Income from Other Sources- A Comprehensive Guide for Taxpayers
From the taxation perspective, the Income Tax Department divides income into five parts:
Salary
Business/profession
House property
Capital Gain
Income from other sources
The last category includes any money that does not come from work, business, or profession. It is a residual income category that comprises a variety of sources of income such as savings account interest, fixed deposits, dividends from investments, rental income, and gifts received, among others. This money is not included in any of the other categories of income. In this guide, we will explain “Income from other sources” and discuss its tax treatment.
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Heads of Income under the IT Act
The Income Tax Act divides a taxpayer's earnings or income into five categories, and it is critical to appropriately classify revenue under these categories for accurate tax calculation. The five categories of income are as follows:
Salary income comprises base salary, allowances, bonuses, commissions, and employer-provided perks.
House Property Income: Includes income from owning and renting out residential or commercial properties. This category includes rental income as well as deemed rental income from self-occupied properties.
Income from Business or Profession: This category covers revenue from consulting, freelancing, and other trade-related activities.
Capital gains refer to profits or losses from selling assets such as property, stocks, mutual funds, or other investments.
The "Income from Other Sources" category includes residual revenue sources not covered by the other four categories. It includes interest income, dividends, lottery prizes, and any other revenue not previously mentioned.
An Overview of Income from Other Sources
As per Section 56(1) of the Income Tax (IT) Act of 1961, "income from other sources" encompasses all money earned from other sources. Simply put, if any income cannot be disclosed under any other income head, it will be classified as this one. Income from Other Sources is a sort of revenue that does not fit into any other category, such as wage, housing property, business or profession, or capital gain. Here are a few instances:
Interest generated on savings accounts, fixed deposits, recurring deposits, and other financial instruments
Dividend income from stock and mutual fund investments
Rental revenue from personal property
Income from renting out machinery or equipment
Income from winning lotteries, racing, card games, gambling, or betting
Gifts worth more than Rs. 50,000 per year
Income obtained as a royalty for granting the use of intellectual property such as copyrights, patents, or trademarks is considered income from other sources.
A pension received by the family members of a dead employee is considered income from other sources.
The interest received from the Income Tax Department is considered income from other sources.
Commission or brokerage income includes any commission or brokerage fees paid for delivering services or facilitating transactions.
Periodic payments from annuity plans or insurance policies are classified as income from other sources.
We will now explain each of these heads in detail.
Interest Income on Savings Accounts
Interest accumulated in your savings bank account must be recorded on your tax return as income from other sources. Take notice that the bank does not deduct TDS on savings bank interest. Interest from both fixed and recurring deposits is taxable, although interest from savings bank accounts and post office deposits is tax deductible to some extent. However, they are shown as income from other sources. This category includes interest revenue from savings bank accounts, fixed deposits, and post office savings accounts.
Deduction on Savings Account Interest Income U/S 80TTA
Individuals can deduct the interest income obtained from savings accounts under Section 80TTA of the Income Tax Act. Section 80TTA allows a deduction for interest earned on savings accounts held with a bank, co-operative society, or post office. The maximum permissible deduction here is Rs. 10,000 per fiscal year. If the interest generated on a savings account exceeds Rs. 10,000 in a given year, the excess amount will be regarded as taxable income under 'Income from Other Sources'. It is crucial to clarify that the deduction under Section 80TTA does not apply to interest earned on fixed deposits, recurring deposits, or other types of deposits.
Tax on Fixed Deposits
Fixed deposit interest is added to other income, such as salary or professional income, and you must pay tax on that income at your applicable tax rate. TDS is taken from interest income when earned, even if it has not been paid. For example, the bank will deduct TDS on the annual interest earned on a five-year fixed deposit. As a result, rather than waiting until the FD matures, it is best to pay your taxes on a yearly basis. With effect from April 1, 2018, senior individuals can enjoy an income tax exemption of up to Rs 50,000 on the interest income they get from fixed deposits with banks, post offices, etc. u/s 80TTB.
Reporting Fixed Deposits and Recurring Deposits in Tax Returns
Interest earned on fixed deposits and recurring deposits is classified as 'Income from Other Sources' and is taxed at the individual's income tax slab rate. Individuals must record the interest income obtained from fixed and recurring deposits on their income tax returns. They must compute the total interest generated from fixed deposits and recurring deposits during the fiscal year before reporting it on their income tax return. This is accomplished by referring to the interest certificate issued by the bank or financial institution where the deposit is maintained. Individuals can record the whole interest earned on their income tax returns under the heading 'Income from Other Sources'. It is vital to note that the total interest earned on fixed and recurring deposits is added to the individual's total income and taxed at the appropriate income tax slab rate.
How to Avoid TDS on Fixed Deposits?
Avoiding TDS (Tax Deducted at Source) on fixed deposits can be difficult because banks are required to deduct TDS on interest income that exceeds a particular level. However, you might consider a few techniques to reduce the impact of TDS on your fixed deposits:
Submit Form 15G/15H: If your income is below the taxable threshold, submit Form 15G (for persons under 60) or Form 15H (for seniors over 60) to the bank. These forms indicate that your total income is below the taxable limit, thus the bank will not take TDS on your fixed deposit interest.
Distribute Investments Across Banks: Each bank applies TDS on fixed deposit interest. Distributing your fixed deposits among various banks allows you to stay below each bank's TDS threshold and avoid TDS on your interest income.
Consider Cumulative Fixed Deposits above Regular Fixed Deposits with Periodic Interest Payouts. The interest on cumulative fixed deposits is reinvested, and when the deposit matures, you receive both the principal and the total amount of interest. This helps to defer TDS liability till the maturity date.
Invest in Tax-Free Bonds: Government-issued bonds offer fixed-income investments without TDS. The interest income from these bonds is tax-free, with no TDS deduction.
Banks offer tax-saving fixed deposits with a five-year lock-in period under Section 80C of the Income Tax Act. Invest in these. The interest earned is allowed for a deduction of up to Rs. 1.5 lakh, with no TDS deduction.
Plan Interest Payouts: If you have multiple fixed deposits, consider staggered payout dates to ensure staying below the TDS threshold each year.
Family Pension
You must declare this income under income from other sources if you are receiving pension payments on someone else's behalf who has passed away. The Family Pension Income is reduced by Rs 15,000 or one-third of the family pension received, whichever is less. This will be included in the taxpayer's income, and tax will need to be paid at the appropriate rate.
Taxation on Lottery, Game Show, and Puzzle Winnings
Any winnings from online or television game shows, lotteries, etc. will be subject to taxation under the heading "Income from Other Sources." The income will be subject to a flat 30% tax rate, or 31.2% when the cess is included.
Exempt Income
After maturity, the amount you remove from your PPF and EPF is tax-free and needs to be reported as exempt income from other sources of income. Keep in mind that: After five years of continuous service, the EPF becomes tax-exempt. Go through the EPF withdrawal guidelines and their tax implications in detail.
Permissible Deductions for Income from Other Sources
A taxpayer who receives income from other sources is entitled to the following deductions for expenses, just like independent contractors and businesses are:
Commission or payment for realising interest on securities or dividends (if not covered by Section 115-O, which is excluded). Any fees or commissions paid in connection with realising a dividend may be subtracted from the dividend income, which is subject to taxation as other income.
Under the category of income from other sources, the plant and machinery rental income is subject to taxation. One is permitted to deduct the costs incurred for such plant and machinery.
Repairs, insurance premiums, and depreciation on buildings, equipment, and furniture are examples of expenses (not capital expenses) that can be subtracted from the rental income generated by renting out these items.
A third of such income is available in the form of a family pension, which is provided to the family members of a deceased employee on a monthly basis. A standard deduction is allowed on family pension, i.e., a deduction which is the lower of Rs. 15,000.
If interest is paid on compensation or improved compensation, 50% of the interest may be subtracted (applying from the 2010–11 assessment year onward).
According to Section 57(iii), any other expense (that is, an item that is not a capital expense) that is used solely and exclusively for the purpose of producing or obtaining such income is deductible.
How is Income from Other Sources Taxed?
One of the five categories of income that are taxable under the Income Tax Act of 1961 is income from other sources. Income from other sources is the tax heading for any income not covered by one of the other four lines of income. We call it the residual head of income. Except for incomes that are exempt from taxation under the Income Tax Act, incomes not included in capital gains, house property, business & profession (PGBP), or salary are covered by income from other sources.
The following three requirements must be met in order for a receipt of earnings to fall under the category of "income from other sources" under Section 56 of the Act:
You earn an income
The Income Tax Act of 1961's other sections do not exempt this type of income from taxes
This type of income is not the same as a wage, capital gains, profits and earnings from a business or profession, or income from a home
Conclusion
Income from other sources is perhaps the most confusing element of tax calculations for Indian taxpayers. While this guide simplifies it, you can consult an expert professional to clear your doubts and calculate your tax liability accurately.
FAQs:
Q1. What are the incomes coming under the head of “Income from Other Sources”?
Dividend income, one-time revenue, interest earned on deposits, income from numerous other sources, such as machinery, plants, and furnishings, which is not subject to tax under any other income category.
Q2. What would occur if "income from other sources" was not declared?
If a taxpayer does not disclose their income from other sources, the Income Tax agency may send them a notice.
Q3. I earn interest from savings accounts, recurring deposits, and fixed deposits. How taxable is it? Are there any deductions I may take out on this income?
All of these interest payments are subject to "Other sources" taxation. Taxes will be due to you according to your income slab. Additionally, interest on savings accounts and recurring deposits is deductible up to Rs 10,000. Senior persons can deduct up to Rs 50,000 from the interest they receive from fixed deposit accounts.
Q4. My only source of income is from fixed deposits. Do I have to submit an income tax return?
In India, a person is required to file an income tax return if their annual income is over Rs. 2,50,000. Should the bank have taken out TDS and your income not be above Rs. 2,50,000, you will need to submit a tax return in order to get reimbursed for any excess TDS that was taken out.
Q5. What are FDs that save taxes?
FDs that save taxes have a five-year lock-in period. Subject to a maximum of Rs. 1,50,000, the amount you invest may also be claimed as a deduction under Section 80C. Yet the interest is completely taxable, just like with a standard FD.
Q6. This year, I received a dividend from an Indian company. Is this subject to taxes like other forms of income?
Dividend income is subject to taxation as "Income from other sources," yes. Dividend Distribution Tax (DDT) has been eliminated by the government as of FY 2020–21. As a result, dividend income is subject to taxation for investors. Interest expense up to 20% of dividend income is allowable by the taxpayer. The tax is to be paid at your regular tax slab rates. Additionally, the corporation deducts 10% of the dividend amount, or Rs 5,000, in order to cover TDS.
Q7. How is a dividend from a foreign corporation treated tax-wise?
Receiving a dividend from a foreign corporation is subject to taxation as "Income from other sources," with the amount of taxes due determined by your income bracket.
Q8. Which heading applies to the taxation of pension income and family pension income?
Pension income falls under the category of "Income from Salary"; family pension income falls under the category of "Income from Other Sources."
Q9. Should I declare interest income on my ITR 1 even if TDS has already been subtracted?
Yes, regardless of the tax deduction, you must report interest income under the Income from Other Sources heading in your ITR 1 and subsequently use Form 16A to claim the tax credit.
Q10. What is considered "Income from Other Sources" in taxation?
"Income from Other Sources" includes earnings from various avenues not covered under specific heads like salary, business, or capital gains. This can encompass interest income, rental income, gifts, and other miscellaneous earnings.
Q11. How is interest income taxed under the category of "Income from Other Sources"?
Interest income, such as that from savings accounts or fixed deposits, is added to the total income and taxed under the head "Income from Other Sources." Deductions, like those for savings accounts, can be claimed.
Q12. Are gifts and winnings taxable as "Income from Other Sources"?
Yes, gifts and winnings, including lottery prizes, are considered income and fall under "Income from Other Sources." However, specific exemptions may apply to certain gifts, such as those received on occasions like marriage.
Q13. How can fixed deposit tax be reduced?
Make a fixed deposit with a five-year lock-in period to save taxes. Proceed to deduct the investment amount up to Rs. 1,50,000 under section 80C. Note, however, that the interest earned on such FDs is subject to taxation just like any other income. When a person's total income is less than the basic exemption limit, they can also file forms 15G and 15H. TDS will not be withheld if it is filed.
Q14. Is it possible for me to deduct the costs I paid in order to obtain income from other sources?
Sure, as long as the costs are directly related to the income, you can deduct them.
Q15. A painting was given to me as a present. Is it subject to taxes?
According to the Income Tax Act, "painting" is considered an asset. If a gift exceeds Rs. 50,000 in value, it will be subject to taxation under the heading "Income from Other Sources.”
Q16. Do presents given to me on the occasion of my marriage need to be taxed?
No, presents given to someone on their marriage—whether monetary or in kind—are completely free from income tax
Q17. How can I submit income tax returns for the money I won from Indian online betting sites?
The winnings will be subject to 30% tax under the "Income from Other Sources" heading.
Q18. How is interest on a joint bank account treated tax-wise? Whose income statements should show this kind of income?
It is included in the tax return of the individual whose PAN is on file with the bank.
Q19. What do casual earnings mean? How does the Income Tax Act treat it in terms of taxes?
Income that is not obtained consistently, such as winnings from horse races or lotteries, is referred to as "casual income," and it is subject to a 30% levy.
Q20. I want to include my wife's tuition reimbursement income on my income tax return. Where should I display that?
If tuition is earned part-time, it can be reported under "Income from other sources." However, if tuition is the primary source of income, it will be treated as business revenue, and GST will be charged if gross receipts exceed the threshold amount.
Q21. What are the tax implications for rental income under "Income from Other Sources"?
Rental income, when not categorized as business income, is taxed under "Income from Other Sources." Standard deductions for repairs, municipal taxes, and a 30% standard deduction on the net annual value are applied.
Q22. Can you explain the taxation of dividends received as "Income from Other Sources"?
Dividends received from investments, such as stocks, are taxed under "Income from Other Sources." However, as of the recent removal of Dividend Distribution Tax (DDT), individuals receiving dividends need to include them in their total income and pay tax based on their applicable slab rates.
