Having that other source of income is surely bliss. Gone are those days when only one person in the family used to earn and that sufficed the needs. Now even though each family member earns, it’s still never enough or sufficient. Income from other sources does add to your primary source and helps you achieve financial stability. Creating that other source of income is necessary as extra income gives you shock-absorbing capacity in case of any unforeseen situations. However, Income from other sources needs to be disclosed to the government, and yes even it is taxable in the hands of the taxpayer.
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What does Income from other sources include?
Any income that is earned apart from the primary income or salary is called income from other sources. This income may accrue due to some investments, financial activities undertaken by the taxpayer. Income from other sources is chargeable to Income tax. Below are the components of income from other sources:
The dividend is the amount of profit that is distributed by the listed company to the shareholders. This amount is given to thanks the shareholders for their valuable investments while ensuring that their wealth is maximized.
Winnings from some quiz shows, betting or lotteries constitute winnings under Income from other sources. Any amount won in these will constitute under winnings category.
- Interest on securities
When you invest in securities, some of them will earn interest. Interest accruing on investments done in securities like debentures and bonds are also grouped under income from other sources.
- Income from rented assets
If you rent out an asset owned by you like machinery, plant, land, furniture will constitute Income from other sources. As an owner, you earn rental income by renting out your assets to others.
- Sum received under Keyman insurance policy.
Insurance amount received when the key employee or employee who is critical to the company dies, thus insurance amount received by the company to replace him is termed as keyman insurance. The maturity amount received from this insurance is categorized under income from other sources.
The gift is the amount received in cash from friends or anyone else is to be included under Income from other sources.
Taxable Income from other sources
Income from other sources is chargeable to tax depending upon the amount received, category, and the percentage of tax applicable on each one of them. Below is how the Income from other sources are taxed and when:
Any dividend paid or declared by a domestic company is exempt from tax. Since the domestic company is liable to pay dividend tax on such distribution, the shareholder is not assessable on such dividends.
Example – Thus dividends from shares held by you will be tax-free.
Winnings from lotteries, crossword puzzles, races, card games, and other games of any sort, gambling or betting of any nature are taxable. Such winnings are chargeable to tax u/s 115 BB at a flat rate of 30%.
Example – The total winning amount will be charged flat 30% tax and you will be able to take home the remaining 70% of the amount. The cash rewards from Kaun Banega Crorepati or any other show are also taxed at a flat 30%.
- Interest on securities
Section 10 (15): Income by way of Interest on notified bonds, securities, or certificates issued by the Government like below:
- 12 years national savings annuity certificates,
- National defense gold bonds 1980,
- Special bearer bonds 1991,
- Treasury savings deposit certificates – 10 yrs,
- Post office cash certificates – 5 yrs,
- National plan certificates – 10 yrs,
- Post office national savings certificates,
- Post office CTD,
- Fixed deposit government savings certificates,
- Special deposit scheme 1981,
- 7% Capital investment bonds,
- Relief bonds issued by CG.
- Interest on bonds and debenture of a notified public sector company,
- Interest on notified bonds of a local authority.
Grossing up of interest: It is always the gross interest that is included in the total income of the assessee. Where interest is paid after deduction of tax at source, it should be grossed up because the amount of tax deducted at source is part of the income of the assessee.
The amount of interest received may be grossed up in the following manner:
(Net interest X 100)/(100 – Rate of TDS)
Rules regarding grossing up:
- Tax-free government securities: Interest from tax-free govt. securities should not be grossed up as no tax is required to be deducted at the source.
- Fewer Tax securities: No grossing up of interest is required in the case where the amount of investment and rate of interest both are given. Gross interest may be calculated straight away. Where only the amount of interest is given but the amount of investment or rate of interest is not given, grossing up is necessary.
- Tax-free commercial securities: Interest from tax-free commercial securities (Other than govt. securities) is always required to be grossed up, even if the amount of investment and rate of interest is given.
The rate of grossing up depends on the rate at which tax was deducted at the source.
- Income from rented out asset
Income from letting of machinery, plant, furniture, or any other asset is taxable. The entire amount is taxable without any exemption.
- Sum received under Keyman insurance policy
The maturity amount received by the company on the death of its key employee is chargeable to tax. The entire amount is taxable.
Love to receive gifts, be cautious as high valued gifts are taxable. Any gift of money, exceeding Rs.50,000/- in aggregate received from unrelated persons on or after 01.04.2006 is taxable. However, if the gift is received by below people under the below circumstances, then the entire gift amount or gifted asset is exempted from tax.
Gift exempted from tax:
- Non-monetary gifts.
- Gift of money received from relatives.
- Gift of money received on the occasion of marriage.
- Gift of money received under a will.
- Gift of money received from local authorities.
Relatives would mean:
- Spouse of the individual,
- Brother or sister of the individual,
- Brother or sister of the spouse,
- Brother or sister of parents,
- Any lineal ascendant or descendant,
- Any lineal ascendant or descendant of the spouse.
How to Save Taxes?
Use below ways to save taxes by categorizing some of your income under the head of Income from other sources. This will help you with more disposable income in your hands:
- Gifts – Purchased a new house item, or received cash that cannot be accounted for? No issues, bill the item in the name of the taxpayer and show it as a Gift under Income from other sources. Get the whole amount exempted from tax.
- Dividend – Invest more in stocks with a good dividend payout ratio, as any dividend received is tax-free in the hands of the investor.
- Rented assets – Rented out an asset, to get rental income? Do not give the tenants your PAN number, and receive rent only in cash to avoid attracting any taxes.
- Tax-free interest – Invest more in tax-free government securities to receive tax-free interest income.
Examples of Income from other sources and Calculation:
Question 1.– Mr.A receives Rs.75000/- from three of his friends. What amount is taxable?
Answer 1. – Here the entire amount of 75000/- will be chargeable to tax and Mr.A cannot claim an exemption of 50000/- as the aggregate money has exceeded 50000/-.
Question 2. – Mr.Sandeep receives Rs.20000/- from Mr.Lalit and Rs.10000/- from Mr.Koti, who are all friends, on the occasion of the new year. Discuss the tax liability.
Answer 2. – Rule as per sec 56(2) – Any sum of money received from non-relatives is chargeable to tax if it exceeds 50000/-. Since the total amount received from friends is Rs 30,000 lesser than Rs 50,000. Thus, the entire amount is exempted from tax.
Question 3. – Mr.Ashok received a sum of 500000/- of which details are :
- From relatives – 100000/-
- From an unregistered charitable institution: 50000/-
- From friends on birthday – 150000/-
- From neighbour who is in death bed – 200000/-
Discuss the tax liability.
Answer 3. – Below is how the amount received will be treated for tax:
- From relatives – 100000/- Not taxable.
- From an unregistered charitable institution: 50000/- — Fully-taxable since unregistered.
- From friends on birthday – 150000/– Taxable
- From neighbour who is in death bed – 200000/- – Not taxable – any sum received in contemplation of death of the payer is exempt.
Question 4. – Arun receives 100000/- from parents, Rs.50000/- from friend Sam, Rs.25000/- from friend Gandhi on the occasion of their birthday. Compute taxable income.
Answer 4. – Below will be the tax liability:
- 100000/- from parents – exempt.
- 75000/- from friends taxable as it has exceeded 50000/-.
Question 5. – Raman receives 500000/- from his relatives and parents of his wife on the occasion of marriage. He also receives one car, some jewelry and a sum of Rs.150000/- from persons who are not relatives on the same occasion. His grandfather registers in his favor land worth 10,00000/- after a month, as his marriage gift. Compute taxable income.
Answer 5. – Gifts received on marriage are not taxable whether relatives or not. All gift in kind is not taxable.
Question 6.- Rashika was declared a lucky winner in a lottery held on 15th August 2022. She received a sum of 100000/- as prize money, so will it be taxable?
Answer 6. – Winnings from the lucky draw is chargeable to tax @30% plus a cess of 3% (effective rate – 30.90%).
Question 7. – Kumar took part in a motor rally and is awarded prize money of 10000/-. He claims that the amount is exempt from tax as it was not a matter of luck but a matter of personal skill. Advise him.
Answer 7. – Winnings from any kind of race or rally are subject to tax. There is no exemption on such income.
Those who want to show Income from other sources under Income tax should use ITR-2 while filing the IT returns.
What are your thoughts on income from other sources?