Income from Other Sources under the Income Tax Act, 1961

 Indian Income Tax Act, 1961, categorises an individual’s total income under five heads for the purpose of computation and taxation. These heads are:

• Income from Salaries
• Income from House Property
• Profits and Gains from Business or Profession
• Capital Gains
• Income from Other Sources

“Income from Other Sources” is a residual head, covered under Section 56 of the Act. It accounts for incomes not chargeable under the other four heads. This article elaborates on the meaning, scope, taxability, latest amendments, and judicial pronouncements concerning this head.

Meaning and Scope

Section 56(1) provides that income of every kind, which is not chargeable under any of the first four heads, shall be chargeable under “Income from Other Sources.” Thus, it acts as a “catch-all” provision to ensure that no income escapes taxation.

Examples include:

• Dividend income
• Interest on securities
• Winnings from lotteries, crossword puzzles, horse races, card games, etc.
• Gifts received without consideration exceeding specified limits
• Rental income of machinery, plant or furniture when not taxable under ‘Profits and Gains from Business or Profession’
• Family pension received after the death of an employee

Specific Incomes Chargeable Under Section 56(2)

Section 56(2) specifies certain incomes that must be taxed under this head:

Dividends

• Dividends are taxable in the hands of shareholders. After the abolition of Dividend Distribution Tax (DDT) in 2020 (Finance Act, 2020), dividends are taxed in the hands of the shareholders at applicable rates.

Winnings from Lotteries, Crossword Puzzles, Horse Races, etc.

• Winnings are taxed at a flat rate of 30% (Section 115BB), without any deductions for expenses.

Interest on Compensation or Enhanced Compensation

• Interest received on delayed compensation (e.g., land acquisition) is taxable.

Gifts Received

• If an individual or HUF receives gifts without consideration exceeding Rs. 50,000 in aggregate during a financial year, the entire amount becomes taxable.
• Certain exceptions apply (e.g., gifts from relatives, on the occasion of marriage, under a will).

Deemed Income in Certain Share Transactions

• If closely held companies issue shares at a price higher than their fair market value (FMV), the excess amount is taxable.

Advance Forfeited

• If any advance money received against the transfer of a capital asset is forfeited, it is taxable under ‘Other Sources’.

Compensation Received

• Compensation received in connection with the termination of employment or modification of employment terms is taxable.

Method of Computation

The computation of income under “Income from Other Sources” follows these steps:

• Aggregate the Income: Total all incomes falling under this head.
• Allowable Deductions: Certain deductions are permissible under Section 57.
• Compute Net Income: Deduct allowable expenses to arrive at net income taxable under this head.

Allowable Deductions under Section 57

Expenses allowed as deductions:

• Commission or remuneration for realising a dividend or interest.
• Repairs, insurance, and depreciation in case of rental income from plant, machinery, or furniture.
• Any other expenditure (not of a capital nature) incurred wholly and exclusively for earning such income.
• In case of family pension, a standard deduction of 1/3rd of the pension amount or Rs. 15,000, whichever is less.

Income Exempt from Tax Despite Falling under Other Sources

Some incomes, although covered by the definition of ‘Other Sources’, are exempt, such as:

• Agricultural income (Section 10(1))
• Certain specified awards [Section 10(17A)]
• Scholarships [Section 10(16)]

TDS on Winnings from Online Games

Finance Act, 2023 introduced a new section 194BA effective from 1st April 2023 regarding TDS on winnings from online games. Any winnings above Rs. 100 are subject to TDS @ 30%.

Important Judicial Pronouncements

1. Commissioner of Income Tax, Mumbai v. D.P. Sandu Bros. Chembur (P) Ltd (2005)

In Commissioner of Income Tax, Mumbai v. D.P. Sandu Bros. Chembur (P) Ltd., the Supreme Court dealt with whether a sum received by the assessee for surrendering tenancy rights was taxable as capital gains under Section 45 of the Income Tax Act, 1961. The Court affirmed that tenancy rights are “capital assets” and their surrender amounts to a “transfer”; however, following the principle in B.C. Srinivasa Setty, since the cost of acquisition of tenancy rights was incapable of being ascertained (before the 1995 amendment to Section 55(2)), capital gains tax could not be levied.

The Court further rejected the Department’s argument that the amount could be taxed as “income from other sources” under Section 56, reiterating that income must be taxed under the specific head applicable and that if it cannot be taxed under capital gains, it cannot be taxed at all. Consequently, the appeal by the Revenue was dismissed.

2. Cadell Weaving Mill Co. Pvt. Ltd. v. CIT (2001)

In Cadell Weaving Mill Co. Pvt. Ltd. v. CIT, the Bombay High Court held that ₹1.40 crores received by the assessee for surrendering statutory tenancy rights was a capital receipt and not taxable under the Income Tax Act, 1961. The Court ruled that tenancy rights constituted a capital asset under Section 2(14), but since the cost of acquisition of such rights could not be ascertained, no capital gains could be computed under Section 45.

Consequently, the receipt could neither be taxed as “income from other sources” under Section 56 nor under Section 10(3) as casual and non-recurring income. The Court disagreed with the Allahabad High Court’s decision in Gulab Chand and upheld that capital receipts, unless chargeable under Section 45, fall outside the purview of taxable income. Thus, the entire amount was held non-taxable.

Budget 2025-2026 Updates: Key Changes to “Income from Other Sources” under Income Tax

The Union Budget 2025 introduced several important changes relating to the taxation of “Income from Other Sources” under the Income Tax Act. These amendments are designed to enhance clarity, ensure consistency across different income types, and simplify tax compliance for taxpayers.

1. Reclassification of ULIP Proceeds:

Starting April 1, 2026, profits from the redemption of Unit Linked Insurance Policies (ULIPs) that do not qualify for exemptions will no longer be taxed under “Income from Other Sources.” Instead, such proceeds will be taxed as capital gains under Section 45(1B), aligning them with the treatment of equity and mutual fund investments.

2. Reduced TDS on Insurance Commission:

The TDS rate under Section 194D on insurance commission has been reduced from 5% to 2%, effective April 1, 2025.This step aims to ease the compliance burden for insurance agents and improve their cash flows.

Additional Relevant Changes

1) Introduction of the “Unified Tax Year”

The Income Tax Bill 2025 reforms replace the dual “Financial Year” and “Assessment Year” system with a single “Tax Year” to simplify the taxation period for all taxpayers.

2) Enhanced Rebate under Section 87A

The tax rebate under Section 87A has been increased to ₹60,000 (from ₹25,000 earlier), allowing individuals earning up to ₹12 lakh to have zero tax liability under the new regime.

Penalties for Non-Disclosure

Failure to report income under ‘Other Sources’ may result in:

1. Penalty under Section 270A for under-reporting of income.
2. Prosecution under Section 276C for willful evasion.

Conclusion

“Income from Other Sources” plays a crucial role in ensuring comprehensive taxation. It captures diverse forms of income that could otherwise fall through the cracks. With recent amendments targeting gifts, virtual assets, online gaming, and valuation norms, the scope under this head has expanded considerably. Taxpayers must exercise diligence in disclosing incomes under this head to avoid penalties and ensure compliance.

Given the evolving nature of financial transactions, the importance of this head will only increase in the future, necessitating greater awareness among taxpayers and tax practitioners alike.

References

1. Income Tax Act, 1961
2. Returns from ULIP investment to get tax treatment as capital asset in these conditions, clarifies Budget 2025, Available Here
3. Commissioner of Income Tax, Mumbai v. D.P. Sandu Bros. Chembur (P) Ltd, AIR 2005 SC 796
4. Cadell Weaving Mill Co. Pvt. Ltd. v. CIT, [2001] 249 ITR 265(BOM)