Income From Other Sources: Calculation, Taxability, Exemptions, and Deductions

How can one accurately determine their tax liabilities related to such a varied income stream? When figuring out your total income, you need to include all of these earnings. You can also subtract certain costs you had while earning this income. According to tax laws, you can deduct expenses like interest on loans used for investments, maintenance costs for rental properties, and a set amount for family pensions—whichever is higher: ₹15,000 or one-third of the pension amount you receive.

However, not all expenses can be deducted. Personal spending and some taxes cannot be claimed, so one should keep good records and know the rules. There are also some types of income that you don’t have to pay taxes on. For example, money you receive as gifts from family or during weddings is tax-free. Additionally, specific government savings plans, like the Public Provident Fund (PPF), are tax-free when you take out your money.

Even though you can deduct some expenses to lower your taxes, it can be tricky to know what you can and cannot deduct. For instance, you can’t deduct personal expenses, but you can deduct interest from investment loans.

It’s vital first to comprehend what constitutes Income from Other Sources. The Income Tax Act’s Section 56 contains provisions that define this income category. Let’s examine them.

What is Income from Other Sources?

The ITA of 1961 created the catch-all category “Income from Other Sources” in Income Tax, which includes any income not falling under one of the four main categories: capital gains, house property, business, or salary. Section 56 of the Act mainly governs this residuary income, which consists of a variety of earnings.

Incomes falling into the residuary nature category are those that aren’t expressly subject to other heads of taxation. Examples include lottery winnings, dividends, family pensions, interest income from fixed deposits, and more.

Particular Incomes Defined in Section 56(2)

Dividends

After the repeal of the Dividend Distribution Tax (DDT), income from dividends is subject to taxation at the recipient’s income tax slab rates. In the event that the dividend exceeds ₹5,000, TDS is due.

Gains from Lotteries and Gambling

These gains are subject to a 30 percent flat tax plus a cess, resulting in an effective overall tax rate of roughly 31.2%.

Interest Income

Interest earned on savings and fixed deposit accounts is taxable under this head, subject to applicable slab rates. If the interest surpasses specific thresholds, deductions might be appropriate.

Family Pension

This income qualifies for a standard deduction of ₹15,000 or one-third of the pension amount, whichever is lower.

Also Read: Muhurat Trading 2024: Timing, Strategy, and How to Diversify with Fixed Income

Computation

Use the following formula to determine net income from other sources:

Net Income = Total Revenue from Other Sources – Deductions

Net income is equal to gross income from other sources minus certain deductions allowed by Section 57. These deductions cover costs incurred in generating the income, such as interest paid on loans used for investments.

Exclusivity

This category contains the following exclusions:

• Gifts from family members up to ₹50,000 are not subject to taxes.
• Depending on the previous taxes that the distributing company paid, certain dividend income may be exempt.

You can consult tools like Income Tax Management for a more thorough of the tax ramifications of income from other sources in income tax and how to report it correctly..

This category includes several prevalent forms of income. The tax authorities handle every form of income differently, including dividends, interest, lottery winnings, and gift income. Let’s now explore the primary sources that fall under income from other sources.

Types of Income Under Income from Other Sources

Critical forms of income from other sources in income tax are broken down here, along with information on their taxation, exemptions, and deductions:

Income from Dividends

Stock dividends are subject to income tax. After the Dividend Distribution Tax (DDT) was eliminated, individuals included dividends in their total income and paid taxes based on their tax slab rates. Ten percent of dividends over ₹5,000 are subject to TDS deduction.

Gains from Lotteries, Puzzles, and Gambling

These gains are subject to a flat tax rate of thirty percent, which adds up to thirty-two percent (31.5%) when the cess is included.

Interest on Savings and Fixed Deposits

Interest on bank deposits is regarded as additional revenue. Taxpayers can deduct interest expenses up to twenty percent of dividend income. TDS is imposed if interest exceeds ₹40,000 (₹50,000 for senior citizens) in a given fiscal year.

Also Read: Section 33AB Income Tax Act: Deduction for Tea, Coffee, and Rubber Development Account

Rental Income and Royalties

You must pay taxes on any money you receive from renting out machinery or from royalties. You can report rental income using other sources of revenue.

Gift Income

Under the category of income from other sources, gifts given in a financial year that totals more than ₹50,000 are subject to taxation. Gifts in kind are subject to taxation if their fair market value exceeds a certain threshold, and cash gifts are counted toward one’s total income.

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Once you have identified the categories of income that fall under this heading, it’s crucial to comprehend how they are taxed. In India, tax law specifies the tax rate and treatment for each category of income, including interest and lottery winnings. Let us examine the taxation of these various sources.

Taxation of Income from Other Sources

Income that is categorized as “Income from Other Sources” are taxed in the following ways:

Flat Tax Rates on Winnings

Section 115BB of the Income Tax Act subjects certain types of winnings, such as lottery winnings, game show prizes, and similar amounts, to a flat tax rate of 30%. The tax is deducted at source (TDS) at the same rate if the winnings exceed ₹10,000. The tax is collected upfront when winnings are paid in cash or credited to the winner’s account, thereby creating a TDS liability.

Interest Income

Interest is taxed based on the individual’s income tax slab and is included in the total income from savings accounts, fixed deposits, and other sources. Income from other sources includes interest income as well. For example, Section 80TTB exempts senior citizens from the first ₹50,000 of interest income from savings accounts. Section 194A applies a 10% TDS if the total interest income is more than ₹40,000 (₹50,000 for senior citizens).

Also Read: Tapping into Section 57 of the Income Tax Act, 1961: A Manual to Tax Efficiency

Exceptions

There are some exclusions within this category. For instance, gifts given by specific relatives or on special occasions like marriages, as well as winnings from government-run games, are typically free from taxes. The total amount of gifts from unrelated parties that are exempt from taxation is capped at ₹50,000.

Deductions

Taxpayers may deduct other sources of income under Section 57 of the Income Tax Act. Among the permitted deductions are:

Interest on Securities

Interest expenses paid in order to earn interest income are deductible by taxpayers.

Family Pension

A maximum deduction of ₹15,000 or a third of the amount received as a family pension, whichever is less.

Compensation for Compulsory Acquisition

50% of income may be subtracted to account for interest accrued on compensation received for compulsory acquisition.

Expenses for personal use and some cash payments over ₹10,000, however, are not deductible under this category.

Comprehending the subtleties of income from other sources is for taxpayers because it encompasses a range of income streams that are subject to different tax rates and exemptions. Taxpayers should refer to the most recent provisions under the Income Tax Act.

One of the most critical aspects of wise tax planning is reducing your taxable income. Certain deductions under Income from other sources in income tax can lower your overall tax burden. Let’s explore the deductions under Sections 80TTA, 80TTB, and 57 that are commonly utilized.

Permissible Deductions

Section 57 allows for the deduction of several expenses from gross income, including depreciation on rented assets, insurance premiums, and current repairs. For taxpayers to minimize their tax obligations, they must also comprehend other allowable deductions under this particular category.

Interest Deduction for Savings Accounts under Section 80TTA

Individuals and Hindu Undivided Families (HUFs) can write off interest on savings accounts in banks, co-ops, or post offices up to ₹10,000 under Section 80TTA. Only residents under 60 years old are eligible for this deduction; older citizens can deduct more under Section 80TTB, which allows up to ₹50,000 for a variety of interest income sources, such as fixed deposits and savings accounts. It is noteworthy that taxpayers are required to accurately report this income because banks usually do not deduct tax at TDS on interest from savings accounts.

Deductions for Costs Associated with Interest or Dividend Realization

Section 57 of the Income Tax Act allows taxpayers to deduct expenses that are directly related to earning dividends or interest income. This includes any fee or compensation received in exchange for realizing such income. Nevertheless, specific requirements must be met: the costs must be entirely and solely incurred in order to generate that income, and they cannot be capital in nature. This is especially important for individuals who invest, as doing so may result in expenses related to managing or safeguarding their profits.

Also Read: Understanding Section 16 of the Income Tax Act: Standard Deduction and Rules

Family Pension Deductions

The monthly benefit paid to a deceased employee’s family is known as a family pension, and it is subject to taxation under the heading “Income from Other Sources.” The Act allows a deduction of the lower of ₹15,000 or one-third of the family pension received to lessen the tax burden on this income. This clause protects grieving family members from undue taxes on their pension received as a consequence of the employee’s death while also assisting in alleviating their financial burden.

For those who receive income from other sources, knowing these deductions can have a significant impact on their total tax obligation. To optimize the advantages offered by the Income Tax Act, taxpayers should take the initiative to maintain documentation of their allowable expenses and ensure accurate reporting of their income.

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Now that you have learnt how deductions work, let’s walk through the process of determining taxable income. This section will cover the techniques outlined in Section 145 for precisely calculating income from other sources in income tax.

Calculating Income from Other Sources

Learning the calculations related to this income is necessary for accurate tax filing in India. The following general formula can be used to calculate net earnings:

Net Income = Total Income – Acceptable Refunds – Allowable Deductions

Compilation of Additional Revenue

Taxpayers may report income from other sources using either the cash or mercantile accounting method in accordance with Section 145 of the Income Tax Act. The timing of income recognition is affected by the method selected:

Cash Accounting

Revenue is recorded as soon as it is received.

Mercantile Accounting

Income is recorded as earned regardless of receipt.

Also Read: Understanding Bharat Bond ETF: A Guide to Fixed-Income Investments

Discharges and Offsets

The following are examples of exemptions under this heading:

• Gifts that are accepted under certain circumstances, such as those from family members or during a marriage.
• Interest is received from specific designated instruments, such as PPFs (Public Provident Funds).

Furthermore, you may deduct any other reasonable expenses incurred solely and exclusively to earn the income. By these constituents, taxpayers can adeptly navigate the intricacies of income from other sources in income tax and optimize their tax obligations.

If you receive interest income from fixed deposits, TDS can reduce your returns. Thankfully, there are several simple strategies to prevent unnecessary deductions. Here’s how to maximize the use of Forms 15G/15H, distribute deposits, and plan interest payouts effectively.

Strategies to Avoid TDS on Fixed Deposits

Taxability, exemptions, and methods to evade TDS are required when handling income from FDs under income from other sources in income tax. Below is a summary of the main tactics for reducing TDS on FD interest:

Form 15G/15H Submission

Individuals can submit Forms 15G or 15H to request banks not to deduct TDS from their interest income. This is especially helpful if the anticipated total interest income is less than the TDS threshold:

• Use Form 15G for individuals under 60 with no overall tax liability.
• Senior citizens (60 years of age and up) who are also exempt from taxation should use Form 15H.

Each financial year, both forms must be filed at the start, and they are valid for the entire year. To avoid TDS deductions, they must be submitted prior to the payment of interest. If an individual fails to submit the form on time, they may request a TDS refund when filing their income tax return.

Also Read: Guide on Section 194 of Income Tax Act: TDS on Payment of Dividend

Getting Deposits from Different Banks

Individuals may consider splitting their deposits among several banks to avoid TDS further. TDS can be avoided by maintaining the interest earned from each bank below the threshold (₹50,000 for senior citizens and ₹40,000 for non-senior citizens). With this approach, deposits must be carefully monitored to ensure that no bank pays out more interest than allowed.

Preparing Payments for Interest

Another helpful tactic is to schedule the interest payment dates for several different fixed deposits. By staggeringly arranging these dates, individuals can manage their interest income to remain below the TDS threshold in any given financial year. This approach necessitates careful planning during the deposit setup process to control the amount of taxable interest within each fiscal year.

People can minimize or eliminate TDS on their fixed deposit interest income by using Forms 15G and 15H, distributing deposits among banks, and scheduling interest payouts. Those with a lower overall tax liability will benefit most from these strategies.

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Both taxable and exempt income are critical for making informed financial decisions. There are tax exemptions for certain withdrawals, such as those from PPF and EPF, as well as insurance policies like Keyman Insurance. Let’s take a closer look at what can be excluded from your taxable income.

Exemptions and Exclusions

Below are the applicable exclusions and exemptions regarding income from other sources in income tax. Of particular interest are the tax-free withdrawals from the Employees Provident Fund (EPF) and the Public Provident Fund (PPF), as well as the exclusions related to the Keyman insurance policy.

PPF (Public Provident Fund)

Both the interest accrued and the total amount withdrawn in PPF are exempt from taxation.

Benefits regarding taxes

Contributions to PPF accounts are deductible under Section 80C, with an annual cap of ₹1.5 lakh. At the conclusion of the 15-year tenure, both the interest accrued and the maturity amount withdrawn are entirely tax-free. Because of this, the PPF is a highly recommended investment for tax planning.

Withdrawal Rules

Once the 15-year period has passed, the full amount is refundable without any taxes. Furthermore, subject to specific restrictions, partial withdrawals are permitted starting in the seventh year without taxes.

Also Read: Explore Exemptions Under Section 17, Income Tax Act

The Employee Provident Fund (EPF)

Like the PPF, the interest accrued on EPF and the total amount withdrawn are tax-exempt, provided the employee has worked continuously for at least 5 years. Taxes may apply to withdrawals made before this timeframe.

Keyman Insurance Policy

This is a special kind of insurance that a company takes out in case one of its employees passes away, which would negatively affect the company. When calculating business income, the premiums paid are not deductible as expenses. The employer’s receipt of the Keyman insurance policy proceeds upon the insured’s death and is subject to taxation under the Income from Other Sources heading.

Therefore, even though the insurance can help the company, the way the government treats payouts may result in taxable income.

The Keyman insurance policy represents a specific financial tool that, while beneficial for businesses, has tax consequences under income from other sources. In contrast, PPF and EPF contributions offer significant tax exemptions and promote savings. These nuances are crucial for efficient tax planning and compliance with regulations.

Conclusion

Income from other sources in income tax is important for planning your taxes effectively. These sources can include money you earn from investments, interest from your bank accounts, rental income, and occasional earnings. Each type of income has its own tax rules, which can affect how much tax you owe.

Knowing the ins and outs of tax deductions and exemptions can help you save money on taxes. For example, the interest you earn from a Public Provident Fund (PPF) or certain tax-free bonds isn’t taxed. However, money you win from lotteries or gambling is taxed at a flat rate of 30%. By knowing which types of income are taxable and which aren’t, you can better manage your taxes and avoid fines for not following the rules. You can also deduct certain expenses related to earning your income, like commissions or repair costs, which can lower your taxable income.

To successfully handle your taxes, understand your different income sources and get expert help. This approach not only keeps you compliant with tax laws but also boosts your overall financial health.

Now that you know the importance of managing your income sources and the associated tax implications, it’s time to enhance your overall financial plan. With Tap Invest, you can explore high-yield alternative investment options that surpass traditional savings strategies, offering returns of 16–18% annually. Tap Invest provides intelligent strategy to grow your wealth, whether you’re aiming for long-term growth or need liquidity for more adaptable financial planning. Invest with Tap Invest today.