The term "Income from Other Sources" refers to a residual category of income that encompasses earnings not exempt from tax and not chargeable under the following specific heads:
a) Salaries
b) Income from House Property
c) Profits and Gains from Business or
Profession
d) Capital Gains
Certain
types of income, such as winnings from lotteries, gifts, interest on enhanced
compensation, and similar earnings, are always taxed under this category.
Specific Incomes
Income
taxable under the head "Income from Other Sources" comprises:
1. Certain incomes specifically taxed
under this head.
2. Other incomes that do not fall
under any other specified heads and are therefore chargeable here.
The following incomes are specifically taxable under the head "Income from Other Sources"
Dividend Income [Section 56(2)(i)]
A dividend
generally refers to the distribution of profits by a company to its
shareholders. However, certain receipts are also treated as deemed dividends
under Section 2(22) of the Income-tax Act, which includes:
a) Distribution involving the release
of a company's assets.
b) Distribution of debentures or
deposit certificates.
c) Distribution of bonus shares to
preference shareholders.
d) Distribution during liquidation.
e) Distribution upon reduction of the
company's capital.
f) Loans or advances provided to
shareholders.
g) Payments made by a company for the
purchase of its own shares from shareholders (applicable from 01-10-2024).
Dividends declared,
distributed, or paid on or after 01-04-2020 are taxable in the hands of
shareholders. The taxability of dividend income depends on:
1. The applicable tax rate or flat
rate, as determined by the law.
2. The residential status of the
recipient and the nature of the security.
Deduction on Dividend Income
Shareholders
are permitted to deduct interest expenditure (if any) incurred to earn dividend
income, subject to a maximum of 20% of the total dividend income.
No other
deductions are allowed for expenses such as commission or remuneration paid to
a banker or any other person for realizing the dividend.
Income from Gambling Activities [Section 56(2)(ib)]
The gross
income earned from the following activities is taxable under the head
"Income from Other Sources" at a flat rate of 30%:
a) Winnings from any lottery or crossword
puzzle
Lottery" includes winnings from
prizes awarded to any individual through a draw of lots, by chance, or through
any other method, under any scheme or arrangement, regardless of its name.
b) Winnings from online games
This includes winnings from
lotteries, crossword puzzles, races (including horse races), card games, any
other type of game, gambling, or betting.
c) Horse races (excluding the activity of
owning and maintaining racehorses)
Horse race" refers to a race where wagering or betting is legally
permitted.
d) Card games and other games of any sort
This encompasses any game show,
entertainment program (on television or electronic platforms), or any other
similar game where participants compete to win prizes.
e) Gambling or betting of any form or
nature
Taxability and Restrictions
-Such income
is taxed on a gross basis, meaning no deductions are allowed for any expenses
incurred to earn the income.
-Additionally,
no set-off of losses is permitted, either from the same activity or any other
head of income.
Employee’s Contribution to Staff Welfare Schemes [Section 56(2)(ic)]
As per
Section 2(24)(x), any sum received by an employer from employees as a
contribution to:
-A provident fund,
-A superannuation fund,
-A fund established under the
Employees’ State Insurance Act, 1948, or
-Any other fund for the welfare of
employees,
is deemed to
be the income of the employer.
Deduction for Timely Deposits
-If the
employer deposits the contribution into the employee’s account in the relevant
fund on or before the due date specified under the applicable law, the amount
is allowed as a deduction under Section 36(1)(va).
Taxability of Non-Deposited Contributions
If the
employer fails to deposit the employee's contribution into the relevant fund on
or before the due date, the following applies:
The undeposited amount becomes
taxable under the head "Income from Other Sources" if it is not
taxable as business income under Section 28.
Interest on Securities [Section 56(2)(id)]
Interest
earned on securities is taxable under the head "Income from Other Sources" if it is not chargeable to income
tax under the head "Profits and
Gains of Business or Profession".
As defined
under Section 2(28B) of the Income-tax Act, "interest on securities"
includes:
a) Interest on any security issued by
the Central Government or a State Government.
b) Interest on debentures or other
securities issued for money by or on behalf of:
A local authority,
A company, or
A corporation established by a
Central, State, or Provincial Act.
Tax Rates
-The
interest income is taxable at the rates applicable to the assessee.
-For
non-residents, certain types of interest income are taxable at concessional
rates, as specified under the Act.
Income from Letting of Machinery, Plant, or Furniture [Section 56(2)(ii)/(iii)]
Income
earned from the leasing or renting of machinery,
plant, or furniture is taxable under the head "Income from Other Sources", provided it is not chargeable
under the head "Profits and Gains of Business or Profession".
Sum Received under a Keyman Insurance Policy [Section 56(2)(iv)]
Any sum received
from a Keyman Insurance Policy, including bonus allocations, is taxable under the head "Income from Other Sources",
provided it is not chargeable under the head "Profits and Gains of Business or Profession" or "Salaries".
Shares Issued at a Premium by a Closely Held Company [Section 56(2)(viib)]
(Not applicable from Assessment Year
2025–26)
Any excess
premium received by a closely held company on the issue of shares is taxable
under the head "Income from Other
Sources" if the following conditions are met:
a) The
company issues equity or preference
shares.
b) The
consideration received for the shares exceeds their face value and fair market value.
Exceptions
This
provision does not apply to consideration received for the issue of shares in
the following cases:
1. From a Venture Capital Undertaking
When consideration is received from a Venture Capital Company, Venture Capital Fund, or
Category-I/Category-II Alternative Investment Fund (AIF).
2. From an
Eligible Start-up
When the company is an eligible start-up that meets the
conditions specified in the notification issued by the DPIIT (Department for Promotion of Industry and Internal Trade).
Interest on Compensation or Enhanced Compensation [Section 56(2)(viii)]
Income
earned as interest on compensation or enhanced compensation is taxable under
the category of "Income from Other Sources." A deduction of 50% of
such interest income is permissible under Section 57. This interest income is
taxable in the financial year in which it is received.
However, the
taxability of interest on compensation or enhanced compensation is contingent
upon the taxability of the principal amount. If the original or enhanced
compensation is exempt from tax, the interest paid on such compensation is also
exempt.
Forfeiture of Advance Money Received for Transfer of a Capital Asset [Section 56(2)(ix)]
If any
amount received as an advance or otherwise during negotiations for the transfer
of a capital asset is forfeited because the negotiations do not lead to the
transfer of the asset, the forfeited amount is taxable under the head
"Income from Other Sources."
This
provision applies only if the forfeiture occurred in the financial year 2014-15
or any subsequent year. The forfeited amount is taxable under this section only
when the asset in question qualifies as a capital asset. If the asset is not a
capital asset, the forfeited advance money will not be taxable under this
provision.
For
instance, if Mr. Bimal receives an advance of Rs. 1 lakhs during negotiations
for the sale of his personal car (or rural agricultural land), but the Vehicle
is not transferred and the advance is forfeited, the amount will not be taxable
under this section. This is because a personal car is considered a personal
effect, and rural agricultural land is not classified as a capital asset.
Compensation on Loss of Employment [Section 56(2)(xi)]
Any
compensation or other payment received by an individual due to or in connection
with the termination of employment, or the modification of the terms and
conditions of employment, is taxable under the head "Income from Other
Sources."
A similar
provision exists under Section 17(3)(i), which states that compensation
received by an employee from their employer or former employer at the time of,
or in connection with, the termination of employment or modification of
employment terms is taxable as "Profits in Lieu of Salary."
The key
differences between these two provisions are as follows:
a) Section
17(3)(i) applies only to "compensation," while Section 56(2)(xi)
includes "any other payment" in addition to compensation.
b) Section
17(3)(i) covers payments received from an "employer or former
employer," whereas Section 56(2)(xi) applies to payments received from
"any person."
The
taxability of the payment under either section depends on the payer and the
nature of the payment.
Example:
Mr. Bimal
entered into an employment agreement with a company to serve as its CEO.
However, the company denied him employment and compensated him for the
non-commencement of the employment. Since no employer-employee relationship
existed, the compensation received cannot be taxed as "Salary" under
Section 17(3)(i). Instead, it will be taxable under "Income from Other
Sources" as per Section 56(2)(xi).
Sum Received from a Business Trust [Section 56(2)(xii)]
A specified
sum received by a unitholder from a business trust is taxable under the head
"Income from Other Sources" if:
a) The sum
is not in the nature of interest, dividend from an SPV, or rental income of a
REIT, as specified in Section 10(23FC) and Section 10(23FCA); and
b) The sum
is not chargeable to tax in the hands of the business trust under Section
115UA.
Sum Received under a Life Insurance Policy [Section 56(2)(xiii)]
A sum
received under a life insurance policy with a high or excessive premium is
taxable under the head "Income from Other Sources," as per Section
56(2)(xiii). This section states that any amount received under such a policy
exceeding the total premiums paid during the policy term will be taxable.
However, if
the premium paid has been claimed as a deduction under any other provision of
the Income Tax Act, it will not be included in the total premium deducted while
calculating taxable income. Additionally, the Central Board of Direct Taxes
(CBDT) may prescribe specific rules for the computation of such taxable income.
Family Pension [Section 56(1)]
Family pension
refers to the monthly pension received by the family or heirs of a deceased
employee. While pension received by an employee during their lifetime is
taxable under the head "Salaries," family pension is taxable under
the head "Income from Other Sources."
The family
members receiving the family pension are eligible for a standard deduction,
which is the lower of the following amounts:
a) One-third
of the family pension; or
b) ₹15,000.
Note:
From
Assessment Year 2025-26 onwards, if the income tax is computed under Section
115BAC(1A) (the default new tax regime), the enhanced threshold limit for the
standard deduction will be ₹25,000.
Any Other Income [Section 56(1)]
Any income
not specifically described under the preceding categories will be taxable under
the head "Income from Other Sources" if it does not fall under any of
the other four heads of income.
The
following types of income are commonly taxed under this head:
a) Interest
earned on bank deposits
b) Income
from investments in small savings schemes (e.g., Post Office Savings or
National Savings Certificates)
Attributable Expenses or Eligible Expenses
Deductible Expenses [Section 57]
Section 57
specifies the types of expenditures that can be deducted from income taxable
under the head "Income from Other Sources." It allows for the
deduction of expenses incurred wholly and exclusively for earning such income,
provided the following conditions are met:
a) The expenditure must not be of a
personal nature for the assessee.
b) It must not constitute capital
expenditure.
c) The expense must be incurred
wholly and exclusively for the purpose of earning the income taxable under this
head.
Non-Deductible Amounts [Section 58]
The
following expenses are not permitted as deductions when calculating income
taxable under the head "Income from Other Sources":
1. Interest Payments
No deduction is allowed for interest payable outside India if:
-The interest is
taxable in the hands of the recipient, and
Tax has not been deducted at source
(TDS), or if deducted, it has not been deposited with the Central Government as
per TDS provisions.
2. Salary Payments
No deduction is allowed for salary payments made outside India if:
The payment is chargeable under the
head "Salaries", and
Tax has not been deducted at source
(TDS) or deposited as required under TDS provisions.
3. TDS Default (Section 58(1A))
Section 58(1A) applies the
disallowance provisions of Section 40(a)(ia) while computing income under
"Other Sources." This disallows expenses where:
Tax has not been
deducted at source, or
Tax has been deducted but not
deposited with the Central Government before the due date for filing the
return.
4. Personal Expenses
No deduction is allowed for any expense of a personal nature incurred
by the assessee.
5Disallowance of Specific Expenses Under
Section 40A (Section 58(2))
Section 58(2) extends the provisions
of Section 40A to the computation of income under "Other Sources."
The disallowed expenses include:
Excessive payments to relatives
(Section 40A(2)).
Cash payments exceeding specified
limits (Section 40A(3)/40A(3A)).
Provisions
for gratuity (Section 40A(7)).
Contributions
to non-statutory funds (Section 40A(9)).
Mark-to-market
losses (Section 40A(13)).
6. Expenditures Related to Betting Income
No deduction is allowed for any
expenses incurred to earn income from winnings, including lotteries, crossword
puzzles, races (including horse races), card games, gambling, or betting.
Exception:
Revenue expenses incurred for owning
and maintaining racehorses are deductible if the horses are used for races
where wagering or betting is legally permitted.
Recovery Against Loss or Expenditure [Section 59]
Section 59
incorporates the provisions of Section 41(1) when computing income taxable
under the head "Income from Other Sources." It stipulates that:
-If an
assessee has been allowed a deduction in any prior year for a loss,
expenditure, or trading liability, and
-Subsequently
receives any amount or benefit in connection with that loss, expenditure, or
liability through remission or cessation,
then the
amount or benefit received becomes taxable as income.
This income
is chargeable to tax in the financial year in which the amount or benefit is
received, irrespective of whether the source of income still exists in that
year or not.
Conclution
The "Income from Other Sources" head ensures that all income not falling under other categories is still accounted for and taxed. Each type of income under this head has specific rules, tax rates, and deductions, so understanding the nature of your income and complying with the provisions can help you manage your tax liability effectively.
FAQs on "Taxable Income from Other Sources Under Indian Income Tax Law
1. What is
"Income from Other Sources"?
- "Income from Other Sources" is a residual
category under the Indian Income Tax Act, encompassing earnings that do not
fall under the heads:
- Salaries
- Income from House
Property
- Profits and Gains
from Business or Profession
- Capital Gains
- Examples include winnings from lotteries, gifts, interest
on enhanced compensation, and similar incomes.
2. What types of income are specifically taxable under "Income
from Other Sources"?
- Dividend income
- Income from gambling activities such as lotteries, online
games, horse races, and card games
- Interest on securities
- Letting of machinery, plant, or furniture
- Sums received under Keyman insurance policies
- Excess premiums on shares issued by closely held companies
(up to AY 2024-25)
- Interest on compensation or enhanced compensation
- Forfeited advance money for transfer of a capital
asset
- Compensation for loss of employment
- Sums received from a business trust
- Sums received under a life insurance policy with high
premiums
- Family pension
- Any other income not falling under other heads of
income
3. Are dividends
taxable under "Income from Other Sources"?
- Yes, dividends declared, distributed, or paid on or after
April 1, 2020, are taxable in the hands of shareholders.
- Shareholders can claim a deduction for interest expense
incurred to earn dividends, up to 20% of the dividend income. No other
deductions are allowed.
4. How is income from
gambling activities taxed?
- Winnings from lotteries, crossword puzzles, online games,
horse races, card games, and betting are taxable at a flat rate of 30%.
- No deductions or set-offs for losses are allowed.
5. What is the tax
treatment of employee contributions to welfare schemes not deposited on time?
- If an employer fails to deposit employee contributions to
welfare schemes (e.g., provident fund, superannuation fund) by the due date,
the undeposited amount is taxable under "Income from Other Sources."
6. Is interest on
securities taxable under this head?
- Yes, interest earned on securities is taxable under
"Income from Other Sources" unless it falls under "Profits and
Gains from Business or Profession." The tax rate depends on the
recipient's status (e.g., concessional rates for non-residents).
7. What is the tax
treatment of family pension?
- Family pension is taxable under "Income from Other
Sources," and a standard deduction is available:
- Lower of 1/3rd of
the pension amount or ₹15,000 (₹25,000 under the new tax regime from AY
2025-26).
8. Can I claim deductions against income under
this head?
- Yes, deductions are allowed for expenses incurred
exclusively to earn income, such as:
- Interest on loans
for earning income
- Expenses for
maintaining racehorses
- However, personal expenses, capital expenditures, and
certain payments (e.g., unpaid TDS) are not deductible.
9. What are
non-deductible expenses under "Income from Other Sources"?
- Expenses not allowed include:
- Personal expenses
- Interest/salary
payments made outside India without TDS compliance
- Excessive cash
payments exceeding specified limits
- Expenses related
to gambling or betting income
- Contributions to
non-statutory funds
10. What happens if advance money for the sale
of a capital asset is forfeited?
- If negotiations fail and advance money is forfeited, the
amount is taxable under "Income from Other Sources," provided the
asset is classified as a capital asset.
11. How is
compensation for loss of employment taxed?
- Compensation for termination or modification of employment
terms is taxable under "Income from Other Sources" if it does not
qualify as "Profits in Lieu of Salary" under Section 17(3)(i).
12. What income from
a business trust is taxable under this head?
- A sum received from a business trust is taxable if it is
not in the nature of:
- Interest,
dividend, or rental income from a Real Estate Investment Trust (REIT) or Special
Purpose Vehicle (SPV).
13. Is income from
life insurance policies taxable?
- Amounts received under life insurance policies with
excessive premiums are taxable if the sum exceeds the total premiums paid.
14. What is
"interest on compensation or enhanced compensation"?
- Interest earned on compensation or enhanced compensation
is taxable under this head, with a 50% deduction allowed. Taxability depends on
whether the principal compensation is taxable.
15. What is the tax
treatment for expenses incurred to recover income?
- Any recovery of previously deducted expenses or liabilities becomes taxable under "Income from Other Sources" in the year of receipt.