‘Income from Other Sources’- Taxability [Section 56 to 59]

Taxability of Income from Other Sources under Section 56 to 59

Table of Contents

1.  [Section 56(2)]: List of Incomes included under ‘Income from Other Sources’

There are many incomes which are taxable under the head ‘Income from Other Sources’. However, section 56(2) enlists certain specific incomes which shall be chargeable to Income-tax under the head ‘Income from other sources’. These are:

(i)         Dividend Income : dividends [including deemed dividend referred to in section 2(22)] Prior to 1.4.2020, the company was liable to pay dividend distribution tax on the amount of dividend declared, distributed or paid.

(ii)        Lottery, Crossword Puzzles, Card Games, and Horse Races: winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort, or from gambling or betting of any form or nature whatsoever; and

(iii)       any sum received by the assessee from his employees as contribution to any provident fund, or any other welfare fund for the employees provided it is not taxable under the head ‘Profits and Gains of Business or Profession’.

As per the meaning of income, contribution of the employee deducted by the employer is treated as income of the employer, but if the employer deposits such amount on or before the due date of deposit applicable for such contribution, he will be allowed a deduction on account of the same. Law, therefore, treats this contribution of the employee as the income of the employer in the first instance.

(iv)      income by way of interest on securities provided the income is not chargeable to Income-tax under the head ‘profits and gains of business or profession’.

(v)        income from machinery, plant or furniture belonging to the assessee and let on hire, provided the income is not chargeable to Income-tax under the head ‘profits and gains of business or profession’.

(vi)       where the assessee lets on hire, the machinery, plant or furniture belonging to him and also buildings, and letting of buildings, is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to income-tax under the head ‘profits and gains of business or profession’.

(vii)      any sum received under a Keyman Insurance Policy, including the sum allocated by way of bonus on such policy, if such income is not taxable under the head “Salaries” or “Profits and gains of business or profession”.

(viii)     any sum of money, the aggregate value of which exceeds 5O,0OO is received without consideration or property (whether movable or immovable) is received without consideration or property is received for an inadequate consideration by any person on or after 1.4.2017, if the amount of such gift or inadequate consideration exceeds 50,000 [Section 56(2)(x)]. For details see para 8.9.

(ix)       where a closely held company receives in any previous year from any resident person, any consideration for issue of shares that exceeds the face value of shares, then the aggregate consideration received for such shares which is in excess of fair market value shall be taxable.

(x)        income by way of interest received on compensation or on enhanced compensation to be taxed in the year in which such interest is received.

(xi)       Forfeiture of advance received for transfer of a capital asset to be taxed under the head “income from other sources” [Section 56(2)(ix)].

(xii)      any compensation received or receivable, whether in the nature of revenue or capital, in connection with the termination or the modification of the terms and conditions of any contract relating to its employment shall be taxable under section 56 of the Act. [Section 56(2)(xi)]

These are the incomes, which have been specified, in particular, to be chargeable under the head “income from other sources”.

Other incomes which are normally included under the head ‘Income from Other Sources’

Following are some of the other incomes which are normally chargeable to tax under this head because these are not covered under any of the four specified heads:

(i)         income from sub-letting of a house property by a tenant;

(ii)        casual income;

(iii)       insurance commission;

(iv)       family pension (payments received by the legal heirs of a deceased employee);

(v)        director’s sitting fee for attending board meetings;

(vi)       interest on bank deposits/deposits with companies;

(vii)      interest on loans;

(viii)     income from undisclosed sources;

(ix)       remuneration received by Members of Parliament;

(x)        interest on securities of foreign governments;

(xi)       examinership fees received by a teacher from an institution other than his employer;

(xii)      total interest till date on employee’s contribution to an unrecognised provident fund at the time when the payment of lump sum amount from the unrecognised provident fund is due;

(xiii)     rent from a vacant piece of plot of land;

(xiv)     agricultural income from agricultural land situated outside India;

(xv)      interest received on delayed refund of income-tax;

(xvi)     income from royalty, if it is not income from business or profession;

(xvii)    Director’s commission for standing as a guarantor to bankers;

(xviii)   Director’s commission for underwriting shares of a new company;

(xix)     Gratuity received by a director who, under the relevant contract, is not an employee or servant of the company, is assessable as income from other sources;

(xx)      Income from racing establishment;

(xxi)     Income from granting of mining rights;

(xxii)    Income from markets, fisheries, rights of ferry or moorings;

(xxiii)   Income from grant of grazing rights;

(xxiv)    Interest paid by the Government on excess payment of advance tax, etc.;

(xxv)    Income received after discontinuance of business.

1.         The Supreme Court has held that interest received by the assessee from the bank on a fixed deposit is income in his hands and there could be no deduction therefrom unless there is a law permitting such deduction. The interest on a loan taken by the assessee on the security of the fixed deposit did not go to reduce the income by way of interest on the fixed deposit as there was no provision for deduction of such interest on the loan.

2.         Refund of income-tax is not income as it was not allowed as a deduction but interest received on refund will be treated as income.

3.         Where perquisites are provided to a director, who is not an employee of the company, the valuation of such perquisites should also be done as per rules relating to valuation of perquisites.

2.  [Section 56(2)(i)] : Taxability of Dividend under Income from Other Sources

Understanding of Section 56(2)(i)

In India, the taxation of dividends is governed by the provisions of the Income Tax Act, 1961. Section 56(2)(i) of the Act specifically deals with the taxability of dividends received by individuals and other entities. It is important for taxpayers to understand the implications of this section in order to comply with their tax obligations and avoid any potential penalties or legal issues.

According to Section 56(2)(i), any sum of money, including the value of any property, received by an individual or a Hindu Undivided Family (HUF) without consideration, is considered as income and is subject to tax under the head ‘Income from Other Sources’. This includes dividends received from companies, whether they are resident or non-resident in India.

Dividends can be of three types:

(a)        Dividends declared by a domestic company.

(b)        Dividends or any other income distributed by Unit Trust of India.

(c)        Dividends declared by a foreign company.

Any amount declared, distributed or paid by a domestic company by way of dividends (whether interim or otherwise) whether out of current or accumulated profits shall be included in computing the total income of a previous year of any person. Hence, dividends shall be taxable in the hands of the shareholders.

Dividend from a foreign company shall also be taxable under the head “Income from Other Sources”.

Similarly, any income received in respect of—

(a)        units from the Administrator of the specified undertaking, or

(b)        the specified company, or

(c)        a Mutual Fund specified under clause (23D),

shall also be taxable.

However, there are certain exceptions to the taxability of dividends under Section 56(2)(i). The section does not apply to dividends received from a company in which the public is substantially interested. A company is said to be substantially interested if it holds 20% or more of the voting power in the company. Dividends received from such companies are exempt from tax under this section.

Another important aspect to consider is the tax rate applicable to dividends under Section 56(2)(i). Dividends received by individuals and HUFs are subject to tax at the applicable slab rates. This means that the tax liability on dividends will vary depending on the total income of the recipient.

For example, if an individual’s total income falls in the 20% tax slab, the dividends received by that individual will also be taxed at 20%. Similarly, if an HUF’s total income falls in the 30% tax slab, the dividends received by the HUF will be taxed at 30%.

It is important to note that the taxability of dividends under Section 56(2)(i) is separate from the tax deducted at source (TDS) provisions applicable to dividends. When a company distributes dividends, it is required to deduct TDS at the rate of 10% if the amount of dividend exceeds Rs. 5,000 in a financial year. The TDS deducted by the company is credited to the recipient’s tax account and can be adjusted against the final tax liability.

However, it is the responsibility of the recipient to include the full amount of dividend received in their income tax return and pay any additional tax, if applicable, based on their tax slab. Failure to do so can lead to penalties and legal consequences.

Key Points regarding the Taxability of Dividend U/s 56(2)(i)

Here are the key points regarding the taxability of dividend income under this section:

Applicability:

This provision applies to individuals, HUFs, and firms, among others, who receive dividend income. It does not apply to companies, as dividend distribution tax (DDT) was applicable to companies distributing dividends.

Tax Rate:

As of my last update, dividend income received by individuals and HUFs is generally taxable at a flat rate of 10%. This rate is exclusive of any applicable surcharge and cess.

Threshold Limit:

As per the provisions of Section 56(2)(i), dividend income received by an individual or HUF exceeding Rs. 10 lakh in a financial year is taxable. Any dividend income below this threshold is not subject to tax.

Reporting:

Taxpayers are required to report dividend income in their income tax returns and disclose the details of the dividend income received during the financial year.

Exemptions:

Certain dividends, such as those received from Indian companies on which dividend distribution tax (DDT) has already been paid, may be exempt from tax in the hands of the recipient. However, the taxation of dividends has undergone significant changes, including the abolition of DDT for companies and the introduction of the Dividend Income Tax (DIT) in the hands of the recipients. Therefore, it’s essential to refer to the latest tax rules and notifications to determine the exact tax treatment of dividend income.

Dividend Distribution Tax (DDT):

Before the changes in the taxation of dividends, companies were liable to pay DDT on the dividends they distributed to shareholders. However, with the abolition of DDT, the taxation of dividends shifted to the recipients, i.e., individuals, HUFs, and other entities.

TDS (Tax Deducted at Source):

As per Section 194 of the Income Tax Act, companies are required to deduct TDS at the rate of 10% on dividend payments exceeding Rs. 5,000 to individual shareholders. The TDS deducted can be adjusted against the final tax liability of the shareholder.

Deductions for Expenses from Dividend Income [Section 57(i) and 57(iii)]

No deduction shall be allowed from dividend income, or income in respect of units of mutual fund specified under section 10(23D) or specified company, other than deduction on account of interest expense and in any previous year such deduction shall not exceed 20% of the dividend income or income from units included in the total income for that year without deduction under section 57.

Gross dividend minus the above deductions is the income from dividend taxable under the head ‘Income from Other Sources’.

3. [Section 56(2)(ib)]: Taxability of Income from Winnings from Lotteries, Crossword Puzzles, Horse Races and Card Games

Under Section 56(2)(ib) of the Indian Income Tax Act, 1961, income from winnings is subject to taxation. This includes income from lotteries, crossword puzzles, horse races, and card games. In this article, we will explore the taxability of such income and the relevant provisions under the Income Tax Act.

Section 56(2)(ib) of the Income Tax Act addresses the taxation of specific kinds of income, which are categorized as “Income from Other Sources.” This section pertains to the income earned from the following sources:

  1. Winnings from Lotteries:

Any income earned from winnings in lotteries, whether state or non-state lotteries, is considered taxable under Section 56(2)(ib).

Lotteries are a popular form of gambling in India. If you are lucky enough to win a lottery, the winnings will be considered as income and subject to taxation. The income tax rate applicable to lottery winnings is determined based on the individual’s income slab. The winnings are added to the individual’s total income and taxed accordingly.

  1. Winnings from Crossword Puzzles:

Income earned from winning crossword puzzles, game shows, or any similar contests is also subject to taxation under this section.

Crossword puzzles are another form of gambling where individuals can win cash prizes. Similar to lotteries, the income from crossword puzzle winnings is taxable. The winnings are treated as income and added to the individual’s total income for the year. The income tax rate applicable will depend on the individual’s income slab.

  1. Winnings from Horse Races:

Winnings from horse races, including income derived from betting on horse races, fall under the purview of this section.

Horse racing is a popular sport in India, and individuals can place bets on horses. If you are lucky enough to win a bet at a horse race, the winnings are subject to taxation. The income tax rate applicable to horse race winnings is determined based on the individual’s income slab. The winnings are added to the individual’s total income and taxed accordingly.

  1. Winnings from Card Games:

Income from winnings in card games, including games like poker or rummy played in any casino, club, or similar establishments, is taxable as well.

Card games such as poker, rummy, and blackjack are also forms of gambling. If you win a significant amount of money playing card games, the winnings are considered as income and subject to taxation. The income tax rate applicable to card game winnings is determined based on the individual’s income slab. The winnings are added to the individual’s total income and taxed accordingly.

Key Point of Taxability of Section 56(2)(ib)

Key points regarding the taxability of such income under Section 56(2)(ib) are as follows:

Rate of Tax:

The income earned from the sources mentioned above is taxed at a flat rate of 30% (plus applicable surcharge and cess) as of my last knowledge update. This tax is deducted at source (TDS) by the payer if the winnings exceed a specified threshold.

Threshold for TDS:

The threshold limit for TDS on these winnings may vary depending on the type of game or activity. For example, for horse races, TDS is applicable if winnings exceed Rs. 10,000 in a single race. The specific thresholds should be checked in the latest tax rules.

Reporting:

Taxpayers are required to report such income in their income tax returns and disclose the details of their winnings from lotteries, crossword puzzles, horse races, or card games.

No Deduction Allowed:

Under Section 58(4), no deduction for any expenditure or allowance is allowed against income taxable under Section 56(2)(ib).

Exemptions:

Certain winnings from authorized state lotteries may be exempt from taxation under Section 10(34) and Section 10(34A) of the Income Tax Act. However, specific rules and exemptions may apply and can change with amendments to the tax laws.

Penalties:

Non-compliance with tax regulations, including the provisions of Section 56(2)(ib), can result in penalties and legal consequences.

Tax Deduction at Source (TDS)

It is important to note that tax deduction at source (TDS) is applicable to income from winnings. If the winnings exceed a certain threshold, the payer is required to deduct TDS at the applicable rate before making the payment. The individual receiving the winnings will then receive the net amount after deducting TDS. The TDS amount deducted can be claimed as a tax credit while filing the income tax return.

Special rate of Income-Tax in case of Winnings from Lotteries, Crossword Puzzles, Races, etc. [Section 115BB]

Although, winnings from lotteries, etc. is part of total income of the assessee, such income is taxable at a special rate of Income-tax, which at present, is 30% + surcharge, if applicable + health and education cess 4%.

Deduction of any expenses, allowance or loss not allowed from such winnings: According to section 58(4), no deduction in respect of any expenditure or allowance, in connection with such income, shall be allowed under any provision of the Income-tax Act. However, expenses relating to the activity of owning and maintaining race horses are allowable.

In other words, the entire income of winnings, without any expenditure or allowance, will be taxable. In fact, deduction under sections 80C to 80U discussed later in the Chapter on Deductions from Gross Total Income will also not be available from such income although such income is a part of the total income.

As lottery income is taxed at flat rate, the basic exemption of income (say Rs. 2,50,000) is not available to the assessee.

Grossing up of lottery income, etc.

As in the case of some other incomes, there is also a provision for tax to be deducted at source from income from winning of lotteries, horse races and crossword puzzles. The rate of TDS in the case of such incomes is 30% if the income exceeds Rs. 10,000. Such tax deducted at source is income and the amount received is net income after deduction of tax at source. In this case, such net income will have to be grossed up as under:

If a person wins a lottery of Rs. 1,00,000, tax must have been deducted @ 30% and net amount received by the assessee would be Rs. 70,000 (1,00,000 – 30,000).

Grossing up would be done as:

Conclusion

Income from winnings from lotteries, crossword puzzles, horse races, and card games is subject to taxation under Section 56(2)(ib) of the Indian Income Tax Act, 1961. The income tax rate applicable will depend on the individual’s income slab. It is important to keep track of such winnings and ensure compliance with the income tax provisions. Additionally, TDS may be applicable if the winnings exceed a certain threshold, and the net amount received after deducting TDS can be claimed as a tax credit.

4. [Section 56(2)(id)]: Interest on Securities Taxable under Income from Other Sources

Interest income is one of the common sources of income for individuals and businesses alike. When it comes to the taxability of interest on securities, Section 56(2)(id) of the Indian Income Tax Act, 1961 plays a significant role. This section deals with the taxation of interest income earned from certain specified securities. In this article, we will explore the provisions of Section 56(2)(id) and understand the tax implications of interest income on securities.

Income, by way of interest on securities, is chargeable under the head “income from other sources”, if such income is not chargeable to income-tax under the head, “Profits and Gains of Business or Profession”.

Understanding Section 56(2)(id)

Section 56(2)(id) of the Indian Income Tax Act, 1961 is applicable to individuals and Hindu Undivided Families (HUFs) who earn interest income from specified securities. Specified securities include any interest-bearing securities issued by the Central Government, State Government, or any local authority. It also includes any debentures or bonds issued by a company in which the public are substantially interested.

According to this section, any interest income earned from the specified securities is taxable under the head ‘Income from Other Sources’. This means that it is subject to tax at the individual’s applicable income tax slab rate. The interest income is added to the individual’s total income and taxed accordingly.

According to section 2(28B) “Interest on securities” means:

(i)         interest on any security of the Central Government or a State Government;

(ii)        interest on debentures or other securities for money issued by, or on behalf of a local authority or a company or a corporation established by Central, State or Provincial Act.

Thus securities may be divided into following categories:

(i)         securities issued by Central/State Governments;

(ii)        debentures/bonds issued by a local authority;

(iii)       debenture/bonds issued by companies;

(iv)       debenture/bonds issued by a corporation established by a Central, State or Provincial Act, i.e., autonomous and statutory corporations.

Chargeability of Interest on Securities

Interest on securities may be taxed on receipt basis or on due basis, depending upon the system of accounting if any, adopted by the assessee. If the assessee follows the cash system of accounting, interest is taxable on receipt basis otherwise it shall be taxable on due basis. If no system of accounting is followed, it will always he taxable on ‘due’ basis.

In case of certain securities issued by Central Government or State Government or in case of certain notified bonds or debentures issued by public sector companies, the interest is fully exempt under section 10(15). The interest in this case is normally 6% p.a. or less except in the case of capital indexed bonds which carries the interest rates of 7%. Such interest which is around 6% p.a. (7% in case of capital indexed bonds) is fully exempt under section 10(15).

Accrual of Interest on Securities

Interest on securities accrues or becomes due on a specified date and not on a day-to-day basis. The date on which the interest shall become due is specified by the issuing authority. Interest may become due on quarterly basis, half yearly basis or annual basis, depending upon the term of the issue.

For example, if a company issues 12% debentures and specifies that interest shall become due on 31St of December every year, the due date is 31st. of December and the interest for the entire year shall become due only on 31st of December every year. The person, who is the registered owner of the debentures as on 31st December, shall be entitled to receive the interest of the full year irrespective of his period of holding.

Grossing up of Interest on Securites

Tax is also to be deducted at source on interest on securities at the prescribed rates of tax. For Income-tax purposes what is to be charged to tax is the gross amount of interest. Therefore, if net- interest is given, it has to be grossed up to arrive at the taxable amount.

in the case of Government securities other than 8% / 7.75% / floating rate Saving (Taxable) Bonds, grossing up is not required as there is no deduction of tax at source. However, grossing up is required in the case of the following securities:—

(i)         8% / 7.75% / floating rate Saving (Taxable) Bonds if the amount of interest payable exceeds Rs. 10,000 ;

 (ii)       securities issued by a statutory corporation or a local authority or by any company. Net Interest can be grossed up as under:

The rates of T.D.S. are as under:

(a)        In case of 8% / 7.75% / floating rate taxable saving bonds 10%

(b)        Non-government securities whether or not listed or recognized stock exchange 10%.

1. Interest on saving account with Post Office in case of an individual is exempt upto Rs.3,500 under section 10(15)(i). Hence, such interest will be included in the gross total income of the individual to the extent it exceeds Rs.3,500 and thereafter deduction shall be allowed under section 80TTA.

2. No tax is deductible on debentures issued by a widely held company if interest is paid/payable to an individual, resident in India and the aggregate amount of such interest paid or payable during the financial year does not exceed Rs. 2,500.

Deductions for Expenses from Interest on Securities [Section 57(i) and (iii)]

As discussed in the case of dividends, the following deductions will also be allowed from the gross interest on securities:

(a)   Collection Charges [Section 57(i)]:

Any reasonable sum paid by way of commission or remuneration to a banker, or any other person for the purpose of realising the interest.

(b)   Interest on Loan [Section 57(iii)]:

Interest on money borrowed for investment in securities can be claimed as a deduction.

(c)   Any other expenditure [Section 57(iii)]:

Any other expenditure, not being an expenditure of a capital nature, expended wholly and exclusively for the purpose of making or earning such income can be claimed as a deduction.

Tax Deduction at Source (TDS)

When it comes to interest income on securities, Tax Deduction at Source (TDS) plays a crucial role. As per the provisions of Section 194A of the Income Tax Act, any person who is liable to pay interest on securities is required to deduct TDS at the time of payment. The current rate of TDS on interest income is 10%.

It is important to note that TDS is applicable only if the interest income exceeds Rs. 10,000 in a financial year. If the interest income is below this threshold, no TDS will be deducted. However, the individual is still required to report and pay tax on the interest income while filing their income tax return.

Tax Planning Strategies

When it comes to tax planning, there are a few strategies that individuals can employ to minimize the tax liability on interest income from securities:

(i) Investing in Tax-Free Bonds:

Tax-Free Bonds are issued by government entities and provide tax-free interest income. By investing in these bonds, individuals can earn interest income without any tax liability.

(ii) Spreading Investments:

Instead of investing a large sum in a single security, individuals can consider spreading their investments across different securities. This can help in reducing the overall tax liability as the interest income from each security can be managed within the tax-free threshold.

(iii) Claiming Deductions:

Individuals can explore various deductions available under the Income Tax Act to reduce their overall taxable income. Deductions such as Section 80C (for investments in specified instruments) and Section 80D (for health insurance premiums) can help in lowering the tax liability.

5. [Section 56(2)(ii)]: Taxability of Income from Letting Out of Machinery, Plant or Furniture

Under the Indian Income Tax Act, 1961, the taxability of income from letting out of machinery, plant, or furniture is governed by Section 56(2)(ii). This section provides the provisions related to the taxation of income from such sources.

income from machinery, plant or furniture, belonging to the assessee and let on hire, is chargeable as income from other sources, if the income is not chargeable to income-tax under the head “Profits and Gains of Business or Profession”.

In case any such assets are hired out as a part of the business activity carried on by the assessee or as commercial assets belonging to the assessee, the income derived therefrom is assessable as business income under section 28 and not as income from other sources under section 56.

Applicability:

Section 56(2)(ii) applies to individuals, Hindu Undivided Families (HUFs), firms, companies, or any other person. It pertains to any income that arises from the letting out of machinery, plant, or furniture.

Computation of Income:

Under this section, the income arising from the letting out of machinery, plant, or furniture is treated as income from other sources. This means it is subject to tax under the head “Income from Other Sources.”

Valuation of Income:

The income is generally computed based on the fair market value of the machinery, plant, or furniture. This is typically the rental income or hiring charges received for the use of these assets. The fair market value is determined based on prevailing market rates.

Taxability:

The income is taxable at the recipient’s applicable income tax slab rates. It is added to the recipient’s total income and taxed accordingly. It is important to note that this income is taxed as per the individual’s or entity’s income tax slab rates, and there may not be specific deductions or exemptions applicable under this section for such income.

Deductions permissible from Letting Out of Machinery, Plant or Furniture and Buildings [Section 57(ii) and (iii)]

The following deductions are allowable:

(a)        Current repairs, to the premises held otherwise than as tenant.

(b)        Insurance premium against risk of damage or destruction of the premises.

(c)        Repairs and insurance of machinery, plant or furniture.

(d)        Depreciation based upon block of assets, in the same manner as allowed under section 2 in the case of Income from Business and Profession subject to the provisions of section 38, i.e., if it is partly let and partly used for own purpose, deduction of expenses (including depreciation) shall he allowed to the extent it is let out.

(e)        Any other expenditure:

Any other expenditure, not being an expenditure of a capital nature, laid out or expended wholly and exclusively for the purpose of making or earning such income can be claimed as a deduction.

Exemptions:

However, there are certain exemptions provided for specific situations or types of income. For example, if the machinery, plant, or furniture is used for business purposes and the income is incidental to the main business activity, it may be exempt from taxation under certain circumstances. Such exemptions are typically governed by other sections and provisions of the Income Tax Act, and they should be evaluated on a case-by-case basis.

Tax Treatment

The income from letting out of machinery, plant, or furniture is taxed at the normal slab rates applicable to the taxpayer. It is added to the total income of the taxpayer and taxed accordingly.

Compliance Requirements

There are certain compliance requirements that need to be fulfilled by the taxpayer when deriving income from letting out of machinery, plant, or furniture. These include:

Filing of Income Tax Return: The taxpayer needs to file their income tax return disclosing the income from letting out of machinery, plant, or furniture.

Maintenance of Books of Accounts: The taxpayer should maintain proper books of accounts, including records of rental income, expenses, and other relevant details.

Tax Audit: If the total income from letting out of machinery, plant, or furniture exceeds the specified threshold, a tax audit may be required as per the provisions of the Income Tax Act.

Clubbing Provisions:

In cases where the income from letting out machinery, plant, or furniture is earned by a minor child, it may be clubbed with the income of the parent or guardian as per the clubbing provisions of the Income Tax Act.

Income from Composite Letting of Machinery, Plant or Furniture and Buildings [Section 56(2)(iii)]

Where an assessee lets on hire the machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, known as composite rent, if it is not chargeable to income-tax under the head “Profits and Gains of Business or Profession”, shall be chargeable as income from other sources.

6. [Section 56(2)(x)] : Taxability of Gift of Money and Property under Income from Other Sources

The Indian Income Tax Act, 1961, governs the taxation of various sources of income in India. One such source is income from other sources, which includes the taxability of gifts of money and property. In this blog post, we will explore the provisions of Section 56(2)(x) of the Income Tax Act, which deals with the taxability of such gifts.

Income of any person to include not only gift of money from any person(s) but also the gift of property (whether movable or immovable) or property acquired for inadequate consideration

(1)        Where any person receives, in any previous year, from any person or persons on or after 1.4.2017, the following income, it shall be chargeable to income-tax under the head “income from other sources” as per section 56(2)(x):

Particulars of income Amount taxable under the head “income from other sources”
(A) Any Sum of Money,—

—without consideration, the aggregate value of which exceeds Rs.50,000

the whole of the aggregate value of such sum
(B) Any Immovable Property,—

(i) without consideration, the stamp duty value of which exceeds Rs.50,000

 

the stamp duty value of such; property

(ii) for a consideration, the stamp duty value of such property as exceeds such consideration, if the amount of such excess is more than the higher of the following amounts, namely:—
(i) the amount of fifty thousand rupees; and
(ii) the amount equal to 10%, of the consideration
the stamp duty value of such property as exceeds the consideration received
1.         Where the date of agreement fixing the amount of consideration for the transfer of immovable property and the date of registration are not the same, the stamp duty value on the date of agreement may be taken for the purposes of this sub-clause. [First proviso to section 56(2)(x)(b)]

2.         The provisions of first proviso mentioned above shall apply only in a case where the amount of consideration referred to therein, or a part thereof, has been paid by way of an account payee cheque or an account payee bank draft or by use of electronic clearing system through a bank account or such other electronic mode as may be prescribed, on or before the date of agreement for transfer of such immovable property. [Second proviso to section 56(2)(x)(b)]

3. Where the stamp duty value of immovable property is disputed by the assessee on grounds mentioned in section 50C(2), the Assessing Officer may refer the valuation of such property to a Valuation Officer, and the provisions of section 50C and section 155(15) shall, as far as may be, apply in relation to the stamp duty value of such property for the purpose of this sub-clause as they apply for valuation of capital asset under those sections. [Third proviso to section 56(2)(x)(b)]

(C) Any property, other than immovable property,—

(i) without consideration, the aggregate fair market value of which exceeds Rs.50,000;

 

the whole of the aggregate fair market value of such property

(ii) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding Rs.50,000: the aggregate fair market value of such property as exceeds such consideration

1.   “Fair market value” of a property, other than an immovable property, means the value determined in accordance with the method as may be prescribed.

2.  As per Explanation to section 56(2)(x) read with Explanation to section 56(2)(vii), “Property’ means the following capital asset of the assessee, namely:—

(i)         immovable property being land or building or both;
(ii)        shares and securities;
(iii)       jewellery;
(iv)       archaeological collections;

(v)        drawings;
(vi)       paintings;
(vii)      sculptures;
(viii)     any work of art; or
(ix)       bullion;

Amendment made by the Finance Bill, 2022 :

Explanation to Section 56(2)(x) Amended [w.e.f. AY 2023-24]

In order to provide for taxing the gifting of virtual digital assets, the Finance Bill, 2022 has amended Explanation to section 56(2)(x) of the Act to inter-alia, provide that for the purpose of the said clause, the expression “property” shall have the meaning assigned to it in Explanation to section 56(2)(vii) and shall include virtual digital asset.

Section 56(2)(x), Not to apply in certain cases of Money or any Property Received:

Section 56(2)(x), shall not apply to any sum of money or any property received—

(i)         from any relative; or

(ii)        on the occasion of the marriage of the individual; or

(iii)       under a will or by way of inheritance; or

(iv)       in contemplation of death of the payer or donor, as the case may be; or

(v)        from any local authority as defined in the Explanation to section 10(20); or

(vi)       from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in section 10(23C); or

(vii)      from or by any trust or institution registered under section 12A or section 12AA; or

(viii)     by any fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in section 10(23C)(iv) or (v) or (vi) or (via); or

(ix)       by way of transaction not regarded as transfer under section 47(1) or (iv) or (v) or (vi) or (via) or (viaa) or (vib) or (vie) or (vica) or (vieb) or (vid) or (vii) or (viiac) or (viad) ; (viiae) or (viaf) or

(x)        from an individual by a trust created or established solely for the benefit of relative of the individual; or

(xi)       from such class of persons and subject to such conditions, as may be prescribed. [inserted w.e.f  A. Y. 2020-21] In other words, the Board has been empowered to prescribe transactions undertaken by certain class of persons to which the provisions of section 56(2)(x) shall not be applicable. [See Rule 11UAC below in this regard]

Amendment made by the Finance Bill, 2022

The Finance Ministry had released a press statement dated: 25-6-2021 where in was announced that income-tax shall not be charged on the amount received by a taxpayer for medical treatment from any person for treatment of COVID-19 during FY 2019-20 and subsequent years.

It was further announced that in order to provide relief to the family members of such taxpayer, income-tax exemption shall be provided to ex-gratia payment received by family members of a person from the employer of such person or from other person on the death of the person on account of COVID-19 during FY 2019-20 and subsequent years. Also, it was stated that the exemption shall be allowed without any limit for the amount received from the employer and the exemption shall be limited to Rs. 10 Lakh in aggregate for the amount received from any other persons.

Valuation of Gifts

When determining the value of gifts for tax purposes, the fair market value of the gift is considered. If the gift is in the form of immovable property, the stamp duty value is taken as the fair market value. Additionally, any income earned from the gifted property is also taxable in the hands of the recipient.

Clubbing of Income

In certain situations, the income from the gifted property may be clubbed with the income of the person making the gift. This applies when the gifted property is transferred to a spouse, minor child, or any other person for inadequate consideration. The income generated from such property is then taxable in the hands of the person making the gift.

Reporting of Gifts

It is important to note that gifts exceeding INR 50,000 received during a financial year must be disclosed in the income tax return. The details of the donor, such as their name, address, and PAN, should also be provided.

7. [Section 58]: Amounts Not Deductible in computing the income under the head ‘Income from Other Sources’

While the income from other sources is taxable, there are certain amounts that are not deductible while computing this income. In this blog post, we will explore the different amounts that are not deductible in computing income from other sources.

1.   Any of the Following Payments

The following payments shall not be deductible in computing the income chargeable under the head ‘Income from Other Sources’:

(a)       Personal Expenses of the Assessee [Section 58(1)(a)(i)];

(b)        like section 40(a)(ia), 30% of any sum payable to a resident on which tax is deductible at source tinder section 192 to section 1 941,A and such tax has not been deducted or after deduction has not been paid on or before the due date specified in section 139(1) [Section
58(1A)].

However, where in respect of any such sum,—

(i)         tax has been deducted in any subsequent year, or

(ii)        has been deducted during the previous year but paid after the due date specified in section 139(1),

30% of such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.

Tax shall be deemed to have been deducted and paid if assessee is not deemed to be in default [Second proviso to section 40(a)(ia) also applicable in this case]:

Where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to section 20 1(1), then, for the purpose of section 40(a)(ia), it shall be deemed that the assessee has—

(a) deducted and

 (b) paid the tax on such sum

on the date of furnishing of return of income by the resident payee referred to in the said proviso.

The amended first proviso to section 201(1) provides as under:

Any person, including the Principal Officer of a company, who fails to deduct the whole or any part of the tax in accordance with the provisions of this Chapter on the sum paid to a payee or on the sum credited to the account of a payee shall not be deemed to be an assessee in default in respect of such tax, if such payee—

(i) has furnished his return of income under section 139;

 (ii) has taken into account such sum for computing income in such return of income; and

(iii) has paid the tax due on the income declared by him in such return of income.

Therefore, if the payee satisfies all the above 3 conditions and the deductor furnishes a certificate to this effect from a chartered accountant in such form as may be prescribed, then the deductor will be allowed the deduction of the expenses mentioned in section 40(a)(ia) by assuming that the deductor has deducted and paid the tax on such sum on the date of furnishing return of income by the payee aforesaid;

(c)        interest paid outside India on which tax has not been deducted at source [Section 58(1)(a)(ii)];

(d)        salaries paid outside India on which tax is not deducted at source [Section 58(1)(a)(iii)];

(e)        any expenditure referred to in section 40A [Section 58(2)] like excessive payments to relatives referred to in Section 40A(2)],

Cash Payments exceeding Rs.10,000 / Rs.35,000 made in a mode other than account payee cheque/draft, etc. referred to in section 40A(3) & (3A), payment of gratuity referred in section 40A(7), etc.;

(f)        income-tax / wealth-tax paid;

(g)        any expenditure or allowance in connection with winning of lottery, crossword puzzles, etc. as already discussed under para 8.6b. However, expenditure incurred by the assessee for the activity of owning and maintaining race horses shall be allowed as a deduction while computing the income from this activity. [Section 58(4)]

Interest paid on amounts borrowed for meeting tax liabilities is not deductible, since the liability to pay income-tax and wealth-tax is a personal one.

2. Capital Receipts

Capital receipts, such as gifts, loans, and inheritances, are not considered as income and hence, are not deductible while computing income from other sources. These receipts are considered as capital in nature and do not form a part of the regular income earned by an individual or entity.

3. Dividends Exempt under Section 10(34)

Dividends received from domestic companies that are exempt under Section 10(34) of the Income Tax Act are not deductible while computing income from other sources. These dividends are already exempt from tax and hence, cannot be claimed as a deduction while calculating the taxable income.

4. Interest on Securities Exempt under Section 10(15)

Interest received on certain specified securities that are exempt under Section 10(15) of the Income Tax Act is not deductible while computing income from other sources. These securities include bonds issued by the government or certain public sector undertakings and are specifically exempted from tax.

5. Winnings from Lottery, Crossword Puzzles, and Game Shows

Winnings from lottery, crossword puzzles, and game shows are taxable under the head ‘Income from Other Sources’. However, any amount paid or credited as winnings from these sources is not deductible while computing income from other sources. These winnings are considered as income and taxed accordingly without any deductions.

6. Interest on Compensation or Enhanced Compensation

Interest received as compensation or enhanced compensation under any law for the time being in force is taxable under the head ‘Income from Other Sources’. However, this interest is not deductible while computing income from other sources. It is treated as a separate source of income and taxed accordingly.

See also  Special Provisions in respect of Newly-established Units in Special Economic Zones (SEZ) [Section-10AA]
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