Income-from-Other-Sources

What is Income From Other Sources?

What is Income From Other Sources?

Income from Other Sources is the fifth head of income-classification under the Income Tax Act. Income from other sources is a residual category. Hence, this category is used to classify income that is not classified for taxation under any other head of income. Income from other sources shall be calculated by the taxpayer based on the mercantile system used by the taxpayer, i.e cash basis or accrual basis. In this article, we look at income from other sources along with the list of allowed deductions.

Incomes Classified Under This Head

Apart from income that cannot be classified under any other heads, there are certain types of incomes which are always taxed under income from other sources. Such incomes are as under:

  • Dividends are always taxed under income from other sources. However, dividends from a domestic company are normally exempt from tax, as the company declaring dividend pays dividend distribution tax. However, with effect from 01.04.2020, the Government of India has abolished dividend distribution tax. From the financial year 2020-21, the shareholder has to pay tax on the dividends received. Also, the benefit of basic exemption limit is available for the dividend income.
  • Winnings from lotteries, crossword puzzles, races including horse races, card game and other game of any sort, gambling or betting of any form are classified as income from other sources.
  • Interest received on compensation or on enhanced compensation is taxed under this head.
  • Gifts received by an individual or HUF (which are chargeable to tax) are also taxed under this head. It should be noted that gifts received from direct linear ascendants are not taxable.
  • If shares in a closely held company are acquired by a firm 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, would be chargeable to tax.
  • If a closely held public company takes any consideration for the issue of shares that exceed the fair market value of these shares, the aggregate consideration obtained for these shares as reduced by its fair market value would be chargeable to tax.
  • If shares in a closely held company are held by a firm or another closely held company from any person without consideration or inadequate consideration, the aggregate fair market value of these shares as reduced by the amount paid, if any, would be chargeable to tax.
  • Any sum of money obtained as an advance or otherwise in the course of negotiations for the transfer of a capital asset would be charged to tax under this head if the sum is forfeited and the agreements do not result in the transfer of such capital asset.

Alternative Classification

The following types of income can be classified as Income from Other Sources if not taxed earlier under the head “Profits and gains of business or profession”:

  • 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.
  • Income from letting out of the plant, machinery or furniture along with building, in a circumstance wherein the lettings are inseparable from each other.
  • Money received under a Keyman Insurance Policy including bonus.

Permissible Deductions

The following deductions can be claimed while computing income from other sources:

  • Commission or remuneration for realising dividends or interest on securities.
  • Any sum received by an employer from employees as a contribution towards any welfare fund of employees is first included as income of the employee. If the employer credits the sum to the employee’s account under the relevant fund on or before the due date which applies to the fund, then the amount of the employee’s contribution is deductible from the income of the employer.
  • Current (not capital) repairs, insurance premium and depreciation in respect of plant, machinery, furniture and buildings are deductible from rent income earned by letting out of the plant, machinery, furniture and building, which are chargeable to tax.
  • A deduction of lower of Rs.15,000 or 33.33% of the income is available in case of income in the nature of family pension. Family pension refers to the regular monthly amount payable by the employer to the family members of the deceased employee.
  • The deduction is available in respect of any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning the income taxable under this head.

Tax Deduction NOT Allowed

The following deductions cannot be claimed while computing income from other sources:

  • Personal expenditure
  • Interest chargeable and payable outside India on which tax has not been paid or deducted at source
  • Amount paid which is taxable under the head “Salaries” and payable outside India on which tax has not been paid or deducted at source
  • Any amount paid on account of wealth-tax
  • Deductions for transactions made at other than arm’s length price under Section 40A

To know about dividend distribution tax, click here.

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