Jigar M. Patel
International Tax Attorney
Income from Other Sources is the residual head of income under the Income-tax Act, covering all incomes that do not fall specifically under the other heads viz. salary, house property, business / profession or capital gains.
Incomes under this head and eligible deductions
Common examples of other sources’ income include interest from bank accounts and fixed deposits, dividends, gifts, rental income from sub-letting and winnings from lotteries or games. Income under this head is generally taxable as per the slab rates of a taxpayer.
Taxpayers are quite often unaware or overlook the permissible deductions they can avail of to offset taxable income under this head and minimize their tax liability. Section 57 provides for specific deductions against the income under this head. It needs to be noted that these deductions are very much available even to taxpayers opting for the new tax regime.
Deduction for Interest on Borrowed Capital
At times, taxpayers borrow money to make investments in shares and securities, deposits, bonds or other financial assets that generate taxable interest or dividend income. In such cases, they may be required to pay interest on such borrowed capital / loan.
While there is no restriction in regard to deduction for interest paid in respect of borrowed money invested in deposits or bonds, the proviso to section 57 restricts the amount of interest deductible in respect of dividend from shares or income from units, which is capped at 20% of such income.
Deduction of expenses incurred for earning income
Under section 57(iii), a taxpayer can claim deduction for any expenses (not being capital or personal in nature) incurred wholly and exclusively for earning such income.
Common instances of such eligible expenditure would include bank charges and commission levied by a bank in connection with services rendered by them. In appropriate cases, fees paid for legal or tax advice in relation to earning such income can also be considered as eligible.
Standard Deduction for Family Pension
Family pension received by the family members of a deceased employee, is taxable as income from other sources. However, a standard deduction of one-third of the pension, subject to a maximum of Rs. 25,000 is allowed while computing the taxable amount.
Deduction for Interest on Compensation for Acquisition
In cases of receipt of interest awarded on compensation or enhanced compensation on property acquisition, a flat deduction of 50% of such interest is also eligible for deduction under section 57, with the rider that no other deduction shall be allowed in such a case.
Taxman’s flat 30% Share from your Prize Winnings
If you thought that your winnings from lotteries, crossword puzzles, gambling, card games, or horse races could enjoy basic income-tax exemption, tax rebate or graded rates of tax, you are under an illusion.
Section 115BB prescribes a flat 30% tax in respect of such incomes, also requiring the person responsible for paying such amounts to deduct 30% tax at source under section 194B, with a threshold limit of Rs 10,000. Winnings from online games too, attract TDS at 30% u/s. 194BA, but without any threshold.
While such incomes are taxable under the head other sources, it is pertinent to note that no deductions of any kind are allowed from the same.
Tax on Winnings in Kind
If the prize is wholly or partly in kind (e.g., a car, a vacation), the payer must ensure that the tax is paid before releasing the prize. The winner typically has to pay the tax amount on his own, before claiming the non-cash prize.
