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Income From Other Sources: Meaning, Exemptions, Deductions & Examples
Income Tax Department bifurcates income into 5 parts:-
- House property
- Business/ profession
- Capital gain
- Income from other sources
Income from Other Sources refers to any income that is not derived from employment, business, or profession. It is a residual category of income that includes various types of income, such as interest on savings accounts, fixed deposits, dividends from investments, rental income, and gifts received etc. This income does not count under any of the other heads of income.
While filing income tax returns via ITR 1 taxpayers usually need clarification about what comes under income from other sources & this confusion leads to trouble. Trouble comes in the form of penalty & interest
Therefore, here we will Discuss about other sources income
Heads of Income
Under the Income Tax Act, a taxpayer's earnings or income are categorized into five heads, and it is essential to correctly classify the income under these heads for accurate tax calculation. The five heads of income are as follows:
- Income from Salary: This includes earnings from employment, such as basic salary, allowances, bonuses, commissions, and any other benefits received from an employer.
- Income from House Property: This head includes income generated from owning and renting out a house property, whether residential or commercial. Rental income and deemed rental income from self-occupied properties are considered under this head.
- Income from Business or Profession: This head includes income earned from running a business or carrying out a profession, such as consulting, freelancing, or any trade-related activities.
- Income from Capital Gains: Capital gains arise when there is a profit or loss from the sale of capital assets like property, stocks, mutual funds, or other investments.
- Income from Other Sources: This head encompasses all residual income sources that do not fall under the other four heads. It includes interest income, dividends, lottery winnings, and any other income not covered elsewhere.
What is Income from Other Sources?
According to section 56(1), of the Income Tax (IT) Act, 1961, Income from other sources includes all income you earn from other sources. In simple words, if any income can not be declared under any other income heads. it will come under this head. Income from Other Sources is a category of income that includes all types of income that cannot be classified under any other head of income such as salary,house property, business or profession,and capital gain.
Some common examples of income from other sources are:
- Interest earned on the savings account, fixed deposits, recurring deposits, and other financial instruments
- Rental income earned from a property owned by an individual
- Dividend income earned from shares and mutual funds
- Income earned from winning lotteries, races, card games,other games like gambling or betting.
- Income earned from letting out machinery or equipment
- Any gift received that exceeds Rs. 50,000 in a financial year.
Interest earned on a savings account is a common type of income under the head 'Income from Other Sources'. This income is taxable as per the income tax slab rates applicable to the individual. It is important to note that the bank or financial institution where the savings account is held deduct tax at source (TDS) on the interest earned on savings account, if the interest earned exceeds Rs. 40,000 per year.
Individuals are required to report the interest earned on their savings account while filing their income tax returns. The interest earned on a savings account can be easily calculated by referring to the bank statement or by checking the passbook entries.
Deduction on Interest Income Under Section 80TTA
individuals can claim a deduction on the interest income earned from savings accounts under section 80TTA of the Income Tax Act.
The deduction under section 80TTA is available for interest earned on savings accounts held with a bank, co-operative society or a post office. The maximum deduction that can be claimed under this section is Rs. 10,000 in a financial year.
If the interest earned on the savings account exceeds Rs. 10,000 in a financial year, then the excess amount will be considered as taxable income under the head 'Income from Other Sources'. It is important to note that the deduction under section 80TTA is not available on interest earned on fixed deposits, recurring deposits or any other type of deposits.
Tax on Fixed Deposits
Interest earned on fixed deposits is considered as income under the head 'Income from Other Sources' and is taxable as per the individual's income tax slab rate. The bank or financial institution where the fixed deposit is held deducts tax at source (TDS) on the interest earned on fixed deposits, if the interest earned exceeds Rs. 40,000 per year. Senior citizens,can enjoy an income tax exemption upto Rs 50,000 on the interest income they receive from fixed deposits with banks, post offices etc., under Section 80TTB.
It is important to note that TDS is deducted on the total interest earned on fixed deposits, if the amount of interest earned exceeding Rs.40000 or Rs.50000 as the case may be.. Therefore, even if the interest earned on a fixed deposit is less than Rs. 40,000 per year, individuals are required to report the interest earned while filing their income tax returns.
Avoiding TDS on Fixed Deposits
Avoiding TDS (Tax Deducted at Source) on fixed deposits can be challenging, as banks are required to deduct TDS on interest income if it exceeds a certain threshold. However, there are a few strategies you can consider to minimize the impact of TDS on your fixed deposits:
- Submit Form 15G/15H: If you are below the taxable income threshold, you can submit Form 15G (for individuals below 60 years of age) or Form 15H (for senior citizens above 60 years) to the bank. These forms declare that your total income is below the taxable limit, and the bank will not deduct TDS on your fixed deposit interest.
- Distribute Investments Across Banks: Each bank applies TDS separately on the fixed deposit interest. By distributing your fixed deposits across different banks, you can stay below the TDS threshold for each bank and avoid TDS on your interest income.
- Opt for Cumulative Fixed Deposits: Instead of opting for regular fixed deposits with periodic interest payouts, consider choosing cumulative fixed deposits. In cumulative fixed deposits, the interest is reinvested, and you receive the entire interest amount along with the principal at maturity. This helps defer the TDS liability until the maturity date.
- Invest in Tax-Free Bonds: If you are looking for fixed-income investments with no TDS, consider investing in tax-free bonds issued by certain government entities. The interest income from these bonds is tax-free, and there is no TDS deduction.
- Invest in Tax-Saving Fixed Deposits: Under Section 80C of the Income Tax Act, you can invest in tax-saving fixed deposits offered by banks for a lock-in period of five years. The interest earned is eligible for a deduction up to Rs. 1.5 lakh, and there is no TDS deduction.
- Plan Your Interest Payouts: If you have multiple fixed deposits, consider staggering the interest payout dates to keep the income below the TDS threshold in each financial year.
Income from Other Sources in ITR 1 Sahaj Form
While filing ITR 1 online, you’ll have to disclose all the income from other sources as a total amount. As shown in the screenshot below, this disclosure has to be made under tab “Computation of Income & Tax” in the field “B3: Income from Other Sources (Ensure to Fill Sch TDS2)”.
How to compute the net earnings under the Income from Other Sources?
The net earnings under the head 'Income from Other Sources' in income tax are calculated as follows:
Gross Income from Other Sources-Deductions allowed under Section 57= Net Income from Other Sources.
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Reporting Fixed Deposit and Recurring Deposits in Your Tax Return
Interest earned on fixed deposits and recurring deposits is considered as income under the head 'Income from Other Sources' and is taxable as per the individual's income tax slab rate. Therefore, individuals are required to report the interest income earned from fixed deposits and recurring deposits while filing their income tax returns.
In order to report the interest earned on fixed deposits and recurring deposits in the income tax return, individuals need to calculate the total interest earned from these deposits during the financial year. This can be done by referring to the interest certificate provided by the bank or financial institution where the deposit is held.
Once the total interest earned is calculated, individuals can report it in the income tax return under the head 'Income from Other Sources'. It is important to note that the total interest earned on fixed deposits and recurring deposits is added to the individual's total income and taxed as per the applicable income tax slab rate.
Examples of Income from Other Sources
Income from Other Sources includes various types of earnings that do not fall under the other four heads of income (i.e., Salary, House Property, Business or Profession, and Capital Gains). Here are some examples of income that are categorized under "Income from Other Sources":
- Interest Income: Interest earned on savings accounts, fixed deposits, recurring deposits, and other bank deposits is considered income from other sources.
- Dividend Income: Dividends received from investments in shares of companies are classified as income from other sources.
- Rental Income from Machinery, Plant, or Furniture: If you rent out machinery, plant, or furniture, the rental income is categorized under this head.
- Winning from Lotteries, Crossword Puzzles, and Game Shows: Income from lottery winnings, crossword puzzles, and game shows is considered as income from other sources.
- Gifts and Cash Prizes: Gifts or cash prizes received on special occasions or events are considered as income from other sources.
- Royalty Income: Income received as royalty for granting the use of intellectual property like copyrights, patents, or trademarks is categorized as income from other sources.
- Family Pension: Pension received by the family members of a deceased employee is treated as income from other sources.
- Interest on Tax Refunds: Interest received on tax refunds from the Income Tax Department is also considered income from other sources.
- Commission or Brokerage Income: Commission or brokerage received for providing services or facilitating transactions is categorized under this head.
- Annuity Income: Periodic payments received from annuity plans or insurance policies are considered as income from other sources.
Frequently Asked Questions
Q- Under which head pension income & family pension income are taxable?
Pension income is taxable under “Income from Salary,” while family pension income is taxable under “Income from other Sources”.
Q- How to save tax on Fixed Deposits?
To save tax, make a fixed deposit with a lock-in period of 5 years. Now, claim the amount of investment as a deduction u/s 80C up to Rs.1,50,000. But note that interest from such FD is taxable as income from other sources. A person can file forms 15G and 15H also when their total income is less than the basic exemption limit. By filing it TDS will not be deducted.
Q- Do I have to show interest income in ITR 1 if TDS is already deducted?
Yes, you should disclose interest income under the head Income from Other Sources in ITR 1 irrespective of tax deduction and later claim the tax credit using Form 16A.
Q- Can I claim a deduction of expenses incurred to earn Income from Other Sources?
Yes, you can claim a deduction of such expenses provided they directly relate to such income.
Q- I received a painting as a gift. Is it taxable?
The asset includes “painting” as per Income Tax Act and If the value of such gift exceeds Rs.50,000, it will be taxable under the head Income from Other Sources.
Q- Do I have to pay tax on gifts received on the occasion of marriage?
No, gifts received (whether in cash or kind) on the occasion of marriage are totally exempt from income tax.
Q- On what amount I have to pay tax if the value of the gift is more than Rs.50,000?
If you have received this gift on any occasion (other than marriage) & its value exceeds Rs.50,000. Then the whole amount will become taxable under the head Income from Other Sources.
Q- How can I file income tax returns for my winnings from online betting sites in India? Will the IT department cause issues if I declare the amount in “income from other sources”?
Winnings will be taxable under the Head of “Income From Other Sources” and will be liable to tax @30%.
Q- What are casual incomes? What is its tax treatment under the Income Tax Act?
Casual income means income that is not earned in a regular manner, such as lottery income, horse races, etc., and they are charged @30%
Q- Do I need to fill in the “income from other sources” field? A company has deducted TDS, as I was on contract. I received Form 16A. If I leave it blank, will it be fine?
It would not be appropriate to leave it blank. It is always recommended to show income in ITR whether TDS has been deducted or not.
Q- What is the tax treatment of interest earned from a joint bank account? In whose income returns should such income be reflected?
It is incorporated in that person’s return whose PAN is registered with the bank.
Q- My wife is giving home tuition and I want to show that income in an income tax return. Where should I show that? Does she need to pay GST on that amount?
If tuition income is part-time, it can be shown under Income from other sources, but if the main source of income is Tuition fee, then it will be considered as business income, and GST will be applicable whenever gross receipts cross the threshold limit.
Q- What would happen if we don't declare “income from other sources”?
The Income Tax department could issue notice to the taxpayers who fail to include the income from other sources.
Q- I received Form 16A from the bank & TDS certificate for the amount paid on interest on my Tax Saver FD (80C), while filing IT returns should I again declare this interest amount? Under the “income from other sources”?
Yes, it is liable to include income from other sources.
Q- What are the general incomes under the head income from other sources?
Income from dividends, one-time income, Interest from deposits, Income from machinery, plant or furniture, and many more which are not taxed under any other head of income.
Q- Can I deduct expenses from income from other sources?
Yes, if there is any expense incurred for earning income, it can always be deducted except income from lottery, betting and gambling.