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Section 56 of the Income Tax Act: A Comprehensive Guide

Updated: Jun 21


Section 56 of the Income Tax Act

Income from salary, income from house property, profits and gains from business or profession, capital gain, and income from other sources are the five primary categories under which sources of income are categorised under the Income-tax Act, 1961 (ITA). Any income that does not fit into one of the other categories—such as wage, house property, business or profession, or capital gains—is referred to as income from other sources. The Income Tax Act of 1961 addresses the taxation of income derived from sources other than oneself under Section 56. All taxpayers, including people, businesses, Hindu Undivided Families (HUFs), and other entities, are subject to this clause.

 

Table of content

 

Income from Other Sources: A Detailed Overview

Residuary incomes, or receipts of earnings that cannot be categorised under any other head of income, include money from other sources. It consists of the following items: 

  • The amount that an employer gets paid by his staff to contribute to various plans, such as the superannuation fund, provident fund (PF), and employees' state insurance (ESI). If the employer does not credit the employee's payment to the appropriate fund account, the amount will be subject to taxes. 

  • Dividends are subject to taxation under Section 56(2)(i) of the ITA and are recorded under the heading "income from other sources." This is dependent upon the source company's residential status at the time the dividend was paid out. 

  • Interest income from securities (Section 56(2)(id))

  • Revenue received as a one-time payment for winning lotteries, crossword puzzles, and races, such as card games, gambling, horse racing, or betting. These incomes are subject to a 4% cess and a flat 30% tax rate. 31.2% will be the effective rate of total taxation. 

  • Money received in advance or during negotiations for the transfer of a capital asset (as long as the funds are forfeited and the asset is not transferred) 

  • Revenue from renting out a taxpayer's furniture, machinery, or other assets (Section 56(2)(ii))

  • Income from the indivisible rental of furniture or machinery with structures (Section 56(2)(iii)) 

  • Any amount, including bonuses, earned under the terms of the Keyman insurance policy (Section 56 (2)(iv))

  • According to ITA Section 56(2)(viib), tax is due on the amount above Fair Market Value (FMV) of shares in case a privately held corporation issues them at a price higher than FMV. This provision is now applicable for the issuance of shares to both residents and non-residents as per the Finance Act 2023. 

  • Any money received by an individual in connection with leaving their job may be subject to additional taxes (Section 56(2)(xi)).

  • A business trust's distribution made in repayment of debt is taxable for the unit holders. The Finance Act 2023 included Section 56(2)(xii) to tax REITs and InVITs as they repay debt. The acquisition price will initially be deducted from the repayment of SPV-level debt. Any amount beyond that purchasing price will now be subject to other source income tax. 

  • Any proceeds from a life insurance policy that are more than the entire premium paid will be subject to taxation from another source. Payment receipts exempt under Section 10(10D) of the Income Tax Act (Section 56(2)(xiii)) are not included in this, nevertheless.

  • The value of a gift (real estate or other movable assets) above and beyond Rs 50,000. (On the other hand, presents from family members, gifts given during a marriage, gifts given under a will or inheritance, etc.)


Provisions of Section 56 (x) of the Income Tax Act

Tax on Gifts

Gifts received within a financial year in the form of cash (checks, internet transfers, fixed deposits, demand drafts, or any other form) or cash equivalents, property (movable or immovable), or in-kind are taxable. Under the Income-tax Act, 1961 (ITA), Section 56 (2)(x), you have to pay taxes on gifts valued at more than Rs 50,000. Presents up to Rs 50,000 are entirely tax-free for the receiver; however, if this threshold is exceeded, the full value of the gifts is subject to taxation. For taxation purposes, the total value of gifts received within the fiscal year is considered; it is not determined by the value of individual presents. If the total amount of gifts received in a given year exceeds Rs 50,000, the entire amount of those gifts will be subject to tax. An employee's cash present from their employer is completely taxed under the heading of salaries. In contrast, if the value of a gift received in kind is over Rs 50,000, the entire amount is subject to taxation.


Illustration: On April 1, 2023, and March 31, 2024, a person received gifts worth Rs 15,000 and Rs 45,000, respectively. In this instance, the total value of gifts exceeds Rs 50,000 during a financial year under the heading "income from other sources," hence the full Rs 60,000 is taxable under Section 56(2)(x). 


Tax on Property Transactions

Any real estate transaction, whether it be mobile or immovable, is subject to income tax and stamp duty obligations. Any immovable property—land, buildings, or both—that is obtained without payment for it has a stamp duty value—the amount that the authorities have determined must be paid for stamp duty—that is greater than Rs 50,000. The entire stamp duty value of such property will be taxable. However, in the event that the property is received for consideration and its stamp duty value surpasses Rs 50,000, or 10% of the consideration, the buyer will be liable to pay income tax on the excess stamp duty value.

When movable property, including jewellery, gold, shares, securities, archaeological collections, drawings, paintings, sculptures, any kind of artwork, and bullion, is acquired at a discounted price or without consideration and has a total fair market value (FMV) of more than Rs 50,000, it is subject to taxation. Nevertheless, the whole excess fair market value will be subject to taxation if the consideration is less than the property's whole fair market value by more than Rs 50,000.


Exceptions to Section 52(2)(x)

Section 56(2)(x) offers an exception whereby transactions that occur without consideration or with insufficient consideration are not subject to taxation. 

  • If a relative gives you a present, Section 56(2) exempts it from tax (x). The following people are regarded as relatives in an individual's case, per the ITA include the spouse, brother or sister, the person's spouse, the person's parents, any blood relative or offspring (whether they are the individual's lineal ascendant or descendant), any blood relative or offspring of the spouse (whether they are the individual's lineal ascendant or descendant of the spouse of the individual), or the person in question's spouse, and any member of a Hindu Undivided Family (HUF). Friends, on the other hand, are not counted as relatives for the purposes of a Hindu undivided family (HUF), hence any gifts from them are subject to taxation.

  • Furthermore, a married couple is not required to pay taxes on gifts they receive. Gifts received by an individual on special occasions like birthdays or anniversaries, however, continue to be taxable. However, gifts that are received as a result of inheritance, under a will, or in anticipation of the donor's passing (such as from a terminally sick person who expects to die soon) are likewise exempt from taxes. 

The following items are exempt from taxes: jewellery, archaeological collections, paintings, sculptures, drawings, works of art, bullion, and personal effects other than shares and stocks. Therefore, personal effects that are moveable, such as furniture and fixtures, are not taxable when sold.

  • If any money or property is obtained from any of the following sources, the income tax law regarding the taxation of gifts will not be applicable: 

  • Any local government in accordance with Section 10(20) of the ITA, which specifies what types of income are exempt from tax. 

  • The trust/institution, hospital/other medical facility, university/other educational institution, and fund/foundation mentioned in Section 10(23)

  • Section 12A, Section 12AA, or Section 12AB-registered trusts or institutions.

  • According to Section 10(23C), the fund/trust/institution, the university/other educational institution, and the hospital/other medical institution 

  • The transaction, which isn't considered a transfer under Section 47, or from any individual by a trust that's been set up specifically to help that person's relative


Tax Relief after COVID-19

In response to the COVID-19 health crisis, the Finance Act 2022 amended Article 56(2)(x) to give taxpayers tax relief for the 2019–2020 fiscal year and beyond. Money from an employer or any other supporter for COVID-19 therapy is not taxable under the amendment. Furthermore, in the event of the breadwinner's demise, any money received by family members from the employer or any other individual will be free from taxes. If the funds are obtained from the employer, there is no upper limit on the exemption. However, the maximum exemption amount for money obtained from any other source is Rs. 10 lakh.


Conclusion

In summary, Section 56 of the Income Tax Act addresses the taxation of income derived from sources other than the taxpayer. To avoid any tax repercussions, it is crucial for taxpayers to comprehend this section's rules and exceptions.


FAQ

Q1. What are the five heads of income? 

The five heads of income include:

  • Income from salary

  • Income from house property

  • Income from capital gains

  • Income from profits from business or profession

  • Income from other sources


Q2. What is the tax rate for income from other sources?

Other sources of income are subject to taxation at the taxpayer's applicable slab rate. The taxpayer's income level determines the slab rate. The tax rate might vary based on income level, from 0% to 30%. 


Q3. How does a gift differ from a transaction without consideration?

A gift is an unrequited, voluntary donation of funds or property. A transfer of funds or property without any kind of value exchange is referred to as a transaction without consideration. Under Section 56, the fair market value of the money or property obtained is taken into account for tax purposes in both situations.


Q4. What is clubbing of income?

Combining another person's income with the taxpayer's is known as "clubbing" income. This is relevant in situations where a spouse or a minor child receives the income. In these situations, the income is combined with the higher-earning parent's or spouse's income. 


Q5. What documentation should a person maintain for gifts and other receipts?

To prevent disagreements with the tax authorities, taxpayers should keep accurate records of all gifts and other receipts, along with a valuation of them. This comprises a documented account of the gift's or receipt's value, the recipient's relationship to the giver, and the receipt date. Any property obtained should also have its fair market value documented.


Q6. Will a cash gift to one’s wife be taxable under Section 56(2)(x)?

Under Section 56(2)(x) of the ITA, a husband can offer his wife a tax-free cash gift, regardless of the amount. However, according to tax regulations, a person cannot accept more than Rs 2 lakh in cash from another person in a single transaction or in a single day.


Q7. What will be taxable income if a person receives a dividend of Rs 11 lakh from an Indian company? 

Dividends received by a resident individual, business, or HUF are taxable in the recipient's hands and would be classified as "income from other sources."


Q8. How is a valuation done for a property received as a gift?

When property is received as a gift, Section 56 takes into account the property's fair market value for taxation purposes. The amount that the property would normally bring in on the open market is its fair market value. The difference between the two valuations is also taxed as income from other sources if the property is registered at a value that is less than its fair market value.


Q9. What is the gift tax exemption relatives list?

According to the Income Tax Act, gifts from family members are not taxable. The following is a list of people who, according to the Income Tax Act, are considered relatives: 

  • The person's spouse

  • The sibling or brother of the individual 

  • Brother or sister of the married person

  • Either the person's parent's brother or sister

  • A person’s lineal descendant or ascendant 

  • Descendent or lineal ascendant of the married person

  • Spouses of those mentioned in points (2) through (6)





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