Deductions and Taxation on Income from Other Sources

Income tax is the most direct form of tax applicable on Indian citizens. Salaried individuals pay it in accordance with the income they earn and the tax slab they fall under. However, apart from salary, many people also earn income from a variety of other sources. To facilitate and ease the process of income tax reporting, the Income Tax Department of India has categorised five heads of income, namely:

• Income from Capital Gains/Loss

• Income from Business and Profession

• Income from Salary

• Income from House Property

Any income that does not fall under these heads is considered as ‘Income From Other Sources’.

In this article, we will explore examples of income from other sources, tax on income from other sources, and income from other sources tax rate, etc.

According to section 56 of the Income Tax (IT) Act, 1961, ‘Income from Other Sources’ is the means of earnings which can not be declared under any other income heads. This section also comprises a list of different incomes which are to be declared under this head when computing the tax dues by using an income tax calculator.

A related section of the IT Act, 1961, is section 57. This section and its several other subsections mention expenditures which are permitted as deductions for incomes which are earned as ‘Income from Other Sources’.

Interest rates that get accumulated in your bank account should be declared in your income tax return under ‘Income from Other Sources’. It must be noted that the bank doesn’t mitigate the tax deducted at source (or TDS) on the savings account bank interests. Interest amount from both, recurring deposits or fixed deposits, can be taxed.

On the other hand, the interest amount from the post office fixed deposits and savings bank account can be made tax-free to an extent. However, they are declared under ‘Income from Other Sources’. Interest income from a fixed deposit or a post office savings account or a savings bank account are all declared under this head.

Interest income earned, for a resident of India with an age of sixty years or less, Hindu Undivided Families, for an amount of up to Rs. 10,000 in a specific financial year can be exempted from tax. The deduction which is permitted on interest income is earned from the following sources:

• Post office savings account

• Savings bank account 

• Savings account with a cooperative society which carries forward the banking business

However, the senior citizens can not become entitled to the benefits u/s 80TTA of the Income Tax Act, 1961. 

The interest received on the fixed deposits is added to the other income that you receive as a professional income or a salary. You will, therefore, be required to pay taxes on that specific income at a rate of tax which is applicable to your respective income slab. The tax deducted at source (TDS) is lessened on the interest income when it is received, even though it might not have been paid off.

Let’s take an example: Suppose the bank deducts the TDS on the interest earned every year on a fixed deposit for a tenure of 5 years. Hence, you must keep in mind that you make the payment of your taxes annually, instead of doing it only when your fixed deposit matures. With effect from April 1, 2018, the senior citizens started enjoying an exemption on their income tax of an amount of up to Rs. 50,000 on the interest they earn from their post office/bank fixed deposits u/s 80TTB.

Banks must mitigate the tax when the interest amount earned from the fixed deposits which are held in all the branches of the banks altogether exceeds Rs. 40,000/year. (Before the financial year 2019, this cap amount was Rs. 10,000). A TDS of 10% is mitigated if the details of PAN are available, else it is 20%. The details of TDS on FD interest is mentioned in the Form 26AS.

If your aggregate income is less than the limit of taxable income, you can prevent tax mitigation on FD by the submission of Form 15H and Form 15G to the bank. You can do so by requesting the bank to not mitigate any TDS.

Form 15G is for everyone other than the senior citizens who are more than 60 years of age while Form 15H is for them. These forms are basically for the residents of India and for those individuals whose taxes sum up to 0. They should be submitted during the beginning of the financial year. In case you fail at submitting them within the stipulated time, you can make a claim for a refund by filing your income tax return.

The validity of these forms lasts for a maximum period of one year. Hence, you must submit them every year to prevent the banks from deducting taxes.

If you have opened three fixed deposits, you can add up the total interest income you thereby earn and put it under ‘Other interest income’.

Beginning from June of 2015, when the interest amount earned from every branch of the bank, including that from the recurring deposits, goes beyond an amount of Rs. 10,000 in a specific financial year, a tax of 10% on the interest income will be mitigated. The interest income earned must be declared under the head ‘Income from Other Sources’. 

The EPF and PPF amount which you withdraw after it matures can be exempted from tax. It must be declared under the head ‘Income from Other Sources’. It must be noted that the EPF can be exempted from tax only after serving for a period of five years. 

If you are collecting the pension on behalf of a deceased person, then you should declare it under the heading ‘Income from Other Sources’. There is a mitigation of an amount of Rs. 15,000 or about one-third of the family pension which is received, whichever is lesser from the income of family pension. This must be added to the income of the taxpayer and the tax should be paid at the rate of tax which is valid.

If you earn money from winning the TV/online game shows, lottery, and more, it can be taxed under ‘Income from Other Sources’.

A complete list of several incomes is mentioned under section 56 of the Income Tax Act of 1961. Following mentioned are a few key income which fall under this category: 

1. Mutual funds, Share Dividends, and more

2. Income from lotteries, horse races, crosswords, and several other types of betting and gambling

3. Any amount received from an employee by an employer as a contribution towards ESI, provident fund, Superannuation fund, and more. This is applicable if the amount does not get deposited into the fund which is relevant by the last date

4. Interest amount which is received from the company deposits, bank term deposits, and more

5. Advanced capital or payment earned during the transfer or negotiation of any capital asset

6. Payment which is received by renting out plant, machinery, and more, provided that income is not considered as ‘Income from profession or business’

7. Gifts which are valued in excess of an amount of Rs. 50,000, other than that when received as a gift

8. Income received from a property’s sale

9. Interest gained from securities

Just as self-employed businesses and freelancers can deduct some expenses from their income, taxpayers receiving income from other sources can claim the deductions for the expenses. These deductions are mentioned below.

• Remuneration or commission for realising dividend or interest on securities. If money or commissions have been paid to realise dividends, these costs may be deducted from dividend income that is taxed as income from other sources.

• Expenses (not capital expenditures) like repairs, insurance premiums, and depreciation on plant, machinery, fixtures and buildings are deducted from the rental income generated by letting out of plants, machines, furniture, and buildings. Rental income from the plant and machinery is taxable under income from other sources. The expenses in respect of such plant and machinery are allowed for deduction.

• A standard deduction is allowed for the family pension, i.e. the lowest deduction of ₹15,000. One-third of such income is available in case of income in the nature of family pension. It is paid monthly to the family members of the deceased employee.

• If interest is accrued on compensation or additional compensation is received, 50% of the interest can be deducted. Subject to Section 57(iii), a deduction is allowed for any other expenses (other than capital expenditures) that have been spent solely and entirely to make or earn such income.

According to the kind of income, the treatment of tax of income from other sources may differ. For example, the income gained from horse races, lottery winnings, and any other kind of betting are taxable at a 30% flat rate plus cess which is applicable. The taxpayer’s income tax slab does not get impacted in such a case.

On the other hand, the mutual funds and/or share dividends are taxable according to the slab rate of income tax of the individual for that particular financial year. Similarly, there are various rules which are applicable for taxation purposes of different other types of income from other sources as received by an individual. 

Taxation on Gifts

According to the Income Tax Act, 1961, the gifts are considered as immovable or movable property, land, money, or any other asset which is received without any exchange of money, or for insufficient consideration. This means that it was received with a payment of an amount which is lesser than the fair market value.

Few types of gifts can be exempted from tax, such as, assets or money which is gained as an inheritance through will, or a gift received during marriage, or that received from family members or other relatives, and more. Besides, as per the persisting rules of taxation, the gifts which have a fair market value which is less than Rs. 50,000, can also be exempted from taxation.

If a gift doesn’t belong to any criteria of exempted tax, the gift’s fair market price or the difference between the actual paid value and the fair market price will be the total value of the taxable amount. This value is added to the taxpayer’s annual income under ‘Income from Other Sources’, and is taxed according to the income tax slab rate as applicable.

Any transaction of a movable or an immovable property will have levied tax in addition to the stamp duty. The transaction of a property comprises both property and land. The entire stamp duty will be taxable, provided it is an immovable property which has been gifted without consideration. 

In case the property has been received after the consideration, and the stamp duty becomes more than either Rs. 50,000 or 10%, the stamp duty shall be taxable according to the buyer’s income. The TDS on property will also be applicable to such transactions.

The movable property like securities, shares, gold, sculptures, bullion, pictures, drawings, archaeological collections, artwork, and such, when received without any consideration or at a lesser price, falls under the tax slab. 

The net earnings under the head ‘Income from Other Sources’ in Income Tax is calculated through the below-mentioned formula: 

Total Income from Other Sources = (Gross Income from Section 56 Income Sources) – (Applicable Section 57 Deductions)

However, it must be noted that the various income types under the head ‘Income from Other Sources’ have various tax rates according to the applicable subsections and sections of the IT Act, 1961. 

Taxation often eats away a significant portion of an individual’s earnings. As a result, investors prefer investments which ensure tax saving through deductions. In recent times, Unit-Linked Investment Plans (ULIPs) have emerged as a top choice among investors looking to supplement their income from other sources.

ULIPs not only help investors create significant wealth for achieving their goals but also provide life insurance cover for the policyholder, thus ensuring that their dependents are taken care of even in their absence.

Investors can choose which ULIPs they wish to invest in based on their own personal requirements and risk appetite. For instance, investors with a high amount of risk aversion can choose to invest in debt-based securities, which provide lower returns as compared to equity-based investments but are more secure in nature.

Alternatively, investors who are more comfortable with taking risks can choose to invest in a mix of equity and debt securities with expectations of higher returns.