Income from other sources

In the context of taxation, income is classified under five major heads as per the Income Tax Act, 1961. One such head, Income from Other Sources, serves as a catch-all category for earnings that do not fall under the other specified heads of income. In this blog, we’ll explore what this head entails and which types of income are included under it.

Heads of Income in Indian Taxation

The Income Tax Act classifies income into five broad categories:

1. Income from Salary: Earnings from employment, including wages, pensions, and allowances.
2. Income from House Property: Income derived from letting out a property.
3. Income from Profits and Gains of Business or Profession: Revenue earned from business operations or professional services.
4. Income from Capital Gains: Profits from the sale of capital assets like property or stocks.
5. Income from Other Sources: A residual category that captures all other income.

The fifth head, Income from Other Sources, ensures that all taxable income is accounted for, even if it doesn’t align with the other heads.

What is Income from Other Sources?

Income from Other Sources is detailed under Section 56 of the Income Tax Act. It includes income that does not fit under the first four heads. Taxpayers are required to disclose such earnings and pay taxes as per the applicable slab rates.

Types of Incomes Covered Under “Income from Other Sources”

Here are some common types of incomes that fall under this head:

• Savings Bank Account Interest Income
• Fixed deposit Interest Income
• Recurring deposit Interest Income
• Family Pension
• Commission income
• Interest on loans
• Scholarships and fellowships
• Winnings from Lottery, Game Shows, Puzzles
• Dividend Income
• Agriculture income
• Income from Gifts
• Virtual Digital Assets (VDAs)

Taxability of Interest Income

1. Savings Bank Account Interest: Interest earned on a savings account is taxable under “Income from Other Sources.” However, individuals can claim a deduction of up to ₹10,000 under Section 80TTA (or ₹50,000 for senior citizens under Section 80TTB).

2. Fixed Deposit Interest: Interest from fixed deposits is fully taxable and must be reported under “Income from Other Sources.” TDS is deducted by banks if the interest exceeds ₹40,000 (₹50,000 for senior citizens) in a financial year.

3. Recurring Deposit Interest: Similar to fixed deposits, interest from recurring deposits is fully taxable. TDS is applicable if the total interest crosses the specified threshold of ₹40,000 (₹50,000 for senior citizens).

Taxability of Family Pension

Family Pension refers to the periodic payment received by the legal heirs of a deceased employee from their employer. It is taxable under the head Income from Other Sources, but certain reliefs are provided to reduce the tax burden:

• A standard deduction of the lower of ₹25,000 or one-third of the family pension amount is allowed under Section 57. This amount of Rs. 25,000 has been increased from Rs.15,000 with effect from FY 2024-25
• The remaining amount is taxed as per the applicable slab rate of the recipient.

For example, if the annual family pension is ₹45,000, the taxable portion will be ₹20,000 after the deduction of ₹25,000.

Taxability of Commission Income

Commission Income is taxable under “Income from Other Sources” unless it is part of salary or professional income. This includes commissions received from acting as an agent, broker, or intermediary.

• If the commission is received as part of employment, it is taxed under Income from Salary.
• If it is part of business or professional activities, it is taxed under Income from Profits and Gains of Business or Profession.
  For commissions not falling under the above categories, it must be reported under “Income from Other Sources” and taxed as per the individual’s applicable slab rate.

Taxability of Interest on Loans

If you lend money and earn interest from the borrower, this income is taxable under Income from Other Sources.

• The entire interest amount is added to your gross total income and taxed as per your applicable slab rate.
• There is no specific deduction available for such income unless related to specific exemptions or sections like agricultural loans.

For instance, if you loan ₹5,00,000 at an interest rate of 10% per annum, the ₹50,000 earned in interest during the year is fully taxable.

Taxability of Scholarships and Fellowships

Scholarships received for educational purposes are exempt from tax under Section 10(16) of the Income Tax Act.

• This exemption is applicable only if the scholarship is intended to meet educational costs.
• Any amount received beyond the educational expenses, such as for personal use or savings, may be considered taxable under “Income from Other Sources.”

For fellowships, the taxability depends on their purpose and nature. If the fellowship is a grant for research or academic work, it may be exempt. However, stipends or monetary awards not linked to education could be taxable.

Taxability of Winnings from Lottery, Game Shows, Puzzles – Casual Income

Income from winnings in lotteries, game shows, crossword puzzles, horse races, and other similar activities is categorized as Casual Income and taxed under Income from Other Sources.

• Tax Rate: Such winnings are taxed at a flat rate of 30% (plus applicable surcharge and cess), irrespective of the individual’s income slab.
• TDS: Tax Deducted at Source (TDS) is applied at 30% by the payer.
• No Deductions: No exemptions, deductions, or set-offs are allowed against such income under Sections 80C to 80U.

For example, if you win ₹1,00,000 in a game show, ₹30,000 (plus surcharge and cess) will be deducted as TDS, and you must report this in your income tax return.

Taxability of Dividend Income

Dividend Income refers to earnings from investments in shares of companies or mutual funds.

• Domestic Companies: Dividends from domestic companies are taxable in the hands of the recipient as per their applicable income tax slab rate.
• Threshold for TDS: TDS is applicable at 10% if the total dividend exceeds ₹5,000 in a financial year.
• Deductions: No specific deductions are allowed, but you can claim expenses like interest on loans taken to invest in shares (up to 20% of the dividend income) under Section 57.

For example, if you earn ₹50,000 in dividends and pay ₹5,000 in loan interest for the investment, you can claim ₹5,000 as a deduction.

Taxability of Agriculture Income

Agricultural Income is exempt from tax under Section 10(1) of the Income Tax Act. However, it is considered for rate determination in certain cases:

• If your net taxable income (excluding agricultural income) exceeds ₹2,50,000, agricultural income is added to compute the applicable tax slab rate (this is called partial integration of agricultural income).
• Agricultural income includes rent from agricultural land, income from the sale of crops, and income from farmhouses (subject to conditions).
  Non-agricultural activities like poultry farming or fisheries are not treated as agricultural income.

Taxability of Income from Gifts

Gift Income is taxable under Income from Other Sources if its value exceeds ₹50,000 in a financial year, subject to exemptions:

• Exempt Gifts: Gifts received from relatives (as defined in the Act), on occasions like marriage, or through inheritance are tax-free.
• Taxable Gifts: Cash, immovable property, or movable assets (e.g., jewelry) received from non-relatives beyond ₹50,000 are fully taxable.
  For example, receiving a ₹70,000 gift from a friend makes the entire amount taxable, whereas a gift from your spouse is exempt.

Taxability of Virtual Digital Assets (VDAs)

Virtual Digital Assets (VDAs) include cryptocurrencies (e.g., Bitcoin, Ethereum), NFTs, and other digital tokens. From April 1, 2022, VDAs are taxed under stringent rules:

• Tax Rate: A flat 30% tax applies to income from VDAs, irrespective of the individual’s income slab.
• No Deductions: No deductions for expenses or losses are allowed except the cost of acquisition.
• TDS: A 1% TDS is levied on transactions.
• Loss Set-Off: Losses from VDAs cannot be set off against any other income.

For example, if you sell cryptocurrency worth ₹1,00,000 after acquiring it for ₹60,000, the taxable income is ₹40,000 at a flat rate of 30%.

Interest on Income Tax Refund

Interest on Income Tax Refund is the interest paid by the Income Tax Department when a taxpayer’s refund is delayed beyond the prescribed timeline. It is taxable under the head Income from Other Sources as per the Income Tax Act, 1961.