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Tac Planning: The Prize Money is Taxable

THE festive season has just gone by – first, it was Diwali, followed by Christmas and then New Year. Several organisations launch lotteries and similar other schemes during this time to attract consumers. The prizes vary from a few thousand rupees of cash awards to expensive pens, watches and cars. Many people have enquired whether the winnings received in cash or kind have any tax angle for the recipient or the payer/sponsor of such scheme.


   It is pertinent to note that according to the provisions of the Income-Tax Act, 1961, where the total income of a taxpayer includes any income by way of race (other than the income from the activity of owning and maintaining race horses) or card game and other games of any sort or from gambling or betting, the same shall be taxable at the rate of 30%. Therefore, if the taxpayer receives any such award/winnings, then such winnings will be liable to tax as part of his total income for a particular tax year.


   An issue arises, whether a particular scheme is in the nature of a lottery or not. In this context, one can refer to judicial precedents wherein following key factors have been considered to constitute it as a lottery scheme. These inter-alia include where the prize is given as part of the overall scheme or some other advantage is given in the nature of a prize, the prize is distributed by chance and where some consideration is paid or promised for purchasing such chance.


   In this context, it is also important to note that the person responsible for paying to any person any income by way of winnings from any lottery or cross word puzzle for an amount exceeding 10,000 is required to deduct income-tax thereon at the rates in force, currently being 30%, at the time of payment of such money. Thus, the payer is also responsible to deduct tax at source before giving the prize/award.


   A question arises where winnings are not exclusively in cash but are either in kind or are in a combination of cash and kind then— whether the tax is required to be withheld even in those cases. The answer to this again is in the affirmative. Thus, in a case where the winnings are wholly in kind or partly in cash and partly in kind but the cash portion of such winnings is not sufficient to meet the liability of tax deduction in respect of whole of the winnings, then the person responsible for paying such winnings has to ensure that the tax has been paid in respect of the same, before releasing the winnings. Therefore, an obligation has been cast on the payer, irrespective of whether the winnings are in cash or in kind to ensure that the tax is deducted/duly paid before the winnings are released in cash or in kind.



 

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