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:
1. Taxability of Dividend income [Section 56(2)(i)]
Under section 2(22), the following payments or distributions by a company to its shareholders are deemed as dividends to the extent of accumulated profits of the company—
(A). any distribution entailing the release of the company’s assets [sec. 2(22)(a)];
(B). any distribution of debentures, debenture-stock, deposit certificates and bonus to preference shareholders [sec. 2(22)(b)];
(C). distribution on liquidation of the company [sec. 2(22)(c)];
(D). distribution on reduction of capital [sec. 2(22)(d)]; and
(E). any payment by way of advance or loan to the following:
(i). a shareholder (being a person who is beneficial owner of equity shares) holding not less than 10% of the voting power; or
(ii). any concern in which such shareholder is a member or a partner and in which he has substantial interest [sec. 2(22)(e)].
(1) Tax Treatment in The Hands of Shareholders –
Tax treatment is given below —
(A). Deemed Dividend under Section 2(22)(e) –
If a loan or advance is given during April 1, 2003 and March 31, 2018 (or during June 1, 1997 and March 31, 2002), which is deemed as dividend under section 2(22)(e), then such loan or advance is taxable under section 56 as “dividend” in the hands of recipient. Tax will be deducted at source under section 194, 195, 196C or 196D.
(B). Tax on certain Dividends received from Domestic Companies [Section 115BBDA]
w.e.f. assessment year 2017-18, any income by way of dividends chargeable to tax in accordance with the provisions of section 115BBDA shall not be exempt under section 10(34) even if the tax has been paid on that dividends by the domestic companies under section 115-O.
Section 115BBDA is applicable if the following conditions are satisfied –
1. The assessee (i.e., shareholder who gets dividend from domestic company/companies) is a resident individual/HUF/firm (for the assessment year 2017-18) or any person [not being a domestic company, or a fund/institution/trust/university/educational institution/hospital/other medical institution referred to in section 10(23C)(iv)/(v)/(vi)/(via), or a trust/institution registered under section 12A/12AA] (from the assessment year 2018-19).
2. Total income of the assessee includes any income in aggregate exceeding Rs. 10 lakhs by way of dividend declared/distributed or paid by a domestic company or companies.
If the above two conditions are satisfied, dividend income from domestic companies in excess of Rs. 10 lakh is chargeable to tax at the Rate of 10% with effect from the assessment year 2017-18.
Taxation of dividend income in excess of Rs. 10 lakh shall be on gross basis. However, tax under section 115BBDA is not applicable in the case of deemed dividend under section 2(22)(e).
Dividend in aggregate exceeding ₹10,00,000 received by certain persons to be taxed at the special Rate of 10% [Section 115BBDA (1)]:
Notwithstanding anything contained in this Act, where the total income of a specified assessee, resident in India, includes any income in aggregate exceeding ₹ 10,00,000, by way of dividends declared, distributed or paid by a domestic company, the income-tax payable shall be the aggregate of—
(a) the amount of income-tax calculated on the income by way of such dividends in aggregate exceeding ₹10,00,000, @ 10%; and
(b) the amount of income-tax with which the assessee would have been chargeable had the total income of the assessee been reduced by the amount of income by way of dividends.
No deduction to be allowed from Dividend Taxable at Special Rate under section 115BBDA (1) [Section 115BBDA (2)]:
No deduction in respect of any expenditure or allowance or set off of loss shall be allowed to the assessee under any provision of this Act in computing the income by way of dividends referred to in section 115BBDA(1)(a).
(2). Deductions for Expenses from Dividend Income [Section 57(i) and 57(iii)]:
The following expenses can be claimed as deductions from gross dividend income other than the dividends referred to in section 115-O:
(a) Collection charges:
any reasonable sum paid by way of commission or remuneration to a banker or any other person for the purpose of realising the dividend.
(b) Interest on loan:
Interest on money borrowed for purchasing the shares can be claimed as a deduction. The interest can be claimed even if no income is earned by way of dividend on such shares. It has been held by the Supreme Court that if the expenditure has been laid out for the purpose of earning the dividend income then whether income is actually earned or not is immaterial and deduction on account of interest can be claimed.
(c) Any other expenditure:
Any other expenditure, not being a expenditure of a capital nature, expended wholly and exclusively for the purpose of making or earning such income, can be claimed as a deduction.
2. Income from Winnings from Lotteries, Crossword Puzzles, Horse Races and Card Games [Section 56(2)(ib)]
Any winnings from:
- crossword puzzles,
- races including horse races,
- card games and other games of any sort,
- 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.
(A). 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% + Education Cess @ 2% + SHEC @ 1%.
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 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.
(B). 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 ₹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 ₹1,00,000, tax must have been deducted @ 30% and net amount received by the assessee would be ₹70,000 (1,00,000 – 30,000).
Grossing up would be done as:
₹70,000 X [100 / (100 – 30) ] = ₹1,00,000.
3. Income from Interest on Securities [Section 56(2)(id)]
(1). Meaning of Interest 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”.
According to Section 2(28B) “Interest on securities” means:
- Interest on any security of the Central Government or a State Government;
- 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:
- Securities issued by Central/State Governments;
- Debentures/bonds issued by a local authority;
- Debenture/bonds issued by companies;
- Debenture/bonds issued by a corporation established by a Central, State or Provincial Act i.e. autonomous and statutory corporations.
(2). Chargeability of Interest on Securities :
- Income by way of interest on securities is taxable on “receipt” basis, if the assessee maintains books of account on “cash basis”.
- It is taxable on “due” basis when books of account are maintained on mercantile system.
- Interest is taxable on “receipt” basis, if such interest had not been charged to tax on due basis for any earlier previous year.
(3). Accrual of Interest on Securities :
Interest on securities does not accrue everyday or according to the period of holding of investment. For instance, if one holds 7% securities from January 1, 2019 to February 28, 2019, it cannot be said that interest of two months has accrued to the security holder. Generally, interest becomes due on due dates specified on securities. For instance…, if specified due dates of interest of particular securities are March 1 and September 1 every year, interest of six months falls due on each such date and holder of securities on these dates will be entitled to interest of six months on each such date.
For instance :
If X purchases 7% Rs. 20,000 Securities (specified due dates: March 1 and September 1) on February 25, 2019 and sells the same on March 2, 2019, he will become entitled for interest of 6 months (i.e., Rs. 20,000 × ½ × 7 ÷ 100 = Rs. 700), irrespective of the fact that he holds Securities just for 6 days. As, in this case, interest of 6 months has become due to X on March 1, 2019, he will be liable to pay tax on the entire interest of Rs. 700 in the previous year 2018-19 if he maintains books of account on “mercantile system”. If, however, X maintains books of account on “cash” system, then Rs. 700 is taxable in the previous year in which it is received.
(4). Grossing up of Interest on Securities :
Gross interest [i.e., Net Interest + TDS (Tax Deducted at Source] is Taxable.
Net interest is grossed up in the hands of recipient if tax is deducted at source by the payer.
Net interest (if tax is deducted at source) in the hands of the recipient should be grossed up by multiplying it by the following fraction:
Net Interest x 100 ÷ [100 – Rate of TDS]
The Rates of T.D.S. are as under:
(a) In case of 8% saving bonds — 10%
(b) Non-government securities whether or not listed or recognized stock exchange — 10%.
Grossing up is required in the case of the following securities: —
- 8% Saving (Taxable) Bonds if the amount of interest payable exceeds Rs.10,000 (these Bonds have now been withdrawn. New 7.75% Government of India Savings (Taxable) Bonds, 2018 have been issued);
- securities issued by a statutory corporation or a local authority or by any company.
(5). 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:
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.
Interest on loan [Section 57(iii)]:
Interest on money borrowed for investment in securities can be claimed as a deduction.
Any other expenditure [Section 57(iii)]:
Any other expenditure, not being a expenditure of a capital nature, expended wholly and exclusively for the purpose of making or earning such income can be claimed as a deduction.
4. Income from Letting Out of Machinery, Plant or Furniture [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 )
(1). 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’.
(2). Deductions permissible from Letting out of Machinery, Plant or Furniture and Buildings [Section 57(ii) and (iii)]:
The following deductions are allowable:
- Current repairs, to the premises held otherwise than as tenant.
- Insurance premium against risk of damage or destruction of the premises.
- Repairs and insurance of machinery, plant or furniture.
- Depreciation based upon block of assets, in the same manner as allowed under section 32 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 be allowed to the extent it is let out.
- Any other expenditure: Any other expenditure, not being a 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.
5. Share Premium in excess of the Fair Market Value to be treated as Income [Section 56(2)(viib)]
Section 56(2)(viib) is applicable as follows –
- Recipient is a company (not being a company in which the public are substantially interested).
- It receives consideration for issue of shares (preference shares or equity shares) from a resident person.
- The consideration received for issue of shares exceeds the face value of such shares. In other words, shares are issued at a premium.
If the above conditions are satisfied, the aggregate consideration received for such shares as exceeds the fair market value of the shares, shall be chargeable to income-tax in the hands of recipient-company under section 56(2)(viib) under the head “Income from other sources”.
The above provisions are not applicable in the following Two Cases –
- where the consideration for issue of shares is received by a venture capital undertaking from a venture capital company or a venture capital fund; or
- where the consideration for issue of shares is received by a company from a class or classes of person as notified† by the Central Government.
The Fair Market Value of the Shares shall be the Higher of the Value—
Further, an opportunity has been provided to the company to substantiate its claim regarding the fair market value. Accordingly, an Explanation has been inserted to the above sub-clause to provide that for the purpose of this clause the fair market value of the shares shall be the value—
- as may be determined in accordance with the method given in rules 11U and 11UA; or
- as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value of its assets, including intangible assets, being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature.
6. Interest on Compensation or Enhanced Compensation [Section 56(2)(viii)]
As per section 145A(b), any interest received by an assessee on compensation or enhanced compensation, as the case may be, shall be deemed to be the income of the year in which it is received.
Further, as per section 56(2)(viii), income by way of interest received on compensation or on enhanced compensation referred to in section 145A(b) above shall be taxable under the head income from other sources in the previous year in which such interest is received.
Deduction from such interest [Section 57(iv)]:
In the case of above interest which is taxable under the head income from other sources, a deduction of a sum equal to 50% of such income shall be allowed to the assessee and no deduction shall be allowed under any other clause of section 57.
Mr. X whose property was compulsorily acquired in 2013 received enhanced compensation of Rs. 9,00,000 on 15.11.2017 which includes Rs.2,40,000 as interest on such enhanced compensation. Discuss the taxability of such compensation.
Enhanced compensation of Rs. 9,00,000 – Rs. 2,40,000 = Rs. 6,60,000 shall be taxable under the head capital gain. Whereas interest on enhanced compensation shall be taxable under the head income from other sources as under:
|Interest on Enhanced Compensation Received||2,40,000|
|Less : Deduction @ 50%||1,20,000|
7. Forfeiture of Advance Received for Transfer of a Capital Asset [Section 56(2)(ix)]
According to section 56(2)(ix), any sum of money, received as an advance or otherwise in the course of negotiations for transfer of a capital asset shall now be taxable under the head income from other sources if:
- Such sum is Forfeited; and
- The negotiations do not result in transfer of such capital asset.
8. Income of any Person from Gift of Money, Gift of Property (whether Movable or Immovable) [Section 56(2)(x)]
(1) Where any Person Receives, in any previous year, from any Person or Persons on or after 1.4.2017:
|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 which is less than the stamp duty value of the property by an amount exceeding Rs. 50,000.||the stamp duty value of such property as exceeds the consideration received|
|(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. “Property” means the following capital asset of the assessee, namely: —
i. immovable property being land or building or both;
ii. shares and securities;
iv. archaeological collections;
viii. any work of art; or
(2) Section 56(2)(x), Not to Apply in certain Cases
Section 56(2)(x), shall not apply to any sum of money or any property received—
- from any relative; or
- on the occasion of the marriage of the individual; or
- under a will or by way of inheritance; or
- in contemplation of death of the payer or donor, as the case may be; or
- from any local authority as defined in the Explanation to section 10(20); or
- 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
- from or by any trust or institution registered under section 12A or section 12AA; or
- 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
- by way of transaction not regarded as transfer under section 47(i) or (vi) or (via) or (viaa) or (vib) or (vic) or (vica) or (vicb) or (vid) or (vii); or
- from an individual by a trust created or established solely for the benefit of relative of the individual.
9. Family Pension payments received by the Legal Heirs of a Deceased Employee
After the death of the employee, if there is any family pension received by the legal heirs of the deceased, it will deemed to be the income of the legal heir and will be taxable under the head ‘Income from Other Sources’. On such pension, as per section 57(iia) a standard deduction shall be allowed to the legal heir @ 33 1/3 % of such pension, or ₹15,000, whichever is less.
For the purpose of section 57(iia) i.e. the standard deduction, family pension means a regular monthly amount payable by the employer to a person belonging to the family of an employee in the event of his death.
10. Contribution of the Employee towards his Welfare Fund, Deducted/Received by the Employer [Section 56(2) (ic)]
Such deduction/amount received as contribution of the employee by the employer is an income of the employer to be taxed under the head ‘Income from Other Sources’, if such income is not chargeable under the head ‘Profits and Gains of Business and Profession’. However, if the above contribution deducted/received by the employer is deposited under the welfare scheme, for which it was deducted, on or before the due date mentioned in the respective scheme, the amount so deposited shall be allowed as a deduction under section 57(ia). This deduction shall be allowed, so far as may be, it is in accordance with the provisions of section 36(1)(va).
11. Any Other Incomes Taxable under this head ‘Income from Other Source’
If there is any other income, which is not discussed above, but is taxable under the head ‘Income from Other Sources’, the deduction will be allowed on account of any expenditure incurred (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income.
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:
- income from sub-letting of a house property by a tenant;
- casual income;
- insurance commission;
- family pension (payments received by the legal heirs of a deceased employees);
- director’s sitting fee for attending board meetings;
- interest on bank deposits/deposits with companies;
- interest on loans;
- income from undisclosed sources;
- remuneration received by Members of Parliament;
- interest on securities of foreign governments;
- examinership fees received by a teacher from an institution other than his employer;
- 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;
- rent from a vacant piece of plot of land;
- agricultural income from agricultural land situated outside India; (xv) interest received on delayed refund of income-tax;
- income from royalty, if it is not income from business or profession;
- Director’s commission for standing as a guarantor to bankers;
- Director’s commission for underwriting shares of a new company;
- 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;
- Income from racing establishment;
- Income from granting of mining rights;
- Income from markets, fisheries, rights of ferry or moorings;
- Income from grant of grazing rights;
- Interest paid by the Government on excess payment of advance tax, etc.;
- Income received after discontinuance of business.