Section 56 of Income Tax Act: Income From Other Sources
Updated: Nov 6
Section 56 of the Income-tax Act of 1961 addresses the taxation of income that does not fall under the main heads of salary, house property, business or profession, and capital gains. Often referred to as "Income from Other Sources," Section 56 helps ensure that earnings from miscellaneous sources—such as gifts, lottery winnings, interest on deposits, and rental income from certain assets—are accounted for in a taxpayer's annual income. It also sets out specific provisions regarding gifts, especially those from non-relatives, to prevent tax evasion through such transactions.
This blog provides a detailed analysis of Section 56, highlighting the key provisions, recent changes, and their impact on both taxpayers and tax administrators. It also includes FAQs to address common queries.
Table of content
Section 56: Income from Other Sources
Residuary incomes, or receipts of earnings that cannot be categorized 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 is 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 the 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) is above and beyond INR 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 50,000. Presents up to INR 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 INR 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 INR 50,000, the entire amount is subject to taxation.
Illustration: On April 1, 2023, and March 31, 2024, a person received gifts worth INR 15,000 and INR 45,000, respectively. In this instance, the total value of gifts exceeds INR 50,000 during a financial year under the heading "income from other sources," hence the full INR 60,000 is taxable under Section 56(2)(x).
Tax on Property Transactions under Section 56(2)(x)
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 INR 50,000. The entire stamp duty value of such property will be taxable. However, if the property is received for consideration and its stamp duty value surpasses INR 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 jewelry, 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 INR 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 INR 50,000.
Exceptions to Section 56(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 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: jewelry, 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 by 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 INR 10 lakh.
Section 56: Impact on Taxpayers and Tax Administration Explained
For the taxpayers
Under section 56 of the Income Tax Act, those who pay tax bring another difficulty level into tax planning. People and companies should recognize what types of income this section includes, keep good documentation, and follow rules to avoid penalties. To have a correct understanding and observe these provisions can result in successful control over taxes as well as reduce one's tax responsibility.
For the tax administration
Section 56 benefits tax authorities by providing a means to tax various forms of miscellaneous income that might otherwise go untaxed. This broadens the scope of taxable income, ensuring that all types of earnings are accurately accounted for. Additionally, the rules on gifts and certain other income types help prevent tax evasion through unconventional channels.
Section 56: In-Depth Analysis
Sub-Section 56(2)(viiib): Taxation of Shares and Securities
This sub-section talks about the tax on shares and securities. These are received by closely held companies. If the company gets any type of consideration to give out shares and the amount is more than the fair market value, then the extra part will be taxed as income from other sources. The rule aims to stop companies from avoiding taxes when they give out shares at higher prices than those found on the market.
Sub-Section 56(2)(viii): Interest Income
It includes a tax on interest income. When the person gets any interest, it is called income from other sources for compensation. This covers the situation of receiving interest on delayed payments related to property acquisition. To ensure that such interest earnings are liable to be taxed.
Sub-Section 56(2)(ix): Forfeited Advance Money
This sub-section states that if you receive advance money and keep it for transferring a capital asset, then money gets forfeited. But also there is no transfer happening due to failed negotiations. Such an amount is considered as income from other sources. The purpose behind the particular provision is to ensure that no forfeited amount will get untaxed.
Sub-Section 56(2)(x): Comprehensive Coverage
Section 56 2x came to broaden the section 56 range. This section consists of receiving money, immovable property, or properties by a person. It also ensures that these receipts are taxed unless they fall under particular exemptions. This subsection increases the taxation in diverse forms of wealth transfer and improves the tax system's toughness.
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, taxpayers must 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 of 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 of 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 INR 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 INR 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)
Q10. Are gifts received during a wedding taxable?
No, gifts received by an individual on the occasion of their wedding are exempt from tax under Section 56(2)(x). This applies to both cash and property gifts, irrespective of their value, and is a one-time exemption applicable only on the wedding day.
Q11. Is the interest earned on fixed deposits considered as "Income from Other Sources"?
Yes, interest earned on fixed deposits is classified under "Income from Other Sources" and is taxable at the taxpayer’s applicable slab rate.
Q12. Are winnings from lotteries, horse races, or game shows taxable?
Yes, winnings from lotteries, horse races, game shows, or any kind of gambling or betting are taxable under "Income from Other Sources" at a flat rate of 30% (plus surcharge and cess). These incomes are not eligible for any deductions under Sections 80C to 80U.
Q13. How are gifts received from non-relatives taxed?
Gifts received from non-relatives exceeding INR. 50,000 in a financial year are taxable under "Income from Other Sources." However, if the total value of gifts (cash, movable property, or immovable property) from non-relatives is less than INR. 50,000, they are exempt from tax.
Q14. Is a loan from a relative taxable under the Income Tax Act?
No, a loan received from a relative is not considered taxable as it is not treated as a gift. However, documentation supporting the loan agreement should be maintained to prevent any disputes with tax authorities.
Q15. How is income from renting machinery, plants, or furniture taxed?
Income from renting out machinery, plant, or furniture is taxed under "Income from Other Sources" if it is not part of the taxpayer’s main business. Expenses directly related to earning this income (e.g., maintenance) can be deducted from the income.
Q16. Can scholarship income be taxable under "Income from Other Sources"?
No, scholarship income granted for education is fully exempt from tax under Section 10(16) and is not included under "Income from Other Sources."
Q17. What happens if a minor child receives a gift or income?
If a minor child receives a gift or earns income (except for income from manual work or a talent-specific activity), such income is clubbed with the parent’s income. The parent with the higher income is responsible for paying tax on the combined amount.
Q18. Can income from family pension be taxed under "Income from Other Sources"?
Yes, family pension received by legal heirs is taxable under "Income from Other Sources." A standard deduction of INR 15,000 or 1/3rd of the family pension received, whichever is lower, is allowed.
Q19. How are arrears of salary taxed?
Arrears of salary are taxable in the year of receipt under "Income from Salary." However, relief under Section 89 can be claimed to reduce the tax burden if arrears pertain to earlier years.
Q20. Are gifts received from employers taxable?
Yes, gifts received from employers are taxable as "Income from Salary" if the total value of the gift exceeds INR 5,000 in a financial year. Gifts up to INR 5,000 are exempt from tax.
Q21. Who are the relatives under Section 56 of the Income Tax Act?
Spouses, siblings, lineal ascendants, and spouses of the above persons are the relatives accepted under section 56 of the Income Tax Act.
Q22. What is Section 56 exemption of the Income Tax Act?
Cash gifts from a husband to wife will be exempted from tax, irrespective of the amount, under section 56(2)(x) of the Income Tax Act. However, a person cannot receive more than INR 2 lakhs from another person in a single transaction and in a single day.
Q23. What types of income are under section 56?
Various types of income covered are gifts received in the form of cash or kind. Or any income which is not taxable under other sections of income tax acts.
Q24. How is the fair market value determined for gifts under Section 56?
The fair market value of the asset is checked at the time of receipt and this value is important to check whether the gift is subjected to taxation under section 56.
Q25. What are the consequences of not reporting income under Section 56?
The consequences are penalties, interest on unpaid taxes, and potential checks from the tax authorities.
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