How to Determine Residential Status for Tax Purposes
- Rajesh Kumar Kar
- 5 days ago
- 9 min read
Residential status under the Income Tax Act, 1961, determines how an individual’s income will be taxed in India. It affects whether global income or only Indian income becomes taxable, making it one of the most crucial steps before filing returns. As per Section 6 of the Act, residential status depends on the number of days an individual stays in India and their past presence over the preceding years. Accurate classification ensures compliance, helps avoid double taxation, and ensures the right deductions are claimed.
Table of Contents
Understanding Income from Other Sources
Income from other sources includes any earnings that do not fall under the primary heads of income such as salary, house property, business, or capital gains. It serves as a residual category under the Income Tax Act, 1961, ensuring that all types of income are accounted for in taxation. Common examples include bank interest, dividend income, gifts, winnings from lotteries, and family pension. This category is governed primarily by Section 56, which defines what constitutes “other income” and how it should be taxed.
Types of Income Covered Under Section 56
Section 56 of the Income Tax Act lists several types of income that are taxable under “Income from Other Sources.” These include:
Interest earned on savings accounts, fixed deposits, recurring deposits, and bonds.
Dividend income received from domestic companies and mutual funds.
Gifts received in cash or kind exceeding ₹50,000 in a financial year (subject to specified exemptions).
Winnings from lotteries, horse races, crossword puzzles, and game shows.
Income from family pension after the death of an employee.
Rental income from sub-letting or letting of machinery, furniture, or plant (if not part of business income).
Each of these sources has separate tax rates and rules depending on the nature of income and the payer.
How to Report Income from Other Sources in ITR
Taxpayers must report income from other sources in the appropriate schedule of their Income Tax Return (ITR). For most individuals, this is included in “Schedule OS” or directly under the “Income from Other Sources” section. The total income from these sources should be added to gross income before computing taxable income. Taxpayers should also ensure that TDS deductions, if any, are correctly reflected in Form 26AS and AIS/TIS to avoid mismatches. Accurate disclosure is essential to prevent notices or penalties from the tax department.
How to Report Interest Income in ITR
Interest income from savings accounts, fixed deposits, or recurring deposits is fully taxable under “Income from Other Sources.” Savings account interest qualifies for deduction under Section 80TTA up to ₹10,000, and senior citizens can claim up to ₹50,000 under Section 80TTB. While reporting, taxpayers should mention the source of the interest and cross-check figures with bank Form 16A or AIS data. Interest from post office savings accounts and tax-saving deposits should also be included if applicable.
Reporting Dividend and Gift Income
Dividend income received from Indian companies is taxable in the hands of the shareholder at applicable slab rates. Any dividend exceeding ₹5,000 attracts TDS at 10%. Gift income is taxable if the aggregate value of gifts from non-relatives exceeds ₹50,000 during the year. Gifts received on occasions like marriage, inheritance, or from specified relatives are exempt. Taxpayers must disclose both monetary and non-monetary gifts under “Income from Other Sources” and keep supporting documentation.
Reporting Winnings and Family Pension
Winnings from lotteries, crossword puzzles, TV shows, or game contests are taxed at a flat rate of 30% under Section 115BB, plus cess and surcharge. No deductions are allowed against such income. Family pension, received by the legal heir after an employee’s death, is also taxable under this head. However, a deduction of one-third of the pension amount or ₹15,000 (whichever is lower) is allowed under Section 57(iia).
Allowable Deductions under Section 57
Certain deductions are allowed from income under this head to determine the taxable amount. These include:
Commission or remuneration paid to collect dividend or interest income.
Deduction of one-third or ₹15,000 (whichever is lower) from family pension.
Any other expenditure incurred wholly and exclusively for earning such income. Deductions are not allowed for casual income such as lottery winnings or gambling, as they are taxed on a gross basis.
How to Report Income from Other Sources in ITR-1 vs ITR-2
Taxpayers using ITR-1 (Sahaj) can report only simple sources such as bank interest, dividend income (up to ₹5,000), and family pension. Those with more complex income such as winnings, higher dividends, or multiple sources must use ITR-2. Reporting under ITR-2 provides additional schedules for detailed disclosures like Schedule OS (Other Sources), Schedule TDS2, and Schedule 80 for deductions. Choosing the correct ITR form ensures accurate processing and prevents return rejections.
TDS Reporting and Claiming Credit under Schedule TDS2
When tax is deducted at source on income such as interest or dividends, it must be reflected in Schedule TDS2 of the ITR. Taxpayers should verify these deductions using Form 26AS and AIS. Any discrepancy between the ITR and departmental data may delay refunds or trigger notices. If TDS has been deducted but not claimed, it can be carried forward to future years only if the income recognition is deferred.
Common Errors to Avoid While Reporting Other Income
Many taxpayers unintentionally make mistakes when reporting income from other sources, which can lead to notices, penalties, or mismatches with the Annual Information Statement (AIS). One of the most common errors is forgetting to report interest income from fixed deposits, recurring deposits, or savings bank accounts. Even if the interest amount is small, it is considered taxable and must be included under the head “Income from Other Sources.” Similarly, taxpayers often miss reporting small dividends received from mutual funds or company shares, especially after the change in tax treatment where dividends are now taxable in the hands of investors.
Another frequent mistake is reporting only the net amount of winnings instead of the gross value. For example, if you win a lottery or game show, the entire winning amount must be reported, even if tax has already been deducted at source. Failing to do so may cause discrepancies when reconciling with Form 26AS or AIS. Some individuals also claim ineligible deductions, such as trying to offset expenses or losses against incomes like lottery winnings, which is not permitted under the Income Tax Act.
A significant oversight occurs when taxpayers ignore minor or one-time incomes that appear in their AIS or bank statements, such as interest on income tax refunds, small honorariums, or gifts. These amounts, though small, must be disclosed to ensure accuracy. Another issue arises when people fail to claim TDS credits properly or report them under the wrong income head, which can result in loss of tax credit or refund delays.
To avoid these problems, it is essential to cross-check your income details with AIS, TIS, and Form 26AS before filing. Ensuring that all sources of income are declared, and the correct tax treatment is applied, helps maintain compliance and reduces the risk of scrutiny from the Income Tax Department. Using professional e-filing platforms like TaxBuddy can further simplify the process by automatically identifying unreported incomes, matching TDS details, and ensuring that every figure aligns perfectly with your official tax records.
Consequences of Non-Reporting or Mismatches in AIS
The Annual Information Statement (AIS) consolidates data on all financial transactions linked to a PAN. If taxpayers fail to report income that appears in AIS or TIS, they may receive a notice under Section 143(1)(a) or 142(1). Repeated discrepancies can invite penalties or reassessment proceedings. Maintaining consistency between declared income and AIS records ensures smoother filing and avoids unnecessary communication with the Income Tax Department.
Conclusion
Income from other sources, though often overlooked, plays a vital role in accurate tax computation. Proper disclosure under Section 56 and timely claiming of eligible deductions under Section 57 can help reduce total tax liability. Taxpayers should verify all sources against Form 26AS and AIS data to maintain accuracy.
For seamless filing and automatic deduction computation, use a trusted tax platform like TaxBuddy, which ensures accurate reporting, validation, and real-time compliance with the Income Tax Act. For anyone looking for assistance in tax filing, it is highly recommended to download the TaxBuddy mobile app for a simplified, secure, and hassle-free experience.
FAQs
Q1. What is considered income from other sources?
Income from other sources includes all types of income that do not fall under salary, business or profession, house property, or capital gains. Common examples include bank interest, fixed deposit interest, dividends, gifts received from non-relatives, winnings from lotteries or online games, and family pension. It acts as a residual category under Section 56 of the Income Tax Act to ensure every form of income is accounted for and taxed appropriately.
Q2. How is interest income taxed?
Interest income earned from savings accounts, fixed deposits, recurring deposits, and bonds is fully taxable at the individual’s applicable slab rate. However, deductions can be claimed under Section 80TTA (for savings account interest up to ₹10,000) and Section 80TTB (for senior citizens up to ₹50,000). The income must be reported under “Income from Other Sources,” and taxpayers should verify the total interest received using bank statements or Form 26AS.
Q3. Is dividend income taxable?
Yes. Dividend income from Indian companies is taxable in the hands of shareholders. The company is required to deduct TDS at 10% if the dividend exceeds ₹5,000 in a financial year. For non-residents, TDS may be higher as per applicable tax treaties. Dividends must be disclosed under the “Income from Other Sources” head in ITR, and related expenses (such as interest on loans used to invest in shares) can be claimed up to 20% of such dividend income under Section 57.
Q4. Are gifts taxable?
Gifts received from non-relatives that exceed ₹50,000 in total during a financial year are taxable as “Income from Other Sources.” However, gifts received from specified relatives (like parents, siblings, spouse, or lineal ascendants/descendants) are fully exempt. Additionally, gifts received on special occasions such as marriage, or through inheritance and wills, are also exempt from taxation. Proper documentation is important to prove the source and nature of such gifts.
Q5. How is family pension taxed?
Family pension received by a legal heir after the death of an employee is taxable under “Income from Other Sources.” A standard deduction is available—either one-third of the total family pension or ₹15,000, whichever is lower. The balance amount is taxable at normal slab rates applicable to the recipient. The deduction ensures that dependents receiving family pensions are provided some relief from tax burden.
Q6. Can lottery winnings be reduced by deductions?
No. Income from lotteries, crosswords, horse racing, online games, or other forms of gambling is taxed at a flat rate of 30% (plus applicable surcharge and cess) under Section 115BB. No deductions, allowances, or set-offs are permitted against this income. The payer is required to deduct TDS at source at the same rate before disbursing the prize money. The full amount must be reported separately in the ITR.
Q7. How are TDS credits claimed?
TDS credits for income from other sources are claimed using Schedule TDS2 in the Income Tax Return. Taxpayers must verify the TDS details through Form 26AS or the Annual Information Statement (AIS) before claiming credit. The TDS should match the income declared to avoid mismatch notices from the department. If any discrepancy exists, taxpayers should contact the deductor to correct it before filing their return.
Q8. Can I report all types of other income in ITR-1?
No. ITR-1 (Sahaj) is meant for taxpayers with simple income structures—salary, one house property, and limited other income like savings account interest. If you have dividend income, winnings, gifts, or foreign income, you must use ITR-2 or ITR-3, depending on your total sources. Reporting income under the correct ITR form ensures accurate tax computation and compliance.
Q9. What happens if other income is not reported?
If a taxpayer fails to report income from other sources, the system may flag mismatches using data from AIS, TIS, or Form 26AS. This can lead to a notice under Section 143(1) or 142(1) for clarification or reassessment. Non-reporting or under-reporting may also attract penalties under Section 270A and interest under Sections 234A/B/C. Hence, it’s crucial to verify all interest, dividend, and gift data before filing.
Q10. Are there any deductions available under Section 57?
Yes, Section 57 allows certain deductions for expenses incurred to earn income under this head. Common deductions include commission or remuneration paid for realizing dividend or interest, and a deduction for family pension (one-third or ₹15,000, whichever is lower). However, no deduction is allowed for winnings like lotteries, betting, or game shows. The purpose of Section 57 is to ensure that only net income is taxed.
Q11. How does AIS help in reporting?
The Annual Information Statement (AIS) consolidates all financial data linked to your PAN—interest, dividends, rent, securities transactions, and high-value deposits. It ensures that taxpayers don’t overlook any source of income while filing. Cross-checking AIS before filing your ITR helps prevent errors, under-reporting, and tax notices. It also provides detailed feedback options to correct or confirm entries.
Q12. How can TaxBuddy help with reporting other income?
TaxBuddy simplifies the process of reporting income from other sources by automatically scanning Form 26AS and AIS data to detect every interest, dividend, and gift entry. The platform applies the correct deductions under Sections 57, 80TTA, and 80TTB, calculates the tax liability accurately, and ensures compliance with the Income Tax Act. This automation helps users avoid mismatches, penalties, and missed claims, offering a smooth, error-free filing experience.
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