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.
