Under the Income Tax Act, 1961, the income earned by a person is classified into different heads of income. However, the entire gross income that you earn is generally not subject to income tax. There are provisions contained in the Income Tax Act for claiming deductions against the income earned.
Section 57 of the Income Tax Act provides deductions against income chargeable under the head “Income from other sources”. Clauses (i), (ia), (ii), (iia), (iii), and (iv) of Section 57 particularly refer to the deductions that may be taken into account for determining the income chargeable under the head “Income from other sources”.
Income from other sources are generally taxable as per the applicable income tax slab rates. Claiming deductions lowers your income tax liability and you wouldn’t want to miss out on claiming them. Read on to know more about the deductions under Section 57 of the Income Tax Act.
Before we delve deep into the types of deductions under Section 57, let us understand the basic concepts surrounding deductions under the Income Tax Act in general and under Section 57 in particular.
Overview of Section 57
Under the Income Tax Act, there are 5 heads for the classification of income. They are Salaries, Income from house property, Profits and gains of business or profession, Capital gains, and Income from other sources. Income which cannot be classified under the first 4 heads, is included in the 5th and residual head of “Income from other sources”.
For instance, dividends, lottery winnings, interest income, family pension, and other types of income received by a taxpayer are taxed under the head “Income from other sources”. Can a taxpayer, though, deduct any expense from income from other sources?
While it seems natural that taxpayers earning business income can claim a deduction for expenses incurred for the purpose of the business, when it comes to income from other sources, taxpayers are often uncertain about claiming expenses. Section 57 of the Income Tax Act helps resolve this uncertainty by providing specific deductions against the different categories of income that are taxable under the head “Income from other sources”.
What are the Deductions Allowed Under Section 57?
The following deductions, as specified in Sec 57, can be claimed when calculating the taxable income under the head “Income from other sources”.
- Deduction for Dividends or Interest on Securities [Sec 57(i)]
Any reasonable amount paid as a commission or remuneration to a banker or any other person for realising interest on securities can be deducted.
The Finance Act, 2020 amended Section 57(i), effective from 1 April 2021. According to this amendment, a taxpayer who receives dividend income can only deduct interest expenses incurred for receiving the dividend. A further deduction of any other costs incurred cannot be deducted. In other words, a taxpayer cannot deduct any expenses from dividend income other than interest on money borrowed for making investments that yield dividends.
Further, the allowable interest expense deduction is restricted to a maximum limit of 20% of the amount of dividends.
- Deduction for Employee’s Contributions to Welfare Schemes [57(ia)]
Any amount that an employer receives from its employees as a contribution to a provident fund, superannuation fund, or E.S.I. fund is considered income from other sources if it is not taxable under the head “Profits and gains of business or profession”. If the employer contributes any amount (from these incomes) to these funds before the statutory deadline, that contribution is eligible for a deduction under Section 57(ia).
- Deduction for Repairs, Depreciation, etc. for Assets Let-out [Sec 57(ii)]
The following deductions under Section 57(ii) can be claimed against the income earned from letting on rent or leasing of machinery, plant, or furniture with or without building:
- Costs associated with recent repairs and the cost of the insurance premium for these assets
- Depreciation, provided the taxpayer is the owner of these assets
- Deduction for Family Pension [Sec 57(iia)]
If you have income in the form of a family pension, you are allowed a standard deduction of up to ₹15,000 or a deduction of a sum equal to 1/3rd of such pension, whichever is less. Family pension under section 57(iia) refers to a consistent monthly sum that the employer pays to the legal heirs of a deceased employee.
- Deduction for any Other Income [Sec 57(iii)]
Any expenditure incurred to earn any other income that is subject to tax under this head can be deducted from that income. The following conditions must be met to claim this deduction:
- The expense should be incurred wholly and exclusively to earn this income
- It shouldn’t be a capital expense of any kind
- It shouldn’t be considered a personal expenditure
- It must be incurred in the relevant accounting year
- Deduction for Interest on Compensation or Enhanced Compensation [Sec 57(iv)]
Sometimes the government is required to pay interest on compensation awarded to owners of land etc., for taking over their property. In some cases, the compensation paid at the first instance is subsequently enhanced and interest is payable to the recipient. A deduction equal to 50% of interest on compensation or enhanced compensation is permitted.
What are the Deductions Not Allowed Under Section 58 ?
Section 58 of the Income Tax Act expressly disallows certain expenses against income from other sources. The following expenses cannot be deducted:
- Any personal expenses of the taxpayer
- Any interest payable outside India for which no tax has been paid or withheld at source
- Any payment that falls under the head “Salaries” and is payable outside India, unless tax has already been paid or withheld at source
- If an assessee receives income from lotteries, crossword puzzles, races (including horse races), card games, and other games of any kind, as well as from gambling or betting of any kind whatsoever, they are not eligible for any deduction for expenses
Amongst the various streams of income that are taxable under the head “Income from other sources”, dividends and interest are common streams of income earned by a majority of taxpayers. Therefore, it is important to know the deductions can be claimed for reducing the incidence of tax. Section 57 is a section that is often overlooked at the time of filing of tax returns. The points mentioned above will help you assess if you can claim any deductions against income from other sources earned by you.
Frequently Asked Questions
How is a pension different from a family pension?
Pensions are classified as salaries since they are benefits that employees receive when they retire. Family pensions are classified as income from other sources as they are benefits that are transferred by employers to the family members of employees following the death of the employee.
Can I claim depreciation under Section 57?
Yes, you can claim depreciation provided you are the owner of the plant, furniture, machinery, or building. In addition to depreciation, any current repairs or insurance premiums are deductible.
Can I claim expenses against dividend income?
You can only claim interest expenses up to 20% of the dividend income. The interest expenses should have been incurred for borrowing money to make investments that generate the dividend income.
What types of interest are classified as income from other sources?
Interest from bonds, debentures, fixed deposits, savings bank accounts, and foreign currency deposit accounts are some examples of interest that are classified as income from other sources.
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.