Income Tax law has mandated every person to pay tax on their income and to file Income Tax Return when their income exceeds the prescribed limit in previous year. Previous year is the financial year in which the person has earned income but the taxpayer has to pay taxes in the next year which is called as Assessment year. Taxpayers earn income from different sources of income and thus, the income tax law has categorized the sources of income into 5 heads of income under section 14 of the Income Tax Act, 1961. The “Income from other source” is the last and widest head of income out of all the heads of income. Its scope is the widest among all the heads because it includes all the sources of income which are not covered by any other head of income. This is why it is also considered as Residuary Income head under income tax law. This blog will help you to understand the nature and scope of the Income head “Income from other source”.
What is covered under the head Income from Other Source?
There are various provisions under the Income Tax Act which deals with Income from other sources and the Section 56 of the Income Tax Act, 1961 defines the meaning and scope of this head. According to this section, Income from other sources includes two types of income. One it includes those sources of income which are specifically prescribed under the Section 56(1) of the Act. Secondly it includes all those incomes or sources of income which do not fall under any of the other heads of income under Section 56(2).
Let’s first discuss the defined and certain scope of Income from Other Source as per section 56(1). This provision has given the title of Residual head to Income from other sources as it states that any kind of income or earning which cannot be taxed under any of the other 4 heads of income then such Income shall be taxed under this head of income for Income tax purposes.
What are the essential conditions of Section 56(1)?
An income shall be classified as income from other sources in the hands of assesses if the income satisfies following conditions –
- The first and foremost condition is that it shall be an income as per Income Tax Act.
- The next condition is that the income must not have been exempted from tax obligation under any of the provisions of Income Tax Act
- The last essential condition is that the Income cannot be subjected to tax under any other heads of income given under Section 14 of the Income Tax Act .
Now, let’s discuss the Section 56(2). This section deals with the specified incomes which shall be taxed under this head. This provision specifically states certain kinds of income or earning which shall be chargeable to tax under this head of Income for tax purposes.
List of Incomes to be taxed under Section 56(2)
Following incomes shall be taxed under the head ‘Income from Other Sources’ for Income Tax purposes –
- Dividend received from Indian Companies
When an assesses has received income in the form of dividend from any Indian Company then the dividend income shall be chargeable to tax under this head.
- Dividend received from foreign companies
Next, when an assesses has received dividend income from a foreign company then it shall also be chargeable under the head Income from other sources as similar to Indian Companies.
- Interest on Securities like equity etc.
If an assesses has received any income by way of interest on securities such as equity shares etc then such Interest income shall be taxed under this head. Provided that such interest income shall not be taxed under the head profits and gains of business or profession.
- One Time Incomes like winning from lotteries
One time income is an income which is earned either at certain occasions or through certain activities which is non-recurring in nature. The best examples of one time incomes are money earned by winning from any lotteries or by horse racing etc or from any other game or legal activity. Such onetime incomes shall be taxed under this head.
- Interest received on compensation/ reimbursement
According to law, If a taxpayer has received any interest on the amount of compensation or reimbursement earned in certain situations such as compulsory acquisition then such Interest shall be chargeable to tax under this head of income for income tax purposes.
- Gift exceeding Rs. 50,000
Although no expenditure has been made on gifts but still gifts are taxable under this whether received in the form of money or movable or immovable property. Thus, If a taxpayer has received a gift either in cash or cheque or movable or immovable property then it shall be taxed under the head income from other sources. Provided that the market value of gift shall be exceeding Rs. 50,000 to incur a tax liability.
- Sum of money received from employees as contribution for prescribed funds
When an assesses has received a sum from his employees in the form of contribution to Super Annulation fund or Provident Fund or for any other fund then such sum shall be charged under this head of income. Provided that, such income shall not be charged under the head profits & gains of business or profession.
- Key man Insurance Policy, when not taxed under other head
When an assesses has received any sum of money under the Key man Insurance Policy and if such sum is not chargeable under the head ‘salary’ or ‘profits & gains of business or profession’ then such income shall be chargeable to tax under this head of income.
- Income earned by letting assets on hire or purchase, when not taxed under other heads
- If an assesses owns any machinery, plant or furniture and he has let on hire such assets then the income received from hiring of such assets shall be chargeable to tax under this head. Provided that, such income cannot be charged under the head profits & gains of business or profession.
- Moreover, if the assesses has let out machinery, plant or furniture along with building then the income received from letting of building along with such assets then also such income shall be chargeable to tax under this head. Provided that, letting of building shall be inseparable from letting of these assets.
- Other Incomes
Apart from these above-prescribed income there are certain incomes which cannot be taxed under other heads of income thus such incomes shall be taxed under this head –
- Income earned by subletting any property
- Interest received on bank Deposits
- Income by way of Royalty
- Agriculture Income received from a place without India
Deductions available under Section 57 of the Income Tax Act, 1961
Apart from being taxed there are certain expenditures which can be claimed as deductions for the Income from Other Sources under Section 57 of the Income Tax Act, 1961. Following is the list of the deductions allowed for this head –
Income Tax Act
Dividend/ Interest received on Securities
Employee’s contribution made towards Superannuation Fund or Provident Fund
Income received by way of rent by letting plant, machinery or building
One-third of the Family Pension up-to the limit of Rs. 15,000
|Section 57(iii)||Any other prescribed expenditure|
|Section 57(iv)||50% of the interest received on compensation or enhanced compensation subject to specific conditions|
|Section 58(4) proviso||Any income earned by any activity involving maintaining or owning racing horses|
List of Expenses not allowed as Deductions under Income from Other Sources
Likewise there are certain expenditures which cannot be claimed as deductions for Income from other sources under Section 58 of the Income Tax Act, 1961. Following is the list of such expenses –
- Expenditure made for personal use shall be taxed
- Wealth tax shall be taxed as it is not exempted from tax liability
- Any salary or interest payable outside India without TDS deduction shall be taxed
- Expenditure prescribed under Section 40A shall be taxed
Every Income which is liable to tax but cannot be taxed under any of the other heads then such income shall be liable to tax under the head Income from other sources. This process might seem easy but it is not this much easy practically as the user might not know which ITR is applicable on him or what are the deductions and exemptions available. Hence, it is always suggested to seek assistance from Experts for ITR Filing in time with utmost accuracy.
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