All You Need to Know About Income from Other Sources

The fifth head of income classification, as per the Income Tax Act, is income from other sources. Income that is not categorised for taxation under any other head of income is categorised under this residual category.

Overview of Income From Other Sources

One of the categories of income subject to taxation under the Income Tax Act, 1961, is income from other sources. Any income that is not included in one of the other four heads of income is taxable under the head “Income from Other Sources“, i.e., the residuary head of income.

The following requirements should be met in accordance with Section 56 of the Income Tax Act for an income to fall under the head “Income from Other Sources“:

  • You earn taxable income during a financial year
  • The taxable income cannot be categorised under any other head of income such as Salaries, Income from House Property, Profits and gains of business or profession, and Capital gains

Types of Income Taxable as Income From Other Sources

In addition to the income that cannot be categorised under any other heads, there are certain types of income that are always taxed as income from other sources. Some of the types of incomes are as follows:

  • Dividends
  • Winnings from crossword puzzles, lotteries, horse races, card games, other games of any kind, gambling, or betting
  • Interest received on compensation or enhanced compensation
  • Gifts received by an individual or HUF
  • Fair market value of shares less any consideration received if shares in a closely held corporation are acquired by another closely held corporation without consideration or for inadequate consideration
  • The total consideration less the fair market of shares if a closely held corporation receives any consideration for the issuance of shares that exceeds the fair market value of the shares 
  • Any sum of money received by a person without consideration in excess of ₹50,000

The following types of income are taxable as income from other sources if not taxed under the head “Profits and gains of business or profession”:

  • Any contribution to a fund for the welfare of employees received by the employer
  • Interest on securities, corporate deposits, bank deposits and loans
  • Income from leasing or hiring of machinery, plant, or furniture
  • Any sum received under a Keyman insurance policy including any bonus received from such policy
  • Family pension received by the legal heirs of deceased employees
  • Remuneration received by a Member of Parliament
  • Casual income

Deductions Applicable for Income from Other Sources

The entire income earned is however not subject to tax. There are specific tax deductions available for certain types of income that are categorised as income from other sources, including the following:

  • Income in the form of a family pension, is eligible for a standard deduction of up to ₹15,000 or a deduction of a sum equal to 1/3rd of such pension, whichever is less
  • A deduction of interest expenses up to 20% of the dividend income can be claimed if the interest expenses have been incurred for borrowing money to make investments that generate the dividend income
  • A deduction equal to 50% of interest on compensation or enhanced compensation can be claimed
  • Interest earned from a savings account held with banks, co-operative societies engaged in banking, or post offices is eligible for a tax deduction of up to ₹10,000 under Section 80TTA. Senior citizens who are residents of India can claim a deduction under Section 80TTB on interest earned on fixed deposits and savings accounts up to ₹50,000

Apart from the specific deductions mentioned above, any expenditure incurred for earning any other income that is taxable as income from other sources can be claimed provided they are not personal in nature, they are incurred for earning the income, and they are not capital in nature. 

Final Words

Many passive streams of income such as dividends, interest, and rent are taxable as income from other sources. A majority of us earn some form of these passive streams of income. Therefore, it is important to know about income from other sources and the deductions that are available so that you can disclose your income under the correct head in your tax return and also claim the expenses that you are entitled to claim under the Income Tax Act.

Frequently Asked Questions

I have a fixed deposit and a savings account with a bank. Would tax be deducted from the interest earned by me?

Tax should be deducted by your bank under section 194A at the rate of 10% on interest on fixed deposit if the total amount of interest earned by you in the financial year is ₹40,000 or more (₹50,000 for senior citizens). Since Section 194A excludes savings bank interest from the applicability of TDS, no tax should be deducted by your bank on the same.

I have won a lottery of ₹10 lakh. Would tax be deducted from the same? How much tax do I have to pay if tax is not deducted?

Yes, tax at the rate of 30% should be deducted under Section 194B since your winning is more than ₹10,000. Even if tax is not deducted your winning will be subject to tax at the same rate of 30% under Section 115BB.

Can I claim a deduction under Section 80TTA for interest on fixed deposits?

No, you cannot claim a deduction for interest on fixed deposits. The interest would be taxable as per the slab rate applicable to you. However, senior citizens can claim a deduction up to ₹50,000 under Section 80TTB.

Credit Principal at Wint Wealth

Vaibhav is Chartered Accountant by profession, having experience of 4+ years in banking & finance sector.
Since past one year associated with Wint Wealth as Credit Principal. Previously worked with Northern Arc Capital for 2 years in FI-Credit Team and AU Small Finance Bank for 1 year in LAP-Credit Team.

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