Brief notes on Income from other sources

Incomes which are charged to tax under the head ‘Income from other sources’

‘Income from other sources’ is the residual head of income. Hence, any income which is not specifically taxed under any other head of income will be taxed under this head.

Further, there are certain incomes which are always taxed under this head. These incomes are as follows:

• As per section 56(2)(i), dividends are always taxed under this head. However, dividends from domestic company other than those covered by section 2(22)(e) are chargeable to tax in accordance with the provisions of section 115BBDA. As per Section 115BBDA, Dividend received from Domestic Companies upto Rs 10 Lacs will be exempt from Tax and then any amount received above 10 lacs will be tax at 10%.
• Winnings from lotteries, crossword puzzles, races including horse races, card game and other game of any sort, gambling or betting of any form whatsoever, are always taxed under this head.
• Income by way of interest received on compensation or on enhanced compensation shall be chargeable to tax under the head “Income from other sources”, and such income shall be deemed to be the income of the year in which it is received, irrespective of the method of accounting followed by the However, a deduction of a sum equal to 50% of such income shall be allowed from such income. Apart from this, no other deduction shall be allowed from such an income.
• Gifts received by an individual or HUF (which are chargeable to tax) are also taxed under this head.
• In addition to above, following incomes are charged to tax under this head, if not taxed under the head “Profits and gains of business or profession”.
  • Any contribution to a fund for welfare of employees received by the [Section 56(2)(ic)].
  • Income by way of interest on securities. [Section 56(2)(id)].
  • Income from letting out or hiring of plant, machinery or furniture. [Section 56(2)(ii)].
  • Income from letting out of plant, machinery or furniture along with building; both the lettings are inseparable. [Section 56(2)(iii)].
  • Any sum received under a Keyman Insurance Policy including bonus. [Section 56(2) (iv)].

Relevance of method of accounting

Income chargeable to tax under the head “Income from other sources” is to be computed in accordance with the method of accounting regularly employed by the assessee. Hence, if the assessee follows mercantile system, then income will be computed on accrual basis. If assessee follows cash system, then income will be computed on cash basis. However, method of accounting does not affect the basis of charge in case of dividend income and income by way of interest received on compensation or on enhanced compensation.

Illustration

Ascertain the head of taxability of the incomes given below:

Taxation of Gift under head Income from Other Sources:

Gifts received by Individual & HUF

56(2)(x) is applicable only when gifts are received by Individual and HUF. Donor or Donee may be Resident or non Resident.

1. Cash:

If aggregate value is less than Rs.50000 than nothing will be taxable. If value exceeds Rs. 50,000, the whole amount will be taxable.

Illustration

During the year 2019-20, Mr. Kumar received following gifts. Ascertain the total amount of gift charged to tax.

• Gift of Rs. 84,000 from his father.
• Gift of Rs. 25,200 received from his friend on his birthday.
• 2,52,000 received on account of will of his grandfather.
• 30,000 received from his friends on the occasion of marriage anniversary

Answer:

Considering above, the tax treatment of various items in the hands of Mr. Kumar will be as follows :

• Gift received from father will not he charged to tax (since father is covered in the definition of relative), hence, Rs. 84,000 will not be charged to tax.
• Gift received from the friends is not covered in any of the above discussed exemptions and, hence, Rs. 25,200 received from his friend on his birthday will be charged to tax.
• Money received on account of Will is covered in the above discussed exemptions and, hence, nothing will be charged to tax on account of Rs. 2,52,000 received on account of Will of his grandfather.
• Money received on account of marriage of an individual in covered in above discussed exemptions. However, the benefit is not available in respect of money received on marriage anniversary. Hence, Rs. 30,000 received from his friends on account of marriage anniversary will be charged to tax.

Considering above discussion, the total amount of gift not covered in any of the specified exemptions will come to Rs. 55,200 (i.e., Rs. 25,200 + Rs. 30,000). If the gift not covered in specified exemptions exceeds Rs. 50,000 then the entire amount of such gift is charged to tax. Hence, taxable amount of gift will come to Rs. 55,200.

2. Movable Property as Gift:

a) Without consideration:

Where any person receives, in any previous year, from any person or persons any property other than immovable property without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property will be taxable in the hands of receiver.

Illustration

From the following information provided by Mr. Kapoor, ascertain the tax treatment of various items.

• Gift of gold received from his mother. The value of gold amounted to Rs. 1,84,000.
• Shares valuing Rs. 40,000 received by way of gift from his brother.
• Gift of diamond jewellery amounting to Rs. 2,50,000 received from his friends on the occasion of his marriage.
• Gift of diamond jewellery amounting to Rs. 30,000 received from his friends on the occasion of his friend’s marriage.

Answer:

Considering the above provisions, the tax treatment of various items in the hands of Mr. Kapoor will be as follows :

• Gift received from mother will not be charged to tax (since mother is covered in the definition of relatives). Hence, gift of gold amounting to Rs. 1,84,000 received from his mother will not be charged to tax.
• Gift received from brother will not be charged to tax (since brother is covered in the definition of relatives). Hence, gift of shares amounting to Rs. 40,000 received from his brother will not be charged to tax.
• Gift received on account of marriage of an individual is covered in above discussed exemptions. Hence gift of diamond jewellery amounting to Rs. 2,50,000 received from his friends on the occasion of his marriage will not be charged to tax.
• Gift received on account of marriage of an individual is not charged to tax. In this case the gift is received on the occasion of marriage of the friend (not the marriage of Mr. Kapoor). Hence, gift of diamond jewellery amounting to Rs. 30,000 received from his friends on the occasion of his friend’s marriage will not be covered in the exemptions prescribed above.

Considering above discussion, the total amount of gift not covered in any of the specified exemptions will come to Rs. 30,000. If the gift not covered in specified exemptions does not exceed Rs. 50,000 then nothing is charged to tax. In this case, the amount of gift not covered in the exemptions comes to Rs. 30,000 (which is less than Rs. 50,000), hence, nothing will be charged to tax.

b) For Inadequate Consideration:

Where any person receives, in any previous year, from any person or persons any property other than immovable property for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration.

The excess differential amount will be taxable in the hands of receiver.

Illustration

During the year 2019-20, Mr. Kamal a salaried employee purchased the following items:

• Gold jewellery purchased for Rs. 84,000; the fair market value of gold jewellery is Rs. 1,84,000.
• Bullion purchased for Rs. 6,00,000; the fair market value of the bullion is Rs. 5,50,000.
• A car television purchased for Rs. 25,000, the fair market value of television is Rs. 1,00,000.

Answer:

Considering above provisions, the tax treatment of various items received by Mr. Kamal will be as follows:

• The fair market value of gold jewellery is Rs. 1,84,000 and the purchase price is Rs. 84,000. The excess of fair market value over the purchase price will amount to Rs. 1,00,000 (i.e., Rs. 1,84,000 – Rs. 84,000). Hence, Rs. 1,00,000 will be charged to tax in respect of purchase of gold jewellery.
• The fair market value of bullion is Rs. 5,50,000. However, the same is purchased for Rs. 6,00,000 which is more than the fair market value. In other words, in this case the purchase price is more than the fair market value and, hence, nothing will be charged to tax.
• Television does not come under the definition of specified movable property, hence, nothing will be taxed in respect of purchase of television.

3. Immovable Property as Gift:

a) Without Consideration:

Where any person receives, in any previous year, from any person or persons any immovable property without consideration and the stamp duty value of which exceeds fifty thousand rupees then in such case, the stamp duty value of such property will be taxable in the hands of receiver.

Illustration :

On 25-2-2020, Mr. Kaushal gifted his personal building to his friend Mr. Lala. The market value of the building was Rs. 18,40,000 and the value of the building adopted by the Stamp Valuation Authority for charging stamp duty was Rs. 19,00,000. What will be the tax implications of the above items in the hands of Mr. Kaushal?

Answer:

There is no question of taxing the value of building in the hands of Mr. Kaushal since he has gifted the same to his friend. In other words, the question of taxability of gift arises when gift is received by an individual/HUF and not when the gift is given by the individual/HUF. However, in this case the taxability will arise in the hands of the receiver, i.e., his friend and Rs. 19,00,000 (i.e., the value adopted to charge stamp duty) will be taxed in the hands of his friend since he has received the building without any consideration.

b) For Inadequate Consideration:

Where any person receives, in any previous year, from any person or persons any immovable property for a consideration, the stamp duty value of such property as exceeds such consideration, if the amount of such excess is more than the higher of the following amounts:

(i) the amount of fifty thousand rupees; and

(ii) the amount equal to five per cent of the consideration

The excess differential amount will be taxable in the hands of receiver.

Illustration :

On 25-2-2020, Mr. Kaushal purchased a building from his friend for Rs. 8,40,000. The value of the building adopted by the Stamp Valuation Authority for charging stamp duty is Rs. 18,40,000. What will be the tax implications of the above transition in the hands of Mr. Kaushal?

Answer:

Difference between stamp value and consideration is Rs 10,00,000 which exceeds higher of below (i.e., Rs 50,000):

a. The exemption threshold of Rs 50,000; and
b. 5 percent of 8,40,000 i.e., Rs 42,000.

Hence the taxable value would be Rs 10,00,000.

4. Some Exempt gifts

If any gifts are received in following situations or from below mentioned people then those gifts will be fully exempt under Income Tax.

Any sum of money or any property received:

• from any relative; or
• on the occasion of the marriage of the individual; or
• under a will or by way of inheritance; or
• in contemplation of death of the payer or donor or
• from any local authority or
• from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in clause (23C) of section 10; or
• from or by any trust or institution registered under section 12A or section 12AA; or
• by any fund or trust or institution or any university or other educational institution or any hospital or other medical institution or
• by way of transaction not regarded as transfer under clause (i) or clause (iv) or clause (v) or clause (vi) or clause (via) or clause (viaa) or clause (vib) or clause (vic) or clause (vica) or clause (vicb) or clause (vid) or clause (vii) of section 47; or
• from an individual by a trust created or established solely for the benefit of relative of the individual.
• any compensation or other payment, due to or received by any person, by whatever name called, in connection with the termination of his employment or the modification of the terms and conditions relating thereto

Note: In the above-mentioned points the term Relatives means

– Spouse of Individual

– Brother & Sister of Individual

– Brother & Sister of Spouse of Individual

– Brother & Sister of either of the parents of Individual

– Any Lineal ascendants or descendants of the individual

-Any Lineal ascendants or descendants of the spouse of the individual.

Below is a comprehensive list of Donors as per definition of relative under I.Tax Act ( Hindi connotation has also been mentioned)

Tax treatment of amount received from life insurance policy

Any amount received under a life insurance policy, including bonus is exempt from tax under section 10(10D). However, following points should be noted in this regard:

• Exemption is available only in respect of amount received from life insurance policy.
• Exemption under section 10(10D) is unconditionally available in respect of sum received for a policy which is issued on or before March 31^st, 2003, however, in respect of policies issued on or after April 1^st, 2003, the exemption is available only if the amount of premium paid on such policy in any financial year does not exceed 20% (10% in respect of policy taken on or after April 1^st, 2012) of the actual capital sum assured. It should be noted that amount received on death of the person will continue to be exempt without any
• Value of premium agreed to be returned or of any benefit by way of bonus (or otherwise), over and above the sum actually assured, which is received under the policy by any person, shall not be taken into account while calculating the actual capital sum assured.

Illustration

Mr. Kumar had taken following life insurance policies.

• Policy 1 : It was taken on 2-10-1984; sum assured is Rs. 1,00,000 and annual premium is Rs. 18,400. The policy will mature in 2014. Maturity value will be 90,000.
• Policy 2: It was taken on 2-3-2004, sum assured is Rs. 10,00,000 and annual premium is Rs. 35,000. The policy will mature in 2015. Maturity value will be 8,00,000.
• Policy 3: It was taken on 10-12-2013, sum assured is Rs. 50,00,000 and annual premium was Rs. 84,000. The policy will mature in 2025. Maturity value will be Rs. 10,00,000.

Advice him regarding the tax treatment of amount to be received from above policies.

**

• Policy 1 was taken before 1-4-2003 and, hence, no conditions/limitations will apply in respect of this policy. The amount received from such policy in any case, i.e., on account of death of Mr. Kumar or on account of pre-maturity of the policy or on account of maturity will be exempt from tax.
• Policy 2 was taken after 1-4-2003 and, hence, tax treatment will be as follows :
• Nothing will be charged to tax in respect of amount received on death of Kumar.
• In any other case, the amount received from policy will be exempt, if the annual premium of any financial year does not exceed 20% of the capital sum assured. The capital sum assured in case of policy 2 is Rs. 10,00,000. 20% of Rs 10,00,000 works out to be Rs. 2,00,000. The annual premium of the policy is only Rs. 35,000, hence, nothing will be taxed on account of amount received otherwise than on death.
• Policy 3 is taken after 1-4-2012 and, hence, tax treatment will be as follows :
• Nothing will be charged to tax in respect of amount received on death of Kumar.
• In any other case, the amount received from policy will be exempt, if the annual premium of any financial year does not exceed 10% of the capital sum assured. The capital sum assured in case of policy 3 is Rs. 50,00,000. 10% of 50,00,000 works out to be Rs. 5,00,000. The annual premium of the policy is only Rs. 84,000, hence, nothing will be taxed on account of amount received otherwise than on death.

Expenses allowed as deductions while computing income chargeable to tax under the head “Income from other sources

Following major deductions are available from income chargeable to tax under the head “Income from other sources” :

(a) Commission or remuneration for realising dividends (if not covered under section 115-O which is exempt) or interest on securities [Section 57(i)].

(b) Any sum received by an employer from employees as contribution towards any welfare fund of such employees is first included as income of the employee, and if the employer credits such sum to the employee’s account under the relevant fund on or before the due date (of such fund), then such amount (i.e., employee’s contribution) is deductible from the income of the employer [Section 57(ia)].

(c) 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 plant, machinery, furniture and building, which are chargeable to tax under section 56(2)(ii)/(iii).

(d) A deduction of lower of Rs. 15,000 or 33 1/3% of such income is available in case of income in the nature of family pension (i.e., regular monthly amount payable by the employer to the family members of the deceased employee) [Section 57(iia)].

(e) Under section 57(iii), 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 such income during the relevant previous year.

Expenses not allowed as deductions while computing income chargeable to tax under the head “Income from other sources”

Under section 58, following expenditures are not deductible while computing income chargeable to tax under the head “Income from other sources” :

• Personal expenditure [Section 58(1)(a)(i)].
• Any interest chargeable under the Act which is payable outside India on which tax has not been paid or deducted at source [Section 58(1)(a)(ii)].
• Any amount paid which is taxable under the head “Salaries” and payable outside India on which tax has not been paid or deducted at source [Section 58(1) (a) (iii)].
• Sum paid on account of wealth-tax is not deductible under section 58(1A).
• Amount specified under section 40A is not deductible [Section 58(2)].

(Republished with Amendments by Team Taxguru)