Taxation and tax deducted at source (TDS) on winnings from Online Games:- Section 115BBJ and 194BA
A. Introduction
India’s nascent gaming industry has a remarkable rise in recent years, quickly propelling it into one of the biggest global markets for gaming. India’s massive youth population is fueling this expansion, along with higher disposable incomes, new gaming genres, and an increase in tablet and smartphone users making gaming easily accessible.
The Indian gaming market to $5 billion in 2025, growing at a Compound annual growth rate of 28-30%. The quantity of gamers in the nation is supposed to expand from 420 million in 2022 to 450 million by 2023, and it is likely to hit 500 million by 2025.
Considering the above growth in the number of users on the online gaming industry and simultaneously increase in the amount involved, the Government of India vide its Budget 2023 made multiple amendments in relation to the taxation of the winnings from the online games and deduction of the TDS on such winnings under the Income Tax Act (the Act).
Through this article, I have tried to summarize provisions of the taxation on the winnings from the online gaming and manner of the computation of such winnings for the purpose of deduction of TDS on such winnings.
B. Amendments w.e.f. Finance Act 2023
Under the Income Tax Act, online games are defined as a game that is offered on the internet and is accessible by a user through a computer resource including any telecommunication device. Considering the growing market and public interest of the online games, Government vide Budget 2023 introduced section 115BBJ under the Act to provide 30% tax on the winnings from the online games. The above section also provides that the calculation of the net winnings for the purpose of the taxation will be prescribed.
Further, to provide for the effective collection of the tax on the net winnings from online games, Government introduced section 194BA under the Act. Section 194BA of the Act provide that if any person receives any income by way of winning from any online game during the financial year then the person responsible for paying such income shall deduct TDS from the net winnings at the end of the financial year. However, in a case where a user withdraws the amount during the financial year then the tax shall be deducted at the time of such withdrawal from the net winnings.
Also, in case where the net winnings are partly in cash, partly in kind, or wholly in kind and the cash is not sufficient to meet the tax liability of deduction from net winning, then the person responsible for paying such income shall ensure that before releasing the winnings the tax has been paid in respect of the net winnings.
Tax Rate u/s 115BBJ and TDS rate has been kept at 30% from the net winnings of the user account. Further, no threshold has been provided on the amount after which such deduction required. Thus, TDS would be required to be deducted on the entire net winnings. However, CBDT vide its circular no. 05/2023 dated 22nd May 2023 has provided some relief for the by non-deduction of TDS for the persons playing with very insignificant amount and withdraw small amount after fulfillment of certain conditions. The above relaxation has been discussed in the later part of the article.
C. Calculation of Net Winnings from Online Games:-
Government vide its notification no. 28/2023 dated 22 May 2023, introduced rule 133 under Income Tax Rules (the Rule) to provide the mechanism of calculation of the net winnings. While computing the net winnings following terms have been defined which will be used in formula for computation.
I) Taxable deposit means any amount deposited in the user account which is not a non-taxable deposit. Further, as per circular No. 5 of 2023 dated 22 May 2023 issued by CBDT, any incentives/bonus which is withdrawable, will form part of taxable deposit.
II) Non-taxable deposit means the amount deposited by the user in his user account and which is not taxable. As per circular No. 5 of 2023 dated 22 May 2023 issued by CBDT, any incentives/bonus which is not withdrawable, will not form part of Non-taxable deposit.
III) Withdrawal means any amount withdrawn by the user from any user account. As per circular No. 5 of 2023 dated 22 May 2023 issued by CBDT, that transfer from one user account to another user account, maintained with the same online gaming intermediary, of the same user shall not be considered as withdrawal.
As per Rule 133 of the Rules, Net winnings from online games shall be calculated using the following formula:
Net winnings during the previous year = (A+D)-(B+C)
Where;
A= Aggregate amount withdrawn from the user account during the financial year;
B= Aggregate amount of non-taxable deposit made in the user account by the assessee during the financial year.
C= Opening balance of the user account at the beginning of the financial year (Excluding Incentive/Bonus Which is Non-Withdrawable)
D= Closing balance of the user account at the end of the financial year (Excluding Incentive/Bonus Which is Non-Withdrawable)
D. Let us understand the above computation with an example:-
| Date | Particulars | Debit Amount | Credit Amount | Balance Amount | Notation |
| 01/04/2023 | Opening Balance | – | – | – | |
| 01/04/2023 | Joining Bonus/ referral/ bonus/ incentives/ promotional money
(non withdrawable) |
– | 1,000 | 1,000 | |
| 01/04/2023 | Amount Added by user | – | 5,000 | 6,000 | B |
| 02/04/2023 | Loss from online game | 2,000 | – | 4,000 | |
| 03/04/2023 | Loss from online game | 1,000 | – | 3,000 | |
| 04/04/2023 | Winnings from online game | – | 5,000 | 8,000 | |
| 05/04/2023 | Joining Bonus/ referral bonus/ Incentives/ promotional money (withdrawable) |
– | 1,500 | 6,500 | |
| 22/04/2023 | Amount withdrawn | 1,000 | – | 5,500 | A |
| 12/03/2024 | Loss from online game | 1,500 | – | 4,000 | |
| 14/03/2024 | Loss from online game | 1,500 | – | 2,500 | |
| 22/03/2024 | Winnings from online game | – | 8,000 | 10,500 | |
| 29/03/2024 | Amount withdrawn | 5,500 | – | 5,000 | A |
| 30/03/2024 | Loss from online game | 2,500 | – | 2,500 | |
| 31/03/2024 | Winnings from online game | 1,000 | – | 3,500 |
Now, calculation of net wining for the purpose of calculation of TDS are as follows:-
| Notation | Particulars | Amount |
| A | Aggregate amount withdrawn from the user account during the financial year; | 6,500
(1,000+5,500) |
| B | Aggregate amount of non-taxable deposit made in the user account by the assessee during the financial year. | 5,000 |
| C | Opening balance of the user account at the beginning of the financial year
(Excluding Incentive/Bonus Which is Non-Withdrawable) |
– |
| D | Closing balance of the user account at the end of the financial year
(Excluding Incentive/Bonus Which is Non-Withdrawable) |
2,500
(3500-1000) |
Thus, Net Winnings= (A+D)-(B+C) = (6,500+5,000)-(0+2,500) = 8,500
However, as required u/s 194BA, TDS would require to be deducted on the amount of net winnings at the time of withdrawal of any amount or at the end of the financial year whichever is earlier.
Thus, let’s make the calculation for the net winnings on the withdrawal dates and then at the end of year:-
– Withdrawal 1:- On 22/04/2023:-
| Notation | Particulars | Amount |
| A | Aggregate amount withdrawn from the user account during the financial year; | 1,000
(1,000) |
| B | Aggregate amount of non-taxable deposit made in the user account by the assessee during the financial year. | 5,000 |
| C | Opening balance of the user account at the beginning of the financial year
(Excluding Incentive/Bonus Which is Non-Withdrawable) |
0 |
| D | Closing balance of the user account at the end of the financial year
(Excluding Incentive/Bonus Which is Non-Withdrawable) |
N.A |
| E | Net winnings comprised in the earlier withdrawal or withdrawals Computed as per formula, during the financial year till the time of withdrawal if TDS has been deducted on such winnings | 0
(as no TDS has been deducted while making the withdrawal on 22/04/2023) |
Thus, Net Winnings= (A)-(B+C+E) = (1000)-(5000+0+0) = -4,000
Since the above amount is negative so no TDS would be deducted while making the withdrawal on 22/04/2023.
– Withdrawal 2:- On 29/03/2024:-
| Notation | Particulars | Amount |
| A | Aggregate amount withdrawn from the user account during the financial year; | 6,500
(1,000+5,500) |
| B | Aggregate amount of non-taxable deposit made in the user account by the assessee during the financial year. | 5,000 |
| C | Opening balance of the user account at the beginning of the financial year
(Excluding Incentive/Bonus Which is Non-Withdrawable) |
– |
| D | Closing balance of the user account at the end of the financial year
(Excluding Incentive/Bonus Which is Non-Withdrawable) |
– |
| E | Net winnings comprised in the earlier withdrawal or withdrawals Computed as per formula, during the financial year till the time of withdrawal if TDS has been deducted on such winnings | N.A
(as this is 1st withdrawal for the financial year) |
Thus, Net Winnings= (A)-(B+C+E) = (6,500)-(5,000+0+0) = 1,500
Thus, TDS at the rate of 30% will be deducted while making the withdrawal of Rs. 1500 by the user.
– At the end of Financial Year 31/03/2024:-
| Notation | Particulars | Amount |
| A | Aggregate amount withdrawn from the user account during the financial year; | 6,500
(1,000+5,500) |
| B | Aggregate amount of non-taxable deposit made in the user account by the assessee during the financial year. | 5,000 |
| C | Opening balance of the user account at the beginning of the financial year
(Excluding Incentive/Bonus Which is Non-Withdrawable) |
– |
| D | Closing balance of the user account at the end of the financial year
(Excluding Incentive/Bonus Which is Non-Withdrawable) |
2,500
(3,500-1,000) |
| E | Net winnings comprised in the earlier withdrawal or withdrawals Computed as per formula, during the financial year till the time of withdrawal if TDS has been deducted on such winnings | 1,500 |
Net winnings =(A+D)-(B+C+E)= (6,500+2,500)-(5,000+0+1500) = 2,500
Thus, TDS at the rate of 30% will be deducted while making the withdrawal of Rs. 2,500 by the user.
E. Guidelines for removal of difficulties u/s 194BA of the Income-tax Act, 1961:-
Recently, CBDT vide its circular No. 5 of 2023 dated 22 May 2023, provide with the guidelines for the removal of difficulties in respect of the deduction of TDS u/s 194BA of the Act to provide the following clarifications:-
1. Calculation of the amount of net winnings in case of maintaince of multiple user accounts:-
A) While calculating the amount of net winnings, every account of the user registered with an online gaming intermediary by whatever name called shall be included.
B) Transfer of the any amount from one from one user account to another user account, maintained with the same online gaming intermediary, of the same user shall not be considered as withdrawal or deposit, as the case may be.
C) It may be possible that one deductor (one TAN) is having multiple platforms and it is not technologically feasible for him to integrate multiple user accounts across platforms then he may, at his option, calculate tax required to be deducted for the purposes of section 194BA of the Act for each platform separately. But even in that case all the user accounts under one user in one platform need to be considered for the purposes of calculating net winnings in the formulas provided in Rule 133. However, in this scenario transfer from one user account to another user account under same online gaming intermediary across platforms shall be considered as withdrawal or deposit for the purposes of calculation of net winnings under Rule 133.
2. Amount which is borrowed by an user and then credited to his or her account will be considered as non- taxable deposit since the amount is already from the taxed income and not chargeable to the tax.
3. Bonus, referral bonus, incentives etc. given by the online game intermediary to the user will be considered as taxable deposit. Thus any deposit in the form of bonus, referral bonus, incentives etc. would form part of net winnings and tax under section 194BA of the Act is liable to be deducted at the time of withdrawal as well as at the end of the financial year.
4. Bonus, referral bonus, incentives etc. are provided in the form of money equivalent too like coins, coupons, vouchers, counters etc. In such a situation the equivalence in money of such deposit shall be considered as taxable deposit and would accordingly form part of balance in user account. However, where incentives/bonus which is credited in user account only for the purposes of playing and they cannot be withdrawn or used for any other purposes, then such deposit shall be ignored for calculation of net winnings. They shall not be included in non-taxable deposit and they shall also not be included in opening balance or closing balance of user account. It may be possible later that these incentive / bonus are recharacterised and they are allowed to be withdrawn, they would be treated as taxable deposit at the time when they are recharacterised. Thus, they will become part of net winnings in the year of recharacterisation.
5. Transfer of an amount from one user account to another user account, maintained with the same online gaming intermediary, of the same user shall not be considered as withdrawal or deposit, as the case may be. However, when the amount is withdrawn from the user account to any other account, it shall be considered as withdrawal. It has been clarified that w.r.t deductor, any account of user which is not registered with the online game intermediary (for which he is a deductor) is an account which is not a user account and any transfer from user account to such account is a withdrawal.
6. It has been clarified that no need to deduct the TDS u/s 194BA of the Act, in case of the insignificant withdrawal on the satisfaction of the below conditions:-
- net winnings comprised in the amount withdrawn does not exceed Rs 100 in a month;
- tax not deducted on account of this concession is deducted at a time when the net winnings comprised in withdrawal exceeds Rs 100 in the same month or subsequent month or if there is no such withdrawal, at the end of the financial year; and
- the deductor undertakes responsibility of paying the difference if the balance in the user account at the time of tax deduction under section 194BA of the Act is not sufficient to discharge the tax deduction liability calculated in accordance with Rule 133.
7. Where the wininnigs are in the kind, the valuation of such winings will be done on fair market value of the winnings in kind except in following cases:’
- The online game intermediary has purchased the winnings before providing it to the user. ln that case the purchase price shall be the value for winnings.
- The online game intermediary manufactures such items given as winnings. ln that case, the price that it charges to its customers for such items shall be the value for such winnings.
It is further clarified that GST will not be included for the purposes of valuation of winnings for TDS under section 194BA of the Act.
8. It may be noted that this mechanism of deduction of TDS under section 194BA read with rule 133 has been provided by the CBDT in May while the provisions are applicable w.e.f. 01 April 2023. Thus there may be possibility that there would be shortfall for such deduction on the winnings. In this regard, the CBDT clarified that where there is any shortfall in deduction of tax due to time lag in issuance of Rule 133 or this Circular, for the month of April, 2023 that shortfall may be deposited with the tax deduction for the month of May 2023 by 7th June 2023. In that case there will not be any penal consequences.
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