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What is Income from Other Sources?

The Income Tax Department classifies income into five categories for streamlining the process of income tax reporting. They are:

  • Income from Salary

  • Income from House Property

  • Income from Capital Gains/Loss

  • Income from Business and Profession

  • Income from Other Sources

Therefore, ‘Income from Other Sources’ can be defined as income that is not included in any of the other listed categories. Besides, there are certain other incomes that are always taxed under this category.

An overview of ‘Income from Other Sources’

  • Section 56(2)(i) of the Income Tax Act, 1961 mentions that dividends will always be taxed under this category. However, dividends from companies based in India, except those covered by Section 2(22)(e), are exempt from tax under Section 10(34).

  • Income from horse races, gambling, betting, lotteries, crossword puzzles are taxable at a rate of 30% under this head.

  • Income in the form of interest gained from compensation or from enhanced compensation is taxable under this category. However, 50% of such income is liable for a deduction.

  • Gifts received by an individual or one who qualifies under the Hindu Undivided Family (HUF) are also taxed under this category.

  • Income by way of interest from individuals with three or more Fixed Deposits.

  • Income of more than Rs.10,000 through Recurring Deposits are liable to deductions at a rate of 10%.

  • Interest of up to Rs.10,000 received from savings account in a bank or post office or co-operative society that functions like a bank, as mentioned in Section 80TTA. This is applicable for residential individuals, that is, individuals till the age of 60 years, and HUF.

  • Income earned from Fixed Deposit, when combined with your source of income like salary, is liable for tax deductions.

  • Income from PPF and EPF (after a service of at least 5 consecutive years), which are exempt from tax deductions, qualify under this head.

  • Income through the Family Pension scheme, that is, the income that one receives on behalf of a deceased. This income attracts a deduction of Rs.15,000 or one-third of the family pension amount, whichever is lesser.

  • These incomes are taxable under this head, if they are not taxed under the head “Profits and gains of business or profession”:

    • Donation or contribution to a welfare fund for employees received by an employee, as specified in Section 56(2)(ic) of the Income Tax Act.

    • Income in the form of interest on securities, as per Section 56(2)(id).

    • Income by way of hiring or renting out of machinery, plant or furniture, as mentioned in Section 56(2)(ii).

    • Income by way of renting out of machinery, plant or furniture along with building under Section 56(2)(iii).

    • Any amount received under a Keyman Insurance Policy, including bonus, as per Section 56(2)(iv).

Tax Deduction That Cannot Be Claimed Under the Head ‘Income from Other Sources’

The deductions that cannot be claimed during computation of ‘Income from other sources’ are:

  • Personal expenses

  • Amount mentioned as per Section 40A is not deductible

  • Taxable amount paid under the category ’salaries’ and payable outside India taxes have not been paid or deducted at source

  • Sum paid towards Wealth Tax that is not deductible

  • Interest that can be charged outside India on which taxes have not been paid or deducted at source

Importance of the method of accounting

Taxable income under the category ‘Income from Other Sources’ is calculated in accordance to the method that the assessee regularly follows. For instance, if the assessee follows the mercantile system, his/her income will be calculated on accrual basis. However, the basis of charge does not get affected by the method of accounting in case of income from interest on compensation or on enhanced compensation and dividend income.

FAQs

What are tax-saving FDs?

You can save tax on FDs by opting for FDs which have a 5-year lock-in period. If you invest an amount of up to Rs.1,50,000 towards these FDs, you will be eligible for deduction under Section 80C of the Income Tax Act, 1961. However, the interest is taxable like a regular FD.

Do I need to fill up an ITR Form if I earn income from Fixed Deposit and Recurring Deposit?

If your annual income is more than Rs. 2,50,000, you will have to file for income tax returns. If your income is less than Rs. 2,50,000 and the bank where you hold the FD account(s) has deducted TDS, you have to file for tax return to claim refund on the extra TDS deductions.

I have invested in shares of a foreign company. I have received the dividends this year. Do I have to declare this income or will this income be exempted from tax deductions because the company is not based in India?

The tax exemptions are applicable only when you receive dividends from companies that have paid towards Dividend Distribution Taxes (DDT). Since a foreign company has not paid DDT, you will not be eligible for tax exemptions and have to declare the income earned from dividends while filing for income tax returns.

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