How to Save Tax
on Income from Other Sources [Deductions and Exemptions ]
INTRODUCTION
Under this residuary head of income, tax is payable by an assessee in respect of income, profits and gains of every kind which do not fall under any of the other heads of income. In particular, and without prejudice to the generality of the above statement, income chargeable to tax under this head includes, among others, dividends; annuity, winnings from lotteries, crossword puzzles and races including horse races, card games and other games of any sort or from gambling or betting, income from government securities, income from machinery, plant or furniture and also belonging to the assessee let on hire, and any sum received under a Keyman Insurance Policy (from AY 1997-98, if not assessable as salary), if the income is not chargeable to tax under the head “Profits and gains of business or profession” and where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting if it is not chargeable to income tax under the head “Profits and gains of business or profession.”
Deductions — Section 57
The income chargeable to tax under this head is computed after making the following deductions, namely:
(i) In the case of dividends, any reasonable
sum paid by way of commission or remuneration to a banker or any other person
for the purpose of realising such dividend on behalf of the assessee (excluding
a foreign company).
(ia) Deduction as per Section 36(1) (va) in
respect of income of the nature of referred to in Section 2(24)(x).
(ii) In the case of income by way of letting of
plant and machinery, etc. deductions, so far as may be in accordance with the
provisions of Section 30, 31, 32 and 38 like rent, routes, taxes, repairs and
insurance of buildings, depreciation, etc.
(iia) In the case of family pension, standard
deduction of 33-1/3% of the pension subject to a maximum of ` 15,000.
(iii) Any other expenditure (not being in the
nature of capital expenditure) laid out or expended wholly, and exclusively for
the purpose of making or earning such income.
Other Provisions
Personal expenses of the assessee like personal holiday expenses, etc. are not deductible from the income under this head. Likewise, the provisions of Section 40A, 40(a) (iia) and 44D are also applicable to “income from other sources” Section 58. Similarly, the provisions of Section 41(1) are applicable for charging to tax any excessive allowance for deduction which were made in the past Section 59. No deduction is allowed in computing the income from lotteries, crossword puzzles, races, card games, betting and gambling.
Dividends And Income From Mutual Funds
Income from dividends and income from mutual funds is fully exempted from income tax.
A dividend received by a shareholder is deemed to be his income for the previous year in which it is declared, distributed or paid. An interim dividend paid by a company shall be the income of the previous year in which the amount of such dividend is unconditionally made available by the company to the member who is entitled to it.
As per Section 1 4A of the Income Tax Act,
1961, any expendi ture incurred in relation to income not includible in total
income is not allowed as a deduction.. Thus, with effect from AY 2004-05 any
expenditure incurred on earning dividend and units income would not be
deductible, for example, the interest you pay on loan taken for the purpose of
buying the shares or units in question. Always avoid taking loan and then
investing in the stock market in shares and units of equity-oriented mutual
funds.
Winnings From Lotteries, Crossword Puzzles, Races, Gambling, Etc.
Section 2(24) (ix) provides that any winnings from lotteries, crossword puzzles, races, including horse races, card games and other games of any sort, including TV games, or from gambling or betting or any form or nature whatsoever will be included in the definition of “income from other sources”.
It is clearly provided in Section 58 that no deduction in respect of any expenditure or allowance would be allowed in connection with income by way of winnings from lotteries, crossword puzzles, races—including horse races, card games and other games of any sort or from gambling of betting of any form or nature.
Big Gifts To Be Taxed As Income
Till FY 2003-04, gifts were not subject to tax. The Finance (No. 2) Act, 2004 amended the definition of income so that for FY 2006-07, that any sum above `50,000 received by an individual or a Hindu undivided family from any unrelated person, in cash or by way of credit, otherwise than by way of consideration of goods and services, shall be included within the definition of income under Section 2(24) of the Income Tax Act. Gifts upto the aggregate value of `50,000 will, however, remain exempted from the purview of being taxed as Income from other sources. There are, however, certain exceptions, such as the entire value of gifts received on the occasion of one’s marriage and gift from relatives, etc. Moreover, the sum of money
received from local authority, or any fund
or foundation or university or hospital or other medical institution as
mentioned in Section 10 (23C) or the trust or institution registered under
Section 12AA would be exempted without any upper limit.
This means that if any gift is received, say, from a charity trust by a meritorious student for higher studies of, say, ` 4 Lakh then such amount would be exempted from being taxed as income as per Section 56. Similarly, if any help is received from some trust, etc. for medical treatment, say of 2 lath then also it would be tax exempt. However, this benefit would not be available on grant for education or medical help if received from an institution from abroad because the same is not covered in the exemption clause; the exemption only is for trusts or institutions mentioned in Section 10 (23 C) or Section 1 2AA of the Income-tax Act, 1961.
As per the Finance (No. 2) Act, 2009 Section 56 has been amended from 1- 10-2009 to provide that the value of any property received without consideration will also be included in the computation of total income of the recipient. Such properties will include immovable property being land or building or both, shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures or any work of art.
As per the Finance Act, 2010, “Bullion”
would also be included in income from other sources if received from a
non-relative and if it exceeds ` 50,000 in a year.
In a case where an immovable property is received without consideration and the stamp duty value of such property exceeds fifty thousand rupees (`50,000), the whole of the stamp duty value of such property shall be taxed as the income of the recipient.
If an immovable property is received for a
consideration which is less than the stamp duty value of the property and the
difference between the two exceeds ` 50,000 (fifty thousand rupees) (inadequate
consideration), the difference between the stamp duty value of such property
and such consideration shall be taxed as the income of the recipient.
In a case where movable property is received without consideration and the aggregate fair market value of such property exceeds fifty thousand rupees (` 50,000), the whole of the aggregate fair market value of such property shall be taxed as the income of the recipient.
It is also provided that:
(i) The value of movable property shall be the fair market value as on the date of receipt in accordance with the method prescribed; and
(ii) In the case of immovable property, the value of the property shall be the “stamp duty value” of the property.
The above provisions are applicable with effect from 1st October, 2009 and will accordingly apply for transactions undertaken on or after such date.
It is further provided by the Finance (No. 2) Act, 2009 that when the capital gain arises from the transfer of a property as mentioned in the above paragraph then for the purpose of capital gain the cost of acquisition of such property shall be deemed to be the value which was taken for the above purpose of Section 56.
Gifts received from specified relatives, however, continue to be exempt from tax. Accordingly, the following sums shall not be included in the taxable income
(a) The sum received by, or credited in the account of: (i) any individual from a relative out of natural love and affection, or (ii) any individual or Hindu undivided, family under a Will or by way of inheritance, or (iii) any employee or the dependent of the deceased employee from an employer, by way of bonus, gratuity or pension or insurance or any such other sum solely in recognition of the services rendered by the employee, or
(b) Any sum received in contemplation of death of an individual or karta or member of a Hindu undivided family, or
(c) Any income referred to in Section 10 of the Income Tax Act or any other income which is exempt or not included in the total income under the Act or
(d) any sum received on account of transfer referred to in Section 47 under Income Tax Act.
As per the Finance Bifi, 2012 in the case
of a Hindu Undivided Family amount received from any member of the HUF would
not be taxable.
The definition of “relative” for the purpose of this provision is as under:
(i) spouse of the individual,
(ii) brother or sister of the individual,
(iii) brother or sister of the spouse of
the individual,
(iv) brother or sister of either of the
parents of the individuals,
(v) any lineal ascendant or descendant of
the individuals,
(vi) any lineal ascendant or descendant of
the spouse of the individual, and (vii) spouse of a person referred to in items
(ii) to (vi) mentioned above.
Taxation Of Cash Credits, Unexplained Money, Investments & Unexplained Expenses
As per the Finance Bill, 2012 on and from the financial year 2012- 2013 the unexplained amounts relating to cash credits or unexplained money and investments as also the unexplained expenses would now be taxed at the maximum marginal rate of income tax, namely 30% plus surcharge and cesses as applicable. It is also provided that no deduction in respect of any expenditure or allowance shall be allowed to the assessee under any provision of the Income Tax Act in computing the above items of deemed income. The benefit of the basic income tax exemption limit would not be available.
Deduction Of Interest On Loan
While computing income from other sources, one of the most important deductions which you can claim is the deduction for payment of interest on loan. There is no upper limit of the rate of interest. An assessee can take a loan from any person and at any rate of interest. For instance, the interest paid on loan taken for hire of plant and machinery, etc., would be allowed deduction. However, as per the Finance Act, 2003 the dividend income as also the income from units of mutual funds is exempted from income tax. Hence from the point of tax planning do not borrow money to make these investments because the
interest on loan, if any, now paid by you
would not be allowed as a deduction in view of the complete tax exemption of
dividend income and income from units of mutual funds.
Key Points
• Expenses incurred on earning any taxable income are tax deductible.
• Interest paid on loan taken to invest in the asset would be deducted only if the income is taxable.
• In respect of exempted incomes interest or any other expense would not be deducted.