With the rise of online gaming platforms, the taxation of winnings from these games has become a pertinent issue. The Finance Act of 2023 introduced Section 115BBJ, outlining the tax implications on income from online games, effective from April 1, 2024. Additionally, Section 194BA mandates TDS deductions on such winnings. Understanding these provisions and their implications is crucial for taxpayers and online gaming intermediaries alike.
Section 115BBJ: Tax on winnings from online games.
115BBJ. Notwithstanding anything contained in any other provisions of this Act, where the total income of an assessee includes any income by way of winnings from any online game, the income-tax payable shall be the aggregate of—
1. the amount of income-tax calculated on net winnings from such online games during the previous year, computed in the manner as may be prescribed, at the rate of thirty per cent; and
2. the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the net winnings referred to in clause (i).
Explanation. —For the purposes of this section, —
1. “Computer resource” shall have the same meaning as assigned to it in clause (e) of the Explanation to section 144B;
2. “internet” means the combination of computer facilities and electromagnetic transmission media, and related equipment and software, comprising the interconnected worldwide network of computer networks that transmits information based on a protocol for controlling such transmission;
3. “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.
TDS on Winnings from online games.
194BA. (1) Notwithstanding anything contained in any other provisions of this Act, 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.
(2) In a case where the net winnings are wholly in kind or partly in cash, and partly in kind but the part in cash is not sufficient to meet the liability of deduction of tax in respect of whole of the net winnings, the person responsible for paying shall, before releasing the winnings, ensure that tax has been paid in respect of the net winnings.
(3) If any difficulty arises in giving effect to the provisions of this section, the Board may, with the previous approval of the Central Government, issue guidelines for the purposes of removing the difficulty.
(4) Every guideline issued by the Board under sub-section (3) shall, as soon as may be after it is issued, be laid before each House of Parliament, and shall be binding on the income-tax authorities and on the person liable to deduct income-tax.
Explanation. —For the purposes of this section–
(a) “computer resource”, “internet” and “online game” shall have the meanings respectively assigned to them in section 115BBJ;
(b) “online gaming intermediary” means an intermediary that offers one or more online games;
(c) “user” means any person who accesses or avails any computer resource of an online gaming intermediary;
(d) “user account” means account of a user registered with an online gaming intermediary.
Rule 133 Of the income tax rules 1962, vide notification no. 28/2023 dated 22nd May 2023 prescribes that:
1. The Rule provides formula to calculate net winnings under various scenarios as below:
2. During the FY for the purpose of section 115BBJ of the IT Act
Net winnings= (A+D)-(B+C), where-
A = Aggregate amount withdrawn from the user account during the FY;
B = Aggregate amount of non-taxable deposit made in the user account by the taxpayer during the FY;
C = Opening balance of the user account at the beginning of the FY; and
D = Closing balance of the user account at the end of the FY.
Example
1. Aggregate amount withdrawn from the user account during the FY = Rs. 1,00,000
2. Aggregate amount of non-taxable deposit made in the user account by the taxpayer during the FY = Rs. 40,000
3. Opening balance of the user account at the beginning of the FY = Rs. 10,000
4. Closing balance of the user account at the end of the FY = Rs. 15,000
Net Winnings = A + D – (B+C) = 1,00,000+15,000-(40,000+10,000) = Rs. 65,000
Key Difference between 194B and 194BA
- In previous section 194B, TDS triggers at the time of payment that is nothing but at the time of withdrawn, however earlier it has threshold limit of Rs.10,000. As per the current section 194BA TDS should be deducted without any threshold limit. Here comes a problem what if Income Tax Department would have not been provided with formula for net winnings. Let us take an example If I deposited Rs.10,000 in my dream 11 account where I’m very much interested to play today but due to unexpected circumstances, I couldn’t play the games and I withdrawn the entire money from my dream 11 account. As there is ambiguity in section 194B, payer would have deducted TDS on this withdrawal despite no winnings actually. To overcome this difficulty the formula has been prescribed by the department in the rules. With the given formula we can understand that to avoid double taxation opening balance has been deducted and to avoid taxation on Non-taxable deposits, it has been deducted. In the previous section the wordings are as “Gross Winnings” and nowhere in the act mentioned the definition for the same but in the present section the wordings are as “Net Winnings” and the same has been provided with formula to calculate without hustle in Rule 133 of Income Tax Rules 1962
TDS under 194BA is in three different scenarios are as follows;
Scenario 1: At the time of first withdrawal during the FY
Net winnings= A-(B+C), where-
A= Amount withdrawn from the user account;
B= Aggregate amount of non-taxable deposit made in the user account by the owner of such account during the FY, till the time of such withdrawal; and
C= Opening balance of the user account at the beginning of the FY.
Note
Net winnings in the above formula shall be zero, if the sum of amounts B and C is equal to or greater than the amount A. (It means by using this formula if net winnings arrived to a “negative figure” then consider the net winnings as “Zero”)
Scenario 2: At the time of subsequent withdrawal during the FY
Net winnings= A-(B+C+E), where–
A= Aggregate amount withdrawn from the user account during the FY till the time of subsequent withdrawal including the amount of such subsequent withdrawal;
B= Aggregate amount of non-taxable deposit made in the user account by the owner of such account during the FY, till the time of such subsequent withdrawal;
C= Opening balance of the user account at the beginning of the FY; and
E= Net winnings comprised in the earlier withdrawal or withdrawals computed under (ii) above, during the FY till the time of subsequent withdrawal.
Note
1. Net winnings in the above formula shall be zero, if the sum of amounts B, C and E is equal to or greater than the amount A. (It means by using this formula if net winnings arrived to a “negative figure” then consider the net winnings as “Zero”).
2. In the above formula “E” is the amount of net winnings on which TDS has already been deducted.
Scenario 3: At the end of FY
Net winnings= A+D-(B+C+E), where-
A= Aggregate amount withdrawn from the user account during the FY;
B= Aggregate amount of non-taxable deposit made in the user account by the owner of such account during the FY;
C= Opening balance of the user account at the beginning of the FY;
D= Closing balance of the user account at the end of the FY; and
E= Net winnings comprised in the earlier withdrawal or withdrawal computed under (ii), or (iii) above, during the FY till the time of subsequent withdrawal.
Note
1. Net winnings in the above formula shall be zero, if the sum of amounts B, C and E is equal to or greater than the sum of amount A and D. (It means by using this formula if net winnings arrived to a “negative figure” then consider the net winnings as “Zero”).
2. In the above formula “E” is the amount of net winnings on which TDS has already been deducted.
The Rule has defined certain terms as below:
- Non-taxable deposit– the amount deposited by the user in his user account and which is not taxable;
- Taxable deposit– any amount deposited in the user account which is not a non-taxable deposit and includes any amount paid directly to the user not through the user account; and (Example if I’m the user and I have my user account in dream 11 but I have deposited some amount in my user account not through my own bank account but through other’s bank account then it would be treated as taxable deposit)
- Withdrawal– any amount withdrawn by the user from any user account.
The Rule provides certain clarifications for removal of doubts as listed below:
- User account shall include every account of user which is registered with the online gaming intermediary and where any taxable deposit, non-taxable deposit or the winnings made by the user is credited and withdrawal is debited.
- In case where user receives payment outside the user account in kind or in cash, or partly in kind and partly in cash, the net winnings shall be calculated by deeming that the money equivalent to such payment has been deposited in the user account and equivalent amount has been withdrawn from the user account at the same time. Accordingly, such amount shall be included in Amount A. (For Example, if I have won a car in any online gaming platform then it would be treated by deeming that money equivalent of received in kind shall be treated as amount withdrawn, in such scenario the person who is providing winning in kind should ensure the payee has been paid all the taxes required to be paid)
In case user has multiple accounts-
- aggregate of all such user accounts shall be considered for the purpose of calculating net winnings.
- Transfer from one user account to another maintained with same online gaming intermediary shall not be considered as withdrawal or deposit (as the case may be) for the purpose of deducting tax under section 194BA of the IT Act. (Internal Transfer between two or more accounts of the same user shall not be treated as withdrawal or deposit).
- For Example, if I transfer my money from dream 11 to Junglee Rummy then it would be treated as withdrawal and deposit separately as both are different online gaming platforms and not to be treated as single user accounts.
Deposit in form of bonus, referral bonus, incentives, promotional money, discount-
- In case where such deposit can only be used for playing the online games and not for withdrawal or any other purposes, the same shall be ignored for the purposes of calculating net winnings and shall not be included in amount B, or amount C or amount D; and
- If aforementioned deposit is subsequently recharacterized and allowed to be withdrawn, it shall be deemed as taxable deposit at the time of recharacterization and the equivalent amount shall be considered as deposited in the user account at that time.
Example:
1. If bonus has credited which can only be played but not able to withdrawn – treat such bonus as Non-Taxable Deposit. However, if it subsequently allowed to withdraw by recharacterization then it would be a Taxable deposit.
2. If bonus has credited which is able to withdrawn – treat such bonus as Taxable Deposit.
Illustration
1. Opening Balance on 01.04.2023 is Rs. 10,00,000
2. Amount Deposited on 05.04.2023 is Rs. 15,00,000
3. Amount Deposited by way of bonus (not withdrawable) in user account 12.12.2023 is Rs. 15,000
4. First Amount withdrawn on 01.01.2024 is Rs. 25,00,000
5. Amount Deposited on 10.01.2024 is Rs. 10,00,000
6. Amount Deposited on 11.01.2024 is Rs. 6,00,000
7. Subsequent withdrawals
- On 15.01.2024 is Rs. 25,00,000
- On 15.02.2024 is Rs. 30,00,000
8. Closing Balance as on 31.03.2024 is Rs. 14,00,000
Solution:
Net Winnings for FY 2023-24 = A+D-(B+C)
= 25,00,000+25,00,000+30,00,000+14,00,000-(15,00,000+15,000+10,00,000+6,00,000)
= Rs. 52,85,000/-
Scenario 1: At the time of first withdrawal during the FY
Net Winnings = A-(B+C)
= 25,00,000-(15,00,000+15,000+10,00,000)
= (15,000)
Therefore, Net Winnings = Rs. 0
Scenario 2: At the time of subsequent withdrawal during the FY
TDS at the time of subsequent withdrawal on 15.01.2024
Net Winnings = A-(B+C+E)
= 25,00,000+25,00,000-(15,00,000+15,000+10,00,000+6,00,000+10,00,000+0)
= Rs. 8,85,000/-
TDS at the time of subsequent withdrawal on 15.02.2024
Net Winnings = A-(B+C+E)
=(25,00,000+25,00,000+30,00,000)- (15,00,000+15,000+10,00,000+6,00,000+10,00,000+8,85,000)
= Rs. 30,00,000/-
Scenario 3: At the end of FY
TDS at the closing i.e., on 31.03.2024
Net Winnings = A+D-(B+C+E)
=(25,00,000+25,00,000+30,00,000+14,00,000)- (15,00,000+15,000+10,00,000+6,00,000+10,00,000+8,85,000+30,00,000)
= Rs. 14,00,000/-
Note : We would suggest you to read circular no. 5 of 2023, dated 22nd May 2023 and Rule 133 of Income Tax Rules 1962.
Conclusion: Taxation on winnings from online games represents a complex yet essential aspect of income tax law. The introduction of Section 115BBJ and Section 194BA signifies a proactive approach by the government to regulate this emerging sector. Adhering to prescribed guidelines and calculations outlined in Rule 133 is imperative for taxpayers and online gaming intermediaries to ensure compliance and avoid penalties. By understanding and adhering to these regulations, stakeholders can navigate the taxation landscape of online gaming with confidence and transparency.
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