What incomes fall under the head of Income From Other Sources?
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The Income Tax Act, 1961 is the most direct tax applicable to Indian citizens. Those who receive a salary should pay it according to their income and tax slab. However, many people also receive income from other sources besides salary. In this blog, we will discuss all the incomes falling under the head of Income from other sources under Income Tax Act, 1961, and tax deductions allowed under this head.
What is income from other sources?
Income from other sources is a residual head of income. It refers to any income which is not specifically taxed under any other head of income and falls under the 5th head of income under Income Tax, 1961. Taxpayers calculate income from other sources based on the mercantile system used by them, i.e., accrual basis or cash basis.
What are the requirements for Income from other sources?
Certain requirements must be met for an individual to fall under the preview of Income from other sources. These are as follows:
- The person should be earning an income.
- The income earned should not be tax exempted under any provision of the Income Tax Act, 1961.
- The income earned should not be categorized as salary, income from the house property, profit, or gain from business or profession.
What incomes fall under Income from other sources?
Apart from the incomes that cannot be described under any other heading, certain types of income are always taxed under Income from other sources. Such income from other sources is defined below:
1. One-time incomes such as winnings from horse races, gambling or betting, crossword puzzles, lotteries, and card games of any form, fall under the head of ‘Income from Other Sources.’
2. Interest received by a person on the amount of compensation or reimbursement paid out in cases such as compulsory acquisition is subject to taxation under this head. Such income will be deemed as the income of the year in which it is received, irrespective of the method of accounting followed by the Income Tax authority. Moreover, a deduction of a sum equal to 50% of such income will be allowed from such income.
3. The gifts received by a person or Hindu Undivided Family (HUF) are taxable under this head. It should be noted that gifts received from direct linear ascendants are not taxable under this head.
4. If shares in a closely held company are acquired by a company or another closely held company from any person without consideration or inadequate consideration, the aggregate fair market value of these shares as decreased by the consideration paid, if any, will be chargeable to pay tax.
5. If a closely held public company takes any consideration for the issue of shares that is more than that of the fair market value of these shares, the aggregate consideration obtained for these shares as reduced by its fair market value will be chargeable to pay tax.
7. Income can fall under “Income from Other Sources” if not taxed earlier under the head “Profits and gains of business or profession” such as any contribution to a fund for the welfare of employees received by the employer, income received by way of interest on securities, income from letting out or hiring of plant, machinery or furniture along with building, in a circumstance wherein the lettings are inseparable from each other, and money received under a Keyman Insurance Policy including bonus.
8. If any compensation is received by a person through his/ her termination of employment or change in terms and condition is taxable under this category.
9. Any sum of money collected as an advance or otherwise during talks for the transfer of a capital asset would be taxed under this category if the sum was forfeited and the agreements failed to result in the transfer of such capital asset.
What are the tax deductions allowed under Income from other sources?
The following tax deductions cannot be claimed while computing under this head:
- Personal expenses.
- Interest is chargeable and payable outside India on which tax has not been paid or deducted at source.
- Amount paid which is taxable under the category of “Salaries” and payable outside India on which tax has not been deducted at source or paid.
- Amount paid on account of wealth tax.
- Deductions for transactions made at other than arm’s length price under Section 40A.
What are the tax deductions permissible under income from other sources?
The table below lists the number of tax deductions permissible under income from other sources:
Nature of income
Dividend or interest earned on securities
Any reasonable sum paid as commission or remuneration to a banker or any other person to realize interest or dividend on securities.
Employee’s contribution towards Provident Fund (PF), Superannuation Fund (SF), or ESI Fund setup for employees’ welfare
In case the employees’ contribution is credited to their respective accounts in the relevant fund before or by the due date specified by the relevant.
One-third of the family pension, subject to a maximum of Rs. 15,000
Interest in the compensation or enhanced compensation
50% of such interest received (subject to specific conditions)
Income from other sources under Income Tax Act, 1961 is an important aspect of taxation that people need to understand to avoid any legal issues. It includes income from various sources such as profit from winning the lottery, gifts, interest received from compensation, etc. The tax deductions that are permissible under income from other sources can reduce the taxable income and can be beneficial for taxpayers.
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