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Income from Other Sources

Section 56: Basis of Charge

Sec 56(1): Income which is not exempt and which cannot be taxed under any other head of
income is taxable under the head Income from other sources.

Examples:

• Family Pension
• Salary received by MP / MLA
• Subletting of House Property
• Director fees
• Examiner Remuneration
• Interest on Bank Deposits

Sec 56(2): Some specific incomes chargeable under this head:

• Dividends
• Winnings from lotteries, crossword puzzles, races including horse races, card games and
games of any sort, gambling or betting of any form i.e., casual income
• Gift received by Individual or HUF
• Forfeiture of advance money received against a capital asset
• Interest on compensation or enhanced compensation received during the year
• When a firm or a private company receives shares of closely held company, without
consideration FMV of which exceeds Rs 50,000 OR for inadequate consideration, FMV of
which exceeds inadequate consideration by RS 50,000. The aggregate of such sum will
form part of income.

The following incomes are chargeable under IFOS only if not chargeable under PGBP:
• Composite Rent of House Property with machinery, plant, furniture etc.
• Income from letting machinery, plant or furniture
• Interest on securities

The following incomes are chargeable under IFOS only if not chargeable under PGBP or Salary:
• Any compensation or any other payment, due or received due to termination of
employment or modifications of the terms and condition relating to employment

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• Any sum received under a Keyman Insurance Policy, when received by any person other
than employer (who took the policy) and employee (in whose name the policy was
taken)

Section 145: Method of Accounting

Income is taxable either on due basis or receipt basis.

According to Sec 145, any income chargeable under IFOS shall be computed in accordance with
the method of accounting regularly followed by the assessee which can be either cash system or
mercantile system.
If the assessee follows accrual (mercantile) system of accounting, due basis shall be adopted for
charging income and expenses.
On the other hand, if assessee follows cash system, the computation shall be on actual receipts
and payment basis.

Casual Income- Sec 56(2)(ib)

It includes:
• Winning from lotteries
• Winning from horse races
• Winning from crossword puzzle
• Gambling and betting
• Card games
• Winning from game shows

Provisions Related to Casual Income:

• Entire winnings are taxable, not just the net income, hence expenses are not allowed as
deduction
• No deductions are allowed under Chapter VIA i.e., Section 80C – 80U
• No benefit of set off and carry forward of loss / unabsorbed depreciation is allowed from
casual income
• Basic Exemption limit is also not available for casual income as entire winnings are directly
taxable @30% + surcharge (if any) + 4% cess (u/s 115BB) and tax is deductible at source
@ 30% on such income in case it exceeds Rs. 10,000.

TDS on Casual Income:

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Sec 194B: Winnings from lotteries, crossword puzzles, etc: @30% if winnings exceed Rs 10,000
Sec 194BB: Winnings from horse race: @30% if winnings exceed Rs 10,000

Mind Blenders:
➢ Winnings from lottery tickets held as stock in trade are taxable under the head “PGBP”
➢ Income of jockey is taxable under the head “PGBP”
➢ Income from owning and maintaining race horses is not a casual income, however it is
taxable under the head “Income from other sources” [Income – Expenses]

Steps to solve question relating to casual income:

• If gross amount is given, add it in total income and directly tax @ 30%
• If net winnings are given, 1st convert it into gross by applying this formula:
Net winnings / (100 – TDS% rate)
• Then add gross amount in total income
• If not mentioned in the question, assume winnings as Gross

Gift- Sec 56(2)(x)

The intention of this section is to bring into tax bogus transactions, if any in the name of gifts
from unknown persons. Keeping this in mind, any gift received from non-relatives has been
subjected to tax u/s 56(2)(x)

When any person receives in any PY, from any person or persons the following:

Nature of Receipt Particulars Sum Taxable

1 Sum of Money Without Whole of such sum, if aggregate exceeds Rs 50,000
Consideration
2 Immovable Without Stamp Duty Value of each immovable property, if
Property Consideration it exceeds Rs 50,000

Inadequate Difference between stamp duty value (SDV) of each

Consideration immovable property and consideration paid, if
such difference exceeds higher of:
Rs 50,000 and
10% of consideration

3 Movable Property Without Aggregate FMV of the property, if it exceeds Rs

Consideration 50,000

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Inadequate Difference between FMV and consideration paid, if

Consideration aggregate exceeds Rs 50,000

Property:
A capital asset of the assessee, namely, -
• Immovable property being land or building or both,
• Shares and securities,
• Jewellery,
• Archaeological collections,
• Drawings,
• Paintings,
• Sculptures,
• Any work of art or
• Bullions
• Virtual Digital Assets (VDA)
Note: If the gifted asset is not in the definition of property, it is not taxable as gift

Gifts Received from the following are exempt:

1. Gift from any relative
2. On the occasion of the marriage of the individual
3. Under a will or by way of inheritance or in contemplation of death
4. From any Local Authority, university, Educational Institute u/s 10(23C)
5. From any Trust or Institution registered u/s 12A or 12AA
6. From Holding Company to 100% subsidiary company or vice versa.
7. From an individual by a trust created solely for the benefit of relative of individual
8. From such class of persons as may be prescribed

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9. By an individual, from any person, in respect of any expenditure actually incurred by him
on his medical treatment or treatment of any member of his family, for any illness related
to COVID-19 subject to conditions notified by the Central Government
10. by a member of the family of a deceased person –
(a) from the employer of the deceased person (without any limit); or
(b) from any other person or persons to the extent that such sum or aggregate of such sums
≤ Rs. 10 lakhs.
where the cause of death of such person is illness related to COVID-19 and the payment
is—
(i) received within 12 months from the date of death of such person; and
(ii) subject to such other conditions notified by the Central Government.

Conditions:

1.
(i) The death of the individual should be within 6 months from the date of testing
positive or from the date of being clinically determined as a COVID-19 case, for
which any sum of money has been received by the member of the family;
(ii) The family member of the individual shall keep a record of the following
documents:
(a) The COVID-19 positive report of the individual, or medical report if clinically
determined to be COVID-19 positive through investigations in a hospital or an
inpatient facility by a treating physician;
(b) A medical report or death certificate issued by a medical practitioner or a
government civil registration office, in which it is stated that death of the person
is related to corona virus disease (COVID-19).
2. Statement of any sum of money received by a member of the family of a deceased person
from the employer of the deceased person or from any other person or persons, on
account of death due to COVID-19 shall be verified and furnished in Form A.

Relative:
In case of an Individual: -
(i) Spouse of the individual
(ii) Brother or sister of the individual
(iii) brother or sister of the spouse of the individual;
(iv) brother or sister of either of the parents of the individual;
(v) any lineal ascendant or descendant of the individual;
(vi) any lineal ascendant or descendant of the spouse of the individual;
(vii) spouse of any of the persons referred in (i) to (vi) above

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In case of HUF: - Any member thereof

Dividend: Sec 56(2)(i)

Dividend is always charged under IFOS whether securities are held as Stock in Trade or as
Investment.

Company’s Liability:
Section: Provisions before PY 2020-21 Provisions in PY 2020-21 and onwards
115-O Company was liable to DDT on NO liability to deduct DDT
dividend declared and paid
194 Company was not liable to Company is liable to deduct TDS u/s 194 in case
deduct TDS u/s 194 on dividend of dividend payments to shareholders
on which DDT was payable
80M Was not in existence Intercorporate dividends are allowed as
deduction
Shareholder’s Liability:
Section: Provisions before PY 2020-21 Provisions in PY 2020-21 and onwards
Sec Shareholder was not liable to Now shareholder is liable to entire dividend
115BBDA tax till dividend income of Rs income @ slab rate
10,00,000 and @ 10% on
dividend income exceeding Rs
10,00,000
57 No deduction was allowed Interest expense is allowed as deduction from
from dividend income dividend income:
Actual interest or
20% of dividend income
(Whichever is less)
10(34) Dividend income up to Rs Now this exemption is not available
10,00,000 was exempt

Deemed Dividend u/s 2(22)(a) to 2(22)(e):

Sec 2(22)(a): Distribution entailing release of assets of the company

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What contributes to dividend: Any distribution by a company to the extent of accumulated

profits (capitalised or not), resulting in release of its assets to its Shareholders

Amount of dividend: Market value of the property to the extent of accumulated profits

Sec 2(22)(b): Distribution of debentures, deposit certificates to shareholders and

bonus shares to preference shareholders

What contributes to dividend: Distribution to shareholder of- Debentures / deposits certificates to

shareholders and bonus shares to preference shareholders
Note: If bonus shares are issued to equity shareholders, it does not amount to distribution of
dividend

Amount of dividend: Amount of debentures / deposit certificates/ bonus to the extent of

accumulated profits (capitalised or not)

Sec 2(22)(c): Distribution to shareholders on liquidation of company

What contributes to dividend: Any distribution by a company to the Shareholder on its

liquidation the extent of accumulated profits (capitalised or not)

Amount of dividend: FMV of the assets (as on date of distribution) distributed to shareholders to
the extent of accumulated profits (capitalised or not)
Sec 2(22)(d): Distribution on reduction of share capital

What contributes to dividend: Any distribution by a company to the Shareholder on its reduction
of share capital the extent of accumulated profits (capitalised or not)

Amount of dividend: FMV of the assets (as on date of distribution) distributed to shareholders to
the extent of accumulated profits (capitalised or not)

Sec 2(22)(e): Loan or Advance to shareholder / concern etc.

What contributes to dividend: Any payment by a company in which the public is not
substantially interested (Private Company) i.e., closely held company of any sum by way of loan
or advance to:
• Any beneficial owner of equity shares holding not less than 10% of the voting power OR

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• To any concern in which such S/H is a member or a partner and in which he has a
Substantial Interest, To the extent of accumulated profits (capitalised or not)

Amount of dividend: Amount of loan / advance to the extent of accumulated profits (capitalised
or not)

Notes:
1. 2(22)(e) is applicable even of payments like payment for purchase of raw material etc.
2. It is applicable even if the loan is repaid before the end of PY.
3. Where any loan or advance is given to any concern, it will be treated as deemed dividend, if
both the conditions are satisfied:
i) Such S/H has substantial interest in such concern at any time during the PY AND
ii) He is a beneficial owner (holding 10% or more of the voting power) of equity shares at the
time of such loan or advances.

Concern means: HUF, firm, AOP, BOI or Company.

Substantial Interest means: If he at any time during the PY, beneficially entitled to 20% or more
of the income of such concern.

Deduction in respect of inter-corporate dividends [Section 80M]

(i) Eligible assessee: Deduction under this section would be allowable to a domestic
company if its gross total income includes in any previous year, any income by way of
dividends received from any other domestic company or foreign company or a
business trust.
(ii) Quantum of deduction: In computing the total income of such domestic company, a
deduction of an amount equal to the amount of dividends received from other
domestic company or foreign company or business trust as does not exceed the
amount of dividend distributed by such domestic company on or before the due date.

In simple words, deduction under this section would be amount of dividend received
from other domestic company, whichever is lower.
Example: X Ltd., a domestic company received dividend of Rs. 10 Lakhs from “Y Ltd.”,
a domestic company (100% subsidiary of X Ltd.) during the previous year 2022-23.
On 15th May, 2022, X Ltd. Declared and distributed dividend of Rs. 5 lakhs.

In this case, X Ltd. Would be eligible for deduction under section 80M in respect of
dividend, received from Y Ltd. To the extent of Rs. 5 Lakhs, being the amount of

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dividend declared and distributed by X Ltd. Hence, the deduction under section 80M
would be Rs. 5 Lakhs.
(iii) No deduction: Where any deduction, in respect of the amount of dividend distributed
by the domestic company, has been allowed under this section in any previous year,
no deduction shall be allowed in respect of such amount in any other previous year.
Meaning of due date: “Due date” means the date one month prior to the date for
furnishing the return of income under section 139(1).

Issue of shares by a closely held company in excess of Face Value: Sec

56(2) (viib)

If consideration received

from a Resident for issue of shares

that exceed the Face Value of shares,

the aggregate consideration received for such shares (-) Fair market value of the shares

is Taxable even if such difference is Rs 10. Hence no limit of 50,000 is to be checked.

Interest received on compensation / enhanced compensation: Sec

56(2)(viii)

Section 56(2)(viii) provides that income by way of interest received on compensation or on

enhanced compensation referred to in section 145B(1) shall be assessed as “Income from other
sources” in the year in which it is received.

Compensation: Taxable in Capital Gains

Note: As per Sec 57, 50% of such interest shall be allowed as deduction, irrespective of the PY to
which it pertains.

As 50% is allowed as deduction, no other expense related to above is allowed as deduction.

Advance Money forfeited against a capital asset: Sec 56(2)(ix)

Prior to PY 2014-15, any amount forfeited is reduced from COA of the asset at the time of
calculating Capital Gains U/s 51

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W.e.f. PY 2014-15, any amount forfeited is taxable under IFOS and hence not reduced from COA
and therefore Sec 51 has been duly amended.

Interest on Securities: Sec 56(2)(id)

If securities are held as Stock in Trade Interest is taxable under PGBP

If Securities are held as Investment Interest is taxable under IFOS

Some exemptions u/s 10(15):

1. Interest income on bonds, securities etc. issued by the CG
2. Interest on deposits in foreign currency: Interest payable by a scheduled bank to a NR or to a
RNOR on deposits in foreign currency, if such deposit is approved by RBI
3. Interest on gold deposits- Any interest on gold deposit bonds issued under the gold deposit
scheme 1999 and on deposit certificates issued under gold monetaisation scheme 2015
4. Interest on Post office savings account- Exempt upto Rs 3,500 in case of individual accounts
and Rs 7,000 in case of joint accounts
5. Interest income from Post Office National Saving Certificate, cumulative Time Deposit
(However Interest on Post office Monthly savings scheme is taxable)
6. Interest on bonds issued by a local authority
7. Interest earned by a Non- Resident on loan to any unit in International Financial Services
Center (IFSC) on or after 1st Sep 2019
8. Tax free bonds Bonds issued by NHAI, Indian railway Finance Corporation Ltd., HUDCO
and Power finance Corporation

Family Pension

It is exempt upto:

15,000 or 1/3 of Family Pension received (Whichever is less)

Note: Family Pension received by Armed Forces or to Gallantry awardees is fully exempt

Keyman Insurance Policy

Maturity amount received by: Charged under the head:

Assessee PGBP U/s 28
Employee Salary U/s 17(3)
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Legal heir on death of employee IFOS U/s 56(1)

Sec 57: Permissible Deductions

Income from letting / subletting of HP Deduction of repair, insurance and

(inseparable rent case) depreciation etc.
Dividend income Interest expense is allowed as deduction from
dividend income:
Actual interest or
20% of dividend income
(Whichever is less)
Family pension Discussed above
Interest on compensation / enhanced Discussed above
compensation
Any other Income Any other expenditure incurred wholly and
exclusively for earning such income.

Sec 58: Expenses not allowable

1. Personal expenses
2. Interest and salary payable outside India if TDS not deducted or deposited
3. Income Tax / Wealth tax paid / payable
4. 100% Expenses u/s 40(a)(i) and 30% Expenses u/s 40(a)(ia) if TDS not deducted or
deposited
5. Expenses mentioned in Sec 40A (i.e. payment to specified persons or cash payment
exceeding Rs 10,000 / Rs 35,000 as the case may be) to the extent applicable.
6. Any expenditure or allowance in connection with winnings of lottery, crossword puzzle
etc. However, expenses incurred by the assessee for the activity of owning and
maintaining race horses shall be allowed as deduction

If assessee opts for Sec 115BAC then he will not get the following exemptions:

1. Deduction u/s 57(iia): Family pension- Hence Family pension will be fully taxable

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