Income From Other Sources
Income tax in India can be complex, especially when it comes to income from sources other than your salary or business profits. This blog aims to demystify the concept of “Income from Other Sources,” explaining how to calculate income tax, available deductions, and exemptions.
What is Income from Other Sources?
Income from other sources is a category that covers any income not included under other heads such as salary, house property, business/profession, or capital gains. Common examples include:
- Interest income (from savings accounts, fixed deposits, etc.)
- Dividend income
- Rental income from subletting
- Gifts received
- Family pension
- Income from lottery, betting, and gambling
- Any other residual income
Calculation of Income from Other Sources
The calculation involves aggregating all such income and then deducting any allowable expenses incurred to earn that income. Here’s a step-by-step guide:
- Identify All Sources: List all sources of income that fall under this category.
- Aggregate the Income: Add up all the income from different sources.
- Deduct Allowable Expenses: Deduct any expenses incurred wholly and exclusively for earning this income (e.g., commission, collection charges).
Example Calculation
Let’s consider an example to make it clear:
Interest from savings account: ₹10,000
Interest from fixed deposit: ₹20,000
Dividend from mutual funds: ₹5,000
Rental income from subletting: ₹30,000
Total Income = ₹10,000 + ₹20,000 + ₹5,000 + ₹30,000 = ₹65,000
Assume you incurred ₹5,000 as collection charges for the rental income.
Net Income = ₹65,000 – ₹5,000 = ₹60,000
Taxation of Income from Other Sources
The income from other sources is added to your total taxable income and taxed as per the applicable income tax slab rates.
Deductions under Section 57
Certain deductions are allowed under Section 57 of the Income Tax Act:
- Interest on Loans: Interest on loans taken for investment in securities or earning interest is deductible.
- Collection Charges: Any commission or remuneration paid for realizing dividend or interest income is deductible.
- Family Pension: Deduction of 33.33% of such income or ₹15,000, whichever is less.
Taxation of Income from Other Sources
Not all income from other sources is taxable. Some exemptions include:
- Interest on Savings Account: Under Section 80TTA, interest up to ₹10,000 from savings accounts is exempt.
- Dividend Income: Dividends received from domestic companies up to ₹10 lakh per annum are exempt under Section 10(34).
- Gifts: Gifts from specified relatives are fully exempt.
Heads of Income
The Income Tax Department categorizes income into five heads for reporting purposes:
- Income from Salary
- Income from House Property
- Income from Capital Gains/Loss
- Profits and Gains from Business and Profession (PGBP)
- Income from Other Sources
Income from Other Sources includes income that does not fall under any of the other heads.
Savings Bank Account – Interest Income
Interest accumulated in your savings bank account must be declared under this head. Note that the bank does not deduct TDS from savings bank interest. Interest from fixed deposits and recurring deposits is taxable, while interest from savings bank accounts and post office deposits is tax-deductible to a certain extent.
Deduction on Interest Income Under Section 80TTA
For a resident individual (aged 60 years or less) or HUF, interest earned up to Rs.10,000 in a financial year is exempt from tax. The deduction is allowed on interest income earned from:
- Savings account with a bank
- Savings account with a co-operative society carrying on the business of banking
- Savings account with a post office
Senior citizens are not entitled to benefits under section 80TTA.
Tax on Fixed Deposits
Fixed deposit interest is added to your total income and taxed at your applicable rate. TDS is deducted on interest income when it is earned.
Example: The bank deducts TDS annually on a 5-year FD. It is advisable to pay taxes annually rather than when the FD matures. From 1 April 2018, senior citizens enjoy an income tax exemption of up to Rs.50,000 on interest income from savings accounts, fixed deposits, and recurring deposits under Section 80TTB.
Avoiding TDS on Fixed Deposits Banks deduct tax when interest income from all deposits exceeds Rs.40,000 in a year. A 10% TDS is deducted if PAN details are available; otherwise, it is 20%. If your total income is below the taxable limit, submit Form 15G (for non-seniors) or Form 15H (for seniors) to the bank to avoid TDS. These forms are valid for one year and must be submitted each year.
Reporting Fixed Deposit and Recurring Deposits in Your Tax Return
Deposit Type | Action |
Fixed Deposits | Add all interest income and enter under ‘Other interest income’ |
Recurring Deposits | Show interest earned under ‘income from other sources’ if it exceeds Rs.10,000 |
Exempt Income
PPF and EPF withdrawals after maturity are exempt from tax and must be declared as exempt income. EPF is tax-exempt after five years of continuous service.
Family Pension
Show this income under ‘income from other sources’. A deduction of Rs.15,000 or one-third of the family pension received (whichever is lower) is allowed.
Taxation of Winnings from Lottery, Game Shows, Puzzles
Income from lottery, game shows, races, gambling, etc., is taxable at a flat rate of 30%, which after cess amounts to 31.2%.
Expenses Allowed to be Deducted from Certain Income Sources
Deductions include:
- Repairs, insurance, depreciation for rental income from plant, machinery, furniture, and buildings
- Standard deduction on family pension
- 50% deduction on interest from compensation or enhanced compensation
- Expenses incurred wholly and exclusively for earning such income
Dividend Income
Dividends are taxed under ‘income from other sources’. Taxpayers can claim interest expense up to 20% of the dividend income. TDS at 10% is deducted if the total dividend exceeds Rs.5,000.
Agriculture Income
Agricultural income includes:
- Rent or revenue from agricultural land
- Income from agricultural activities and subsequent operations to make the product market-ready
- Income from farm buildings required for agricultural operations
Virtual Digital Assets (VDAs)
Profit or loss from the sale of VDAs (cryptocurrency, NFTs) is taxed at 30%.
Income from Gifts
Gifts exceeding Rs.50,000 in a financial year are taxable under ‘income from other sources’.
Understanding income from other sources and how it is taxed can help you manage your finances better. Always keep records of all income and related expenses to ensure you claim the right deductions and exemptions. If your income is complex or substantial, consider consulting a tax professional to maximize your tax efficiency.
Feel free to reach out filingsfirst with any questions or for more detailed guidance on specific cases. Happy tax planning!
