How “income from other sources” is taxed

The Income Tax Act has five heads of income, of which “Income from Other Sources” (IFOS) is one. It can be considered a residual income item because it covers income that does not fall under other income items. IFOS includes corporate dividends, interest income, royalty income, etc. It is therefore relevant to examine the taxation of some of this income.

Any gift received by an employee from an employer is taxable as “Income from salary”, while any benefit/gift/benefit arising from a business or profession is taxable as “Profit & Gain” in the context of a business or profession. Apart from these, any gift/property acquired by a taxpayer is taxable under IFOS. If a taxpayer has received a monetary gift for no consideration and the total fair market value (FMV) is greater than 50,000, then the total amount is taxable like the other sources. If the taxpayer received a monetary gift with insufficient consideration and the aggregate FMV is greater than 50,000, then the difference between the FMV and the actual consideration must be reported.

In the case of immovable property, if it is received free of charge and the value of the stamp duty exceeds 50,000, the stamp duty value of this property is taxable like other sources, whereas if this property is received for consideration less than the stamp duty value of the property by an amount greater than 50,000, the stamp duty value of such property that exceeds the actual consideration is taxable.

There will be no tax if these gifts of money or goods are received at the time of marriage, from a relative (spouse, brother, sister or brother of the spouse, and sister of the beneficiary’s parents, etc.), or in under any will or inheritance, in contemplation of death.

Dividends are another popular income stream under IFOS. The meaning of “dividend” has a broader scope and includes the equal distribution of assets to shareholders upon liquidation as well as any distribution due to the reduction of the company’s share capital. Since the responsibility for paying tax on dividends received rests with the taxpayer, he must declare this income under the heading “Income from other sources” and pay tax on it according to the rate of slab. In the case of a Keyman insurance policy taken out by a company for its key employees, if the amount is received by the insured, who is the key employee and not the company, such sum received at maturity of the Keyman insurance policy will be taxable under ‘Income from other sources’. The taxation of interest income varies according to the nature of the income. For example, interest on savings accounts is only taxable beyond 10,000, while interest on the public provident fund (PPF) is exempt and interest earned on the employee’s contribution to the PF account will be taxed if it exceeds 2.5 lakh in a financial year and interest earned on the post office savings bank account is exempt to the extent of 3,500 in the case of an individual account and 7,000 in the case of a joint account.

Any one-time income such as winnings from lotteries, crosswords, horse racing, card games or betting of any kind is considered IFOS and taxable. Taxpayers may also claim certain other deductions under IFOS. For example, in the case of a family pension, deduction of 1/3 of this income or 15,000, whichever is less, is allowed. The term “family pension” means a regular monthly amount payable by the employer to a person belonging to the family of an employee in the event of the death of the employee.

The taxpayer is required to fill in the IFO details under Schedule OS such as gross interest income, dividends, amount of money received as a gift if it exceeds 50,000, etc.

The Information Technology Act allows capital and business losses to be adjusted against other income in a given year. Income that falls under the heading IFOS cannot be used to offset losses under the heading “capital gains”. Income from winnings from lottery, crossword puzzles, races (including horse racing) and any other games or games of any kind cannot be offset either.

Amit Maheshwari is Tax Partner, AKM Global, a tax and advisory firm. Yeeshu Sehgal, Tax Markets Manager, AKM Global, contributed to this article.

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