As per the Income Tax Act, 1961, various heads of income are defined to maintain clarity and thereby carry out systematic computation of taxable income. These income categories provide the essential basis for the assessment and taxation of income in India. The Act primarily bifurcates Income into five categories, which variously include types of income and provide for different laws relating to them.
The first category of income, Income from Salaries, includes compensation received by an individual from his employer by way of wages, pension, or any benefits arising out of employment. The second category, Income from House Property, applies to income from rent for property ownership. The third type, Profits and Gains of Business or Profession, consists of income from a business or profession. The fourth type, Capital Gains, refers to gains made out of the sale of capital assets such as land, shares, or mutual funds. As the fifth type, Income from Other Sources is a residual type of income and consists of income not falling under any of the above four, like interest income, dividends, or winnings from a lottery.
This systematic classification helps to ensure that various forms of income are taxed in a manner consistent with their character and laws governing respective income heads and hence renders the tax administration just and effective.
Income From Other Sources
Income from Other Sources is the fifth and last type of income as defined by the Income Tax Act of 1961, under Section 56. It includes any kind of income that does not fall under the other four categories: salaries, house property, business or profession, and capital gains. It is created to ensure no taxable income is exempted just because it cannot be classified elsewhere.
Income belonging to this category would include interest earned on savings accounts or fixed deposits, dividends, winnings from lotteries, winnings from horse races, gifts in a particular condition, family pensions, and income earned through subletting. Any amount of money or property received by an individual or Hindu Undivided Family (HUF) without reasonable consideration that exceeds the prescribed ceilings could be charged to tax under provisions to counter abuse.
Income from Other Sources is calculated after deducting specified amounts under Section 57, including commissions or fees incurred to earn the income, family pension maintenance expenses, and interest on loans used to earn interest income.
This section is crucial in covering a variety of miscellaneous incomes, for complete taxation of a taxpayer’s income, and for the integrity of the Indian tax system.
Examples Of Income Sources Covered Under This Head
According to the Income Tax Act of 1961, the “Income from Other Sources” category (Section 56) is a residual category where all income not otherwise taxed under the other four categories of Salaries, House Property, Business or Profession, and Capital Gains is included. This provision ensures tax coverage of all forms of income, whether or not directly related to traditional sources of income.
The title “Income from Other Sources” is crucial in providing for the total taxation of all other types of income that do not fit elsewhere. It encompasses a wide range of types of income, from interest and dividends to gifts and gambling profits, hence no income is taxed out simply because of its unconventional nature. Understanding the particular inclusions and deductions under this category is vital for optimum tax compliance and planning.
The following are the primary sources of income falling under this category:
1. Dividend Income
Dividend income means the portion of a company’s profit that is distributed among its shareholders. Before the Finance Act 2020, dividends received from Indian companies were not being taxed for shareholders as the companies had already paid Dividend Distribution Tax (DDT). But with effect from the Assessment Year 2021-22, the regime of DDT has been withdrawn, and dividend income is being charged to tax in the hands of the shareholders at the respective slab rates.
Dividends from:
- Domestic firms
- Foreign sources
- Mutual funds, excluding equity-oriented schemes
are taxed under this head unless exempted under Section 10(34) or 10(35).
A TDS of 10% is levied on dividend income in excess of ₹5,000 in a financial year.
2. Interest Income
Interest earned from diverse sources forms a common component under this category. This comprises interest earned in bank savings accounts, fixed deposits, bonds, debentures, post office deposits, income tax refunds, and land acquisition case compensation.
This income is taxed at the individual’s relevant slab rate. Section 57 allows certain deductions, like interest on loans used to earn interest (e.g., investments in bonds). Section 80TTA/80TTB gives a general deduction of ₹10,000 for individuals and ₹50,000 for senior citizens on interest from savings.
3. Lotteries, Crossword Puzzles, Horse Races, etc., Winnings
This type of income includes income from gambling, gaming, and betting. It includes winnings from lotteries, card games, horse racing, online contests, and reality TV shows.
These winnings are charged at a flat rate of 30% under Section 115BB regardless of the level of the taxpayer’s income. No allowance, expenses, or loss can be deducted from this income. A 30% TDS is liable for winnings above ₹10,000.
4. Gifts Received [Section 56(2)(x)]
The Act also provides certain anti-abuse provisions that tax gifts received without consideration (i.e., for nothing) or with insufficient consideration. Section 56(2)(x) applies to individuals or Hindu Undivided Families (HUFs) receiving in excess of ₹50,000 in cash, immovable property (like land or buildings), or movable property (such as shares or jewellery) having a fair market value (FMV) of over ₹50,000.
In instances of lack of consideration or inadequate consideration, the entire value (or value difference) is taxable in the hands of the recipient.
Exceptions are granted for gifts from relatives (defined in the Act), gifts received while married, legacies or inheritances, and gifts by local governments or charitable institutions.
This rule helps check tax evasion by way of gifting valuable cash or property.
5. Family Pension
A family pension is awarded to members of a family (mostly spouses or children) on the death of a government or private sector employee. Being not given in lieu of service (as the employee is dead), it is treated as “Income from Other Sources” rather than “Salaries.”
Section 57(iia) allows a reasonable deduction of either ₹15,000 or one-third of the family pension, whichever is less.
6. Income from Subletting
Where a tenant rents out a property and, in turn, sublets the same to a third person (without ownership), any rent received by the tenant (sub-lessor) is taxable under this section. It is different from rental income from owned property, which is taxed as “Income from House Property.”
Costs incurred in earning such rental income (e.g., maintenance charges, legal expenses) may be claimed as deductions under Section 57.
7. Sitting Fees of Directors
Directors of a company who are not employees usually receive sitting fees or honoraria for attending board or committee meetings.
Such income is not termed as a salary (because no employer-employee relationship exists) and thus falls under this category of taxation.
It is completely taxable, and any genuine expenses undertaken to earn this revenue (like travel costs for meetings) can be claimed as a deduction in case the company does not reimburse them.
8. Forfeiture of Advance Payment for Capital Asset Sale
Where a person gets an advance or earnest money on account of the sale of a capital asset and the sale does not materialise, the amount forfeited is subtracted from the selling price.
Section 56(2)(ix), however, requires that all forfeited advances be taxed in the year of forfeiture as “Income from Other Sources” regardless of whether the asset is sold or not.
9. Keyman’s Insurance Policy Proceeds
A Keyman Insurance Policy is a life insurance policy that a business purchases for a key employee or partner.
If the proceeds of such a policy are paid to a person other than the business or employer, they are taxable in this category unless otherwise exempted.
This rule is intended to discourage tax evasion through policy structuring.
10. Interest on Unrecognised Provident Fund (URPF)
An unrecognised provident fund is a fund that has not been approved by the Commissioner of Income Tax.
Any interest credited on these funds is fully taxable under this section during the year in which they are credited.
Recognised provident funds, on the other hand, are exempt from parts or all of Section 10 and other rules.
11. Letting Out Plant, Machinery, or Furniture
If an individual possesses plant, machinery, or furniture and rents it out (not in the business assets), the rent received is taxable under this head.
But if it is a composite letting (for example, a building and machinery) and is not separable, the income can be taxed as either “Business or Profession” or “House Property” depending on the type of agreement.
Section 57 allows deductions for costs like maintenance, repairs, and depreciation.
How to Compute Net Income Under this Head?
1. Calculate taxable income: All non-chargeable incomes are included in this (e.g., interest, dividends, family pension, gifts, lottery prizes, rent received under subletting).
2. Add total gross income: Add up all funds received or accruing in this category for the year of assessment.
3. Subtract allowable expenses according to Section 57. Some allowances are allowed, including:
- Remuneration or commission is paid to produce income.
- Expenses incurred for keeping income-producing assets, for example, repairs.
- Relief on family pension: 1/3rd or ₹15,000, whichever is less.
- Interest on income-generating loans (e.g., investments).
4. No deductions other than those permissible. No deduction is allowed for winnings from card games or lotteries.
On completion of deductions, the figure obtained is net taxable income under the head “Income from Other Sources” and added to the total income for tax calculation.
Tax Deduction Not Allowed Under Income from Other Sources
Only those costs that are specifically allowable under Section 57 can be reimbursed.
- There are no deductions allowed for lottery or game prizes. Any income that accrues from lotteries, crossword games, card games, and gambling is subject to 30% tax under Section 115BB, with no provision for deductions or exemptions allowed.
- Personal expenditures are not allowed as deductions.
- Capital expenses are not allowed deductions. Only revenue expenditures (recurrent expenses) that are linked to income generation are allowed. Capital expenditures, i.e., the purchase of property or equipment, cannot be claimed.
- Non-relevant, unreasonable, or evidence-supported expenses cannot be deducted.
- No deductions are allowed for TDS or taxes. Taxes paid on such income, such as TDS, are not deductible under this section.
- No expenses can be deducted for those incurred regarding receiving or holding taxable gifts.
Conclusion
“Income from Other Sources” subjects all income to complete taxation by encompassing income categories that are not classified under other categories. It is important in avoiding revenue loss as well as in upholding tax equity. Taxpayers are required to scrutinise this income thoroughly and apply only the deductions explicitly allowed in the Income Tax Act, 1961.
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