horse breeding and training.
Card Games and Other Games of Chance: Income earned from participating in card games, casino games, or other games of chance is generally considered as “Income from Other Sources.” This includes any winnings or prizes received from such activities. The income is included in your total income and taxed at the applicable income tax rates. It’s important to comply with any reporting requirements and pay the applicable taxes on such winnings.
- Tax Deducted at Source (TDS): In certain cases, the organizers or entities facilitating these activities may be required to deduct tax at source (TDS) on the winnings or prize money. The TDS rates and thresholds can vary, and it’s essential to be aware of the applicable TDS provisions and ensure proper documentation and reporting.
- Deductions and Exemptions: There are no specific deductions or exemptions available for income earned from crossword puzzles, horse races, card games, or similar activities. The income is generally taxable as per the applicable income tax rates without any specific deductions.
Permissible Deductions, Impermissible Deductions
Permissible deductions, also known as allowable deductions, are expenses or costs that can be deducted from your taxable income, thereby reducing your overall tax liability. These deductions are recognized and allowed by the tax laws of India. On the other hand, impermissible deductions, also known as disallowed deductions, are expenses or costs that cannot be claimed as deductions for tax purposes. Here’s a brief explanation of permissible and impermissible deductions in India:
- Business Expenses: Deductions are allowed for expenses that are incurred wholly and exclusively for the purpose of business or profession. This includes expenses such as rent, salaries, wages, office supplies, travel expenses, advertising, and professional fees.
- Depreciation: Depreciation is allowed as a deduction for the wear and tear of assets used in the course of business or profession. Different rates of depreciation are prescribed for different types of assets.
- Interest Expenses: Interest paid on loans or borrowings used for business purposes can be claimed as a deduction. This includes interest on business loans, working capital loans, and other business-related interest expenses.
- Charitable Contributions: Donations made to registered charitable organizations or institutions are eligible for deductions under Section 80G of the Income Tax Act, subject to specified limits and conditions.
- House Rent Allowance (HRA): HRA received by salaried individuals can be claimed as a deduction, subject to certain conditions and limits.
- Medical Expenses: Medical expenses incurred for the treatment of specified illnesses or medical conditions can be claimed as deductions under Section 80DDB, subject to certain limits and conditions.
- Education Expenses: Deductions are allowed for tuition fees paid for the education of children under Section 80C of the Income Tax Act, subject to specified limits and conditions.
- Personal Expenses: Personal expenses, such as personal travel, personal phone bills, personal insurance premiums, and personal entertainment expenses, are not allowed as deductions.
- Capital Expenditure: Expenditure on acquiring capital assets, such as land, buildings, vehicles, or machinery, cannot be claimed as a deduction. However, depreciation on such assets is allowed.
- Fines and Penalties: Fines, penalties, or any other amount paid for a violation of the law are not allowed as deductions.
- Gifts to Family and Relatives: Gifts made to family members or relatives are not eligible for deductions, except in specific cases under the provisions of the Income Tax Act.
- Personal Loans and Interest: Interest paid on personal loans or personal credit card debt is not allowed as a deduction.