Section 56 of Income Tax Act

Section 56 of the Income Tax Act explains the taxation on earnings that fall under the head of Income from Other Sources (IFOS). This includes all the earnings not classified as income, as mentioned in the I-T Act, 1961. 

 

This includes interest earned from security, immovable properties, and income from rental properties, equipment, or gifts. Section 56(2)(x) of the Income Tax Act elaborates on the taxation on gift exchange. 

 

Read on to know what is Section 56 of the Income Tax Act, the type of taxable income under Section 56, the exemptions, and more. 

Section 56 of the Income Tax Act is for the fifth category of income source as categorised in the Income Tax Act. Here is a look into the income taxable u/s 56: 

1. Dividends 

Based on the residential status of the company paying it, dividends are taxed u/s 56(2)(i) of the I-T Act as ‘Income from Other Sources or IFOS.’ 

2. One-time Profits  

Any lotteries, crosswords, and racing earnings, including horse races, card games, gambling, or betting winnings, are considered one-time profits. Any such income is taxable at a 30% flat rate and a 4% cess under IFOS.

3. Securities 

All interest earned from investment in securities is taxable under Section 56(2)(id).

4. Advance Payments for Capital Asset Transfer 

Advance payments or payments received during negotiations for the transfer of a capital asset (in case the money is forfeited and there is no asset transfer).

5. Income from Rent 

Net income from renting out plants, furniture, or machinery that belongs to a taxpayer is taxable under Section 56(2)(ii). Additionally, net income from renting machinery or furniture with the property where the machinery is established is taxable under Section 56(2)(iii).

6. Keyman Insurance Policy 

Any income from the returns from the Keyman insurance policy, which includes a bonus, is liable for income tax under Section 56 (2)(iv) of the I-T Act.

7. Shares Crossing FMV

When a private company issues shares greater than the Fair Market Value (FMV) price, then the amount received in excess of FMV is taxable under Section 56(2)(viib).

As per Section 56(2)(x) of the Income Tax Act, all cash or cash equivalent gifts, movable or immovable property gifted are taxable. However, all gifts under ₹50,000 are exempt from taxation for a financial year. 

So, you must pay tax on all gifts that have a combined value of over ₹50,000 within a fiscal year. Furthermore, any cash an employee receives from their employer is classified as salary and taxed under 56(2)(x) of the Income Tax Act.

All immovable property received without consideration (without being paid anything for it), which includes land, buildings or both, are taxable. The stamp duty value of such property must be more than ₹50,000. 

 

However, if the acquired property is for consideration with a stamp duty value over ₹50,000, then you must pay income tax on stamp duty as well. Movable personal property includes gold or other jewellery, bullion, stocks, securities, drawings, paintings, sculptures, archaeological collections, etc.

 

For such property with a global FMV of more than ₹50,000, you must pay tax according to Section 56(2) of the Income Tax Act. However, if you consider less than the overall fair market value of the property, then the entire excess FMV will be taxable over ₹50,000. 

There are few exemptions to Section 56(2) of the Income Tax Act, as follows:

1. Gifts from relatives  

2. Gifts received as a wedding present  

3. Gifts from trusts, educational institutions, hospitals, or medical institutions  

4. Any trust or institution u/s 12A, 12AA or 12AB 

5. Gifts received as a part of a will after the death of the donor 

 

However, you cannot consider gifts received from the local authority under this section. In accordance with the first point, relatives mean siblings, spouse, spouse’s sibling, any blood relative, parent sibling, blood relative of spouse, or offspring of the blood relative or spouse. 

 

Remember, as per Section 56 of the Income Tax Act, interest and gains from certain investments are also taxable. However, there are some avenues that help you save on taxes, such as a 5-year FD or an ELSS. You can easily invest in these avenues and other top options via Bajaj Markets and secure your finances.