Section 56: Taxability of Income From ‘Other Sources’

As per Section 56 : Taxability of Income from Other Sources, income of every kind, which is not to be excluded from the total income under this Act, shall be chargeable to income-tax under the head “Income from Other Sources” if it is not chargeable to Income-tax under any of the first four heads specified in section 14.

In other words, the following conditions must be satisfied before an income can be taxed under the head “Income from Other Sources”:

(i)         There must be an income;

(ii)        Such income is not exempt under the provisions of this Act;

(iii)       Such income is not chargeable to tax under any first four heads viz., “Income from Salary”, “Income from House Property”, “Profits and Gains of Business or Profession” and “Income from Capital Gain”.

Income from other sources is, therefore, a residuary head of income.

[Section 56(2)]: Specific 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)         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)        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.

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

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.

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’.

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

As per Section 56(2)(ib), any winnings from:

(i)  lotteries,

(ii)        crossword puzzles,

(iii)  races including horse races,

(iv)       card games and other games of any sort,

(v)        gambling or betting of any form or nature whatsoever,

are chargeable to tax as “income from other sources”.

1. “Lottery” includes winnings, from prizes awarded to any person by draw of lots or by chance or in any other manner whatsoever, under any scheme or arrangement by whatever name called; 2. “Card game and other game of any sort” includes any game show, an entertainment programme on television or electronic mode, in which people compete to win prizes or any other similar game.

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:

 

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

As per Section 56(2)(id), 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”.

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

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

(b)        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 Securities

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.

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

As per Section 56(2)(ii), 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.

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.

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.

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

As per Section 56(2)(x), the following income due to Gift of Money and Property shall be chargeable to income-tax under the head “income from other sources”

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.