Under Section 194B of the Income Tax Act, 30 per cent tax is deducted on any prize money in excess of Rs 10,000 and other winnings from games, lotteries etc. This is deducted at source (TDS). A Three per cent education cess is payable on the tax amount.
While filing your income tax return you must include prize money under ‘income from other sources’ and, you must submit the TDS certificate as proof that you have paid all the tax due against the prize money.
Taxation on prizes in kind
A multitude of game/talent shows opt for a combination of cash and kind. The tax liability on cash prizes can be arrived at by a simple calculation, but this is not the case with prizes in kind. Although the applicable tax rate is the same, that is, 30 per cent, it poses a challenge on two fronts — who bears the tax liability and what is the valuation of the prize?
“If the prizes awarded are in kind, the prize distributor will, before releasing the prize, ensure that tax has been paid in respect of the winnings. It will either recover it from the winner or bear the tax liability itself and deposit TDS.
But if prizes are partly in cash and partly in kind, tax is deducted on the total value of the cash and kind from the cash. And, if the cash is insufficient to meet the TDS liability, either the winner or the prize distributor pays the deficit. This will depend entirely on the terms and conditions of prize scheme.
Say, you win a car with a market value of Rs 7 lakh and the conditions require you to bear the tax liability. You will have to cough up Rs 2.1 lakh tax, and Rs 6,300 education cess. Then there are registration charges, road tax, octroi and insurance, which must be borne by the winner. The only alternative: Forego your award.
Guidelines for valuing prizes, including holidays, insurance products and even contracts awarded by channels to winners, are unclear. The valuation will be largely circumstantial. For instance, to value a holiday, you may have to consider how much it costs an unrelated third party.