A guide on the laws governing tax on windfall earnings.
DO WINNINGS QUALIFY AS INCOME?
It’s indeed painful to forego a part of your winning amount, and hence it’s your right to know why you are subjected to pay income tax on winnings, especially when they are not regular source of income like salary. The Income Tax Act 1961 has a quick answer to your query. Under section 2(24) of the Act, windfall earnings in the nature of winnings from lotteries, crossword puzzles, card games, any form of gambling, betting or any type of race (including horse races) which do not have an element of regularity, have been specifically clarified to be income. Being a form of income, it is then subject to taxation.
As per section 56(2)(ib), windfall earnings are classified under the head income from other sources. However, when you are paying your tax at the end of the year, if your total income includes income from sources such as lotteries, card games and so on, under section 115 BB, the total income tax payable will be the aggregate of the amount of tax on income from such activities and the amount of tax that you would have to pay if on the rest of your income.
HOW MUCH TO PAY AS TAX?
The critical question, however, remains — how much to pay on a windfall earnings. You are expected to pay a basic tax of 30% on your winnings. However, including a surcharge and an educational cess of about 3% (2% education cess + 1% secondary higher education cess), you will effectively be taxed at 33.99%. What you need to remember is that even if your net taxable income is below the income tax limit, you still have to pay the above mentioned tax on your winnings.
TDS OBLIGATIONS
Under section 194 B of the I-T Act, the person/ organisation who/ which is paying you an amount (winning) of more than Rs 5,000 has to deduct tax at source effectively at 33.99%. The TDS certificate, thus, issued would be mentioned in form 16A. However, in case of horse racing, it is slightly different. Income by way of winnings from any horse race exceeding Rs 2,500 shall be subject to tax withholding.
Further complications can arise if your winnings are entirely in kind or if they are partly in cash and partly in kind. As per proviso to section 194B, where the winnings from lottery, gambling, etc, are either wholly in kind or partly in cash and partly in kind and the part in cash is not sufficient to meet the liability of deduction of tax in respect of whole of the winnings, the person responsible for paying shall ensure that the tax has been paid in respect of the winnings. In some cases, if the winnings are in kind, then tax is computed on the market value of such winnings.
NO DEDUCTIONS ALLOWED
As per section 58 of the I-T Act, no deductions are allowed on windfall earnings. And you cannot set-off losses incurred in other fields against your windfall earnings. Unfortunately, there is not much scope for tax planning in the case of windfall earnings. However, if the windfall is in kind and the person who has received it feels the tax amount payable by him can hurt his cash flow, then he could consider selling the windfall gain in kind and use the cash for productive purposes. But if the windfall happens to be an asset, then you will have to pay capital gains tax on selling it. Alternatively, you can also consult your financial planner and evaluate his advice to make the best of windfall gain.
DO WINNINGS QUALIFY AS INCOME?
It’s indeed painful to forego a part of your winning amount, and hence it’s your right to know why you are subjected to pay income tax on winnings, especially when they are not regular source of income like salary. The Income Tax Act 1961 has a quick answer to your query. Under section 2(24) of the Act, windfall earnings in the nature of winnings from lotteries, crossword puzzles, card games, any form of gambling, betting or any type of race (including horse races) which do not have an element of regularity, have been specifically clarified to be income. Being a form of income, it is then subject to taxation.
As per section 56(2)(ib), windfall earnings are classified under the head income from other sources. However, when you are paying your tax at the end of the year, if your total income includes income from sources such as lotteries, card games and so on, under section 115 BB, the total income tax payable will be the aggregate of the amount of tax on income from such activities and the amount of tax that you would have to pay if on the rest of your income.
HOW MUCH TO PAY AS TAX?
The critical question, however, remains — how much to pay on a windfall earnings. You are expected to pay a basic tax of 30% on your winnings. However, including a surcharge and an educational cess of about 3% (2% education cess + 1% secondary higher education cess), you will effectively be taxed at 33.99%. What you need to remember is that even if your net taxable income is below the income tax limit, you still have to pay the above mentioned tax on your winnings.
TDS OBLIGATIONS
Under section 194 B of the I-T Act, the person/ organisation who/ which is paying you an amount (winning) of more than Rs 5,000 has to deduct tax at source effectively at 33.99%. The TDS certificate, thus, issued would be mentioned in form 16A. However, in case of horse racing, it is slightly different. Income by way of winnings from any horse race exceeding Rs 2,500 shall be subject to tax withholding.
Further complications can arise if your winnings are entirely in kind or if they are partly in cash and partly in kind. As per proviso to section 194B, where the winnings from lottery, gambling, etc, are either wholly in kind or partly in cash and partly in kind and the part in cash is not sufficient to meet the liability of deduction of tax in respect of whole of the winnings, the person responsible for paying shall ensure that the tax has been paid in respect of the winnings. In some cases, if the winnings are in kind, then tax is computed on the market value of such winnings.
NO DEDUCTIONS ALLOWED
As per section 58 of the I-T Act, no deductions are allowed on windfall earnings. And you cannot set-off losses incurred in other fields against your windfall earnings. Unfortunately, there is not much scope for tax planning in the case of windfall earnings. However, if the windfall is in kind and the person who has received it feels the tax amount payable by him can hurt his cash flow, then he could consider selling the windfall gain in kind and use the cash for productive purposes. But if the windfall happens to be an asset, then you will have to pay capital gains tax on selling it. Alternatively, you can also consult your financial planner and evaluate his advice to make the best of windfall gain.
