Online Gaming Taxation under Income Tax and GST Laws

The online gaming industry in India has witnessed exponential growth in recent years, driven by rapid digital penetration, affordable mobile internet, increased smartphone usage, and the rising popularity of fantasy sports, e-sports, skill-based contests, and real-money gaming platforms. This growth trajectory has transformed online gaming from a niche entertainment activity into a multi-billion-dollar sector, attracting investment, generating employment, and contributing to the digital economy.

However, this unprecedented expansion has also raised intricate legal, regulatory, and taxation challenges. From the tax policy perspective, the sector occupies a unique position at the intersection of entertainment, commerce, and technology, necessitating a re-examination of traditional tax norms and their applicability to digital business models.

In recognition of the distinct nature and revenue potential of online gaming, the Indian tax authorities have introduced a series of targeted legislative measures under both Direct Tax and Indirect Tax regimes to regulate, govern, and tax this sector effectively. Key developments include:

• The insertion of Section 115BBJ under the Income Tax Act, 1961, providing for a special rate of tax on winnings from online games, effective from 1st April 2024.
• The introduction of Section 194BA, which mandates Tax Deduction at Source (TDS) on net winnings in online gaming, replacing the erstwhile Section 194B for this segment.
• The formulation of Rule 133, which lays down the methodology for computing “net winnings” for the purpose of TDS and taxation.
• The revamped GST framework, especially after the 50th GST Council Meeting, which clarified the applicability of GST at 28% on the full value of bets or deposits in online gaming, casinos, and horse racing, with effect from 1st October 2023, via amendments to CGST Act and IGST Act, and corresponding rules.

These changes mark a paradigm shift in the taxation of online games, replacing legacy provisions with a sector-specific regime that seeks to capture the economic realities of virtual platforms and ensure revenue neutrality and compliance.

From a legal standpoint, the classification of games as either “games of skill” or “games of chance” has been central to determining their taxability under both income tax and GST laws. This has led to extensive litigation, with landmark judicial pronouncements from the Supreme Court and High Courts shaping the evolving jurisprudence. The regulatory ambiguity in the pre-amendment period also led to varying practices by gaming operators regarding TDS, GST levy, and income characterization.

This comprehensive note endeavours to provide an exhaustive and analytical exposition on the taxation of online gaming in India, covering the legislative background, statutory provisions, key amendments, judicial precedents, administrative circulars, and compliance requirements. It aims to address critical questions, such as:

• How are net winnings computed for TDS and taxability under Section 115BBJ?
• What are the obligations of gaming platforms under Section 194BA?
• How does Rule 133 impact daily and annual tax calculations for players?
• What is the GST treatment on deposits, winnings, and platform fees?
• How do past judicial rulings on skill vs. chance games impact current tax positions?
• What are the compliance and reporting obligations under both tax regimes?

In doing so, the note integrates practical insights with legal analysis to assist tax professionals, gaming companies, legal advisors, policymakers, and researchers in navigating the complex and evolving tax landscape of this dynamic sector.

2. Legislative History and Evolution of Tax on Online Games

Income Tax Perspective

GST Perspective

3. Section 115BBJ – Special Tax Rate for Online Gaming Income

Section 115BBJ has been introduced in the Income Tax Act, 1961 to specifically tax the winnings or profits earned from online gaming platforms. The statutory provision is as follows

Statutory Provision

Section 115BBJ of the Income-tax Act, 1961, inserted by the Finance Act, 2023, effective from Assessment Year 2024-25, states:

“Where the total income of an assessee includes any income by way of winnings from any online game, notwithstanding anything contained in any other provision of this Act, the income-tax payable shall be the aggregate of—

(a) the amount of income-tax calculated on the income by way of winnings from any online game, at the rate of thirty per cent; and

(b) the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the amount of income by way of winnings from any online game.”

Explanation: For the purposes of this section, “online game” means a game that is offered on the internet and is accessible by a user through a computer resource including any telecommunication device.

Key Features

• Applicable irrespective of whether the game is of skill or chance.
• Taxed on gross winnings, not net income.
• No deduction of expenses or set-off of losses allowed against such income.

Example

If a user wins ₹10,00,000 in a financial year from an online gaming platform, ₹3,00,000 (plus applicable surcharge and cess) will be taxable under Section 115BBJ.

4. Section 194BA – TDS on Online Game Winnings

Statutory Provision

Section 194BA of the Income-tax Act, 1961, inserted by the Finance Act, 2023, effective from 1 April 2023, provides:

“Any person responsible for paying to any person any income by way of winnings from any online game during the financial year shall deduct income-tax on the net winnings in his user account, computed in the manner as may be prescribed, at the end of the financial year at the rates in force:

Provided that in a case where there is a withdrawal from user account during the financial year, the income-tax shall be deducted at the time of such withdrawal on the net winnings comprised in such withdrawal, as well as on the remaining amount of net winnings in the user account, computed in the manner as may be prescribed, at the end of the financial year.”

Explanation: For the purposes of this section:

• “Online game” shall have the meaning assigned to it in Section 115BBJ.
• “Online gaming intermediary” means an intermediary that offers one or more online games.
• “User” means any person who accesses or avails any computer resource of an online gaming intermediary.
• “User account” means account of a user registered with an online gaming intermediary.

Key Clarifications (CBDT Circular No. 5/2023 dated 22 May 2023)

• Net winnings are computed as:

Net Winnings = Amount Withdrawn – (Aggregate of Non-Taxable Deposits + Opening Balance)

• Non-taxable deposits include amounts deposited by the user that are not taxable, such as from already taxed income.
• Taxable deposits include bonuses, referral bonuses, incentives, and money equivalents like coins, coupons, vouchers, counters, etc., provided by gaming companies.
• Withdrawal in kind: In cases where winnings are wholly or partly in kind, the person responsible for paying shall ensure that tax has been paid in respect of the net winnings before releasing the winnings.

Example

A player deposits ₹2,00,000, wins ₹3,00,000, and withdraws ₹4,00,000.
Net winnings = ₹4,00,000 – ₹2,00,000 = ₹2,00,000

TDS @30% = ₹60,000

5. Rule 133 of the Income-tax Rules, 1962

Rule 133 prescribes the manner of computation of net winnings for the purposes of Section 194BA. Key aspects include:

• Maintenance of detailed ledger for each user.
• Computation of net winnings considering deposits, withdrawals, bonuses, and opening balances.
• Treatment of multiple wallets held by a user as separate user accounts.

6. GST Implications on Online Gaming

Rule 31B of the CGST Rules, 2017

Rule 31B, inserted via Notification No. 51/2023-Central Tax dated 29.09.2023, effective from 1 October 2023, states:

“Notwithstanding anything contained in this chapter, the value of supply of online gaming, including supply of actionable claims involved in online money gaming, shall be the total amount paid or payable to or deposited with the supplier by way of money or money’s worth, including virtual digital assets, by or on behalf of the player:

Provided that any amount returned or refunded by the supplier to the player for any reasons whatsoever, including player not using the amount paid or deposited with the supplier for participating in any event, shall not be deductible from the value of supply of online money gaming.”

Explanation: For the purposes of Rule 31B and Rule 31C, any amount received by the player by winning any event, including game, scheme, competition, or any other activity or process, which is used for playing by the said player in a further event without withdrawing, shall not be considered as the amount paid to or deposited with the supplier by or on behalf of the said player.

Key Features

• Valuation: Total amount paid or payable to or deposited with the supplier, including virtual digital assets.
• No deduction: Refunds or amounts not used for participation cannot be deducted from the value of supply.
• Tax Rate: 28% GST applicable on the value determined as above.

7. Judicial Precedents on Online Gaming

1. Gurdeep Singh Sachar v. Union of India & Ors. [2019]

Facts: A petition was filed before the Bombay High Court against Dream11, alleging that it was conducting illegal operations of gambling/betting in the guise of ‘online fantasy sports gaming’ and evading taxes.

Conclusion: The Bombay High Court upheld the legality of online fantasy sports gaming, ruling that such games are predominantly games of skill. The Court also noted that Dream11 was not in error in paying GST under the appropriate classification for its online gaming activities.

Note: The Supreme Court has stayed the operation of the Bombay High Court’s judgment until further notice, casting doubts over the legality of online fantasy sports games in India.

2. CIT v. Manjoo & Co. {2010} 195 Taxman 39 (Ker.)

Winnings from lotteries, crossword puzzles, horse races, etc. are taxable at the rate of 30 percent under section 115BB irrespective of the facts whether such income is taxable as business income or income from other sources.

3. M.D. Chamarbaugwala v. Union of India (1957)

The Supreme Court held that competitions involving substantial skill are business activities protected under Article 19(1)(g) of the Constitution. This distinction between games of skill and games of chance is pivotal in determining the applicability of gambling laws.

4. Gameskraft Technologies Pvt. Ltd. v. Directorate General of GST Intelligence (2023)

The Karnataka High Court quashed a ₹21,000 crore GST demand against Gameskraft, ruling that games of skill are not equivalent to betting or gambling and thus not subject to 28% GST. However, the Supreme Court later stayed this judgment, and the matter is pending final adjudication.

5. Supreme Court Hearings on GST Classification (2025)

The Supreme Court is currently hearing cases challenging the retrospective application of 28% GST on online gaming platforms. Companies argue that their games are skill-based and should not be taxed as gambling activities. The outcome of these cases will significantly impact the online gaming industry’s tax obligations.(The Economic Times)

6. Varun Gumber v. Union Territory of Chandigarh & Ors. [2017]

Facts: The petitioner filed a case against Dream11, alleging that its fantasy sports platform constituted gambling and violated the Public Gambling Act, 1867.

Conclusion: The Punjab & Haryana High Court held that the success in Dream11’s fantasy sports depends upon users’ exercise of skill based on superior knowledge, judgment, and attention, and thus, it is a game of skill, not chance.

8. Compliance Framework for Online Gaming Operators

9. Notifications and Circulars

Income Tax:

• Notification No. 28/2023, dated 22nd May 2023: Introduced Rule 133 for computing net winnings under Section 194BA.
• CBDT Circular No. 5/2023 dated 22 May 2023: Provided guidelines on the applicability of Section 194BA, including treatment of multiple wallets and computation of net winnings.

GST:

• Notification No. 06/2023- Central Tax (Rate) : Clarified the GST rate of 28% on online gaming, casinos, and horse racing.
• GST Council’s 50th Meeting Recommendations: Recommended the uniform rate of 28% GST on full face value for online gaming, effective from 1st October 2023.

COMPARISON: OLD VS NEW PROVISIONS ON ONLINE GAMING TAXATION UNDER THE INCOME TAX ACT

FAQ on TDS Provisions on Online Gaming (Section 115BBJ, Rule 133, and Section 194BA)

1. What is Section 115BBJ of the Income Tax Act?

Answer:
Section 115BBJ provides a special tax rate of 30% on income earned from online games, like fantasy sports, rummy, poker, or any other game played online, regardless of whether the winnings are in cash or kind.

2. What is Section 194BA of the Income Tax Act?

Answer:
Section 194BA deals with TDS (Tax Deducted at Source) on net winnings from online games. It requires the online gaming platform to deduct TDS at 30% before releasing winnings to the user.

3. What is Rule 133 of the Income Tax Rules?

Answer:
Rule 133 explains how to calculate the “net winnings” from online games for TDS purposes. It provides the method to compute the difference between deposits, withdrawals, and winnings.

4. When does TDS under Section 194BA apply?

Answer:
TDS is deducted:

• At the time of withdrawal, or
• At the end of the financial year, whichever is earlier, on the net winnings in the user’s online gaming account.

5. What is meant by “net winnings”?

Answer:
Net winnings =
Total withdrawals during the year

• Balance in the account at year-end
  − Total deposits made by the player during the year

(As per Rule 133)

6. Is there any threshold for TDS under Section 194BA?

Answer:
No. Unlike lottery or betting, there is no minimum limit. Even ₹1 net winning is subject to 30% TDS under Section 194BA.

7. Who is responsible to deduct TDS?

Answer:
The online gaming platform (Operator) is required to deduct TDS before releasing winnings.

8. Will TDS be deducted if winnings are not withdrawn?

Answer:
Yes. Even if winnings are not withdrawn, TDS will be deducted at the end of the financial year on the net winnings in the user’s account.

9. What happens if winnings are in kind (e.g., car, phone)?

Answer:
If the prize is non-cash, then TDS must be paid by the user before receiving the prize, or the platform must bear the tax and deduct it from its own pocket.

10. Can a user claim credit for TDS under Section 194BA?

Answer:
Yes. The user can claim credit for TDS deducted in their income tax return (ITR) for the relevant year.

11. Are online games different from betting or lottery for tax purposes?

Answer:
Yes. Online games are taxed under Section 115BBJ and TDS is under Section 194BA.
Lottery, betting, gambling are taxed under Section 115BB, with TDS under Section 194B.

12. Is GST also applicable on online gaming?

Answer:
Yes. GST at 28% is levied on the full value of bets/entry fees placed in online games.
(This is separate from Income Tax provisions.)

13. Is this law applicable to all online gaming platforms?

Answer:
Yes. Any platform offering online games, whether based in India or abroad, must comply if it has users in India.

14. What are the penalties for non-compliance with TDS rules?

Answer:
If a platform fails to deduct or deposit TDS:

• Interest and penalties may apply.
• Expense may be disallowed.
• Prosecution in serious cases.

15. From when are these provisions effective?

Answer:

• Section 194BA is effective from 1st April 2023.
• Rule 133 also came into effect from 1st April 2023.
• Section 115BBJ applies to income from online games earned from FY 2023–24 onwards.

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Disclaimer: The information provided in this article, “Comprehensive Taxation Framework for Online Gaming in India: Section 115BBJ, Section 194BA, Rule 133 & GST Implications,” is for general informational purposes only and should not be construed as legal, accounting, or tax advice. While every effort has been made to ensure the accuracy and reliability of the content based on the provisions of the Income Tax Act, 1961, GST Act, relevant rules, judicial precedents, and circulars as available up to May 2025, laws and interpretations are subject to change through amendments, judicial pronouncements, and departmental clarifications. Readers are advised to consult with a qualified tax professional, chartered accountant, or legal advisor for specific advice pertaining to their individual facts and circumstances. The author and publisher disclaim any liability for any loss or damage caused directly or indirectly by the use of, or reliance on, the information contained herein.