Income Tax on Awards & Prizes: Lottery, Game Shows, and Puzzle
Awards are those that are given to individuals for their talent, skill, achievement, and brilliance in a particular field. Film awards, television awards, sports awards, national awards, etc., are given to individuals who perform well in their respective fields. These awards might be national or international. Prizes, on the other hand, are given to individuals who win in a particular form of game. These prizes can be from lottery, horse races, puzzles, etc., and the prize can be given in cash or in kind. Awards and prizes can be given in two ways –
- In cash
- In-kind, for instance, awards in the form of gold, property, car, appliances, etc.
When it comes to awards and prizes, many individuals do not understand their tax implications. They wonder whether the award or the prize that they received would be taxable or not. What do you think? Let us discuss this further.
Awards and their tax implication
When it comes to awards, they are considered to be tax-free if they are approved by the Government of India. The taxability of awards depends on the reason why the award was given, who is giving the award, and whether the award was approved by the Central or the State Government.
If the award is given in the public interest and is approved by the Government, it would be considered tax-free under Section 10 (17A) of the Income Tax Act. The Indian Government has a list of completely tax-free awards in the hands of the awardee. These awards include the following –
- National Awards
- Nobel Prize if it is notified by the Government under Section 10 (17A) of the Income Tax Act
- Awards are given by the Government to winners of the Olympics, Asian Games, Commonwealth Games, etc.
- Arjuna Award
- Bharat Ratna Award, etc.
If, however, the award is not approved by the Central or the State Government or it is given by an unapproved authority, it would become taxable in the hands of the awardee under Section 56(2) of the Income Tax Act. The money received under the award would be mentioned under the head ‘income from other sources’, and it would be taxed.
Common examples of taxable awards include the following –
- Wisden Cricketer Award
- ICC Cricket Awards
- Filmfare Awards
- Grammy Awards, etc.
Prizes and their tax implication
Prizes and winnings are always taxable in the hands of the winner. The amount of prize won would be recorded under the head ‘income from other sources’ and subject to tax as per Section 56(2) provisions. Examples of taxable prizes include the following –
- Winnings from lotteries, crossword puzzles, horse racing, etc.
- Winnings from a game show like Kaun Banega Crorepati, Dance India Dance, etc.
- Winnings from sporting events, etc.
The Rate of Tax on Award Prizes
Awards that are not approved by the Government and prizes are taxed at the rate of 30%. Cess is added to the tax rate, which brings the total tax rate to 31.2%. This rate would be independent of the tax slab rate of the individual. This means that even if the individual’s income falls in the 20% slab rate, winnings from awards and prizes would still be taxed at @31.2%. The item's market value is considered if the prize or winning is received in kind. The tax is then levied on the item's market value.
Deductions and exemptions on income from awards and prizes
No deductions or tax-free exemptions would be allowed to be deducted from the winnings if they are taxable. So, the taxpayer cannot claim deductions under Chapter VI A of the Income Tax Act (Section 80C, Section 80D, etc.) on the winnings that are taxable.
If the amount of the award or the prize is more than INR 10,000, TDS would have to be deducted from the winnings before paying it to the winner according to the provisions of Section 194B.
Anil won a game show, receiving INR 2 lakhs in cash and a car worth INR 10 lakhs. He had income from a salary of INR 10 lakhs and income from fixed deposit interest at INR 50,000. He invested INR 1.5 lakhs in Section 80C and INR 20,000 towards his health insurance policy. His tax liability would be calculated as follows –
Tax on winnings
|Cash prize received
|INR 2 lakhs
|Market value of car won
|INR 10 lakhs
|Total taxable winnings
|INR 12 lakhs
|Tax @ 31.2%
Tax on income
|INR 10 lakhs
|Income from other sources (FD interest)
|Income from other sources (winnings)
|INR 12 lakhs
|Gross total income
|Less: Standard deduction on salary
|Less: Section 80C deductions
|Less: Section 80D deductions
|Net total income
INR 12,500 + 20% of INR 3,30,000
= INR 12,500 + INR 66,000
= INR 78,500
Total tax payable = INR 374,400/- + INR 81,640/- = INR 4,56,040/-
If you win awards or prizes, check whether they are approved by the Government or not. If the award is approved by the Government, you don’t have to pay taxes. If, however, the award is not approved, tax would have to be paid. Understand the implications of taxation and how much tax is payable so that you don’t face any penalty from the income tax department.
Rules for Income Tax on Lottery or Game Show Income
The income tax rules for lottery or game show income in India are governed by the Income Tax Act 1961 provisions. Here are some important rules and guidelines:
- Income from Other Sources: Lottery winnings or game show winnings are considered "income from other sources" under the Income Tax Act.
- Taxable Amount: The entire amount won from a lottery or game show is taxable. It is included in the individual's total income for the relevant financial year.
- Tax Rate: Lottery or game show income is subject to income tax at the applicable slab rate. The tax rates vary based on the income slab the individual falls into, as per the prevailing income tax rates for the relevant financial year.
- TDS (Tax Deducted at Source): The payer or organizer of the lottery or game show is responsible for deducting TDS at the applicable rate before making the payment to the winner. They are required to deduct tax on the winnings and issue a TDS certificate to the winner.
In the case of winnings from horse races, TDS will be applicable if the amount exceeds Rs 10,000.
- TDS Rate: The TDS rate for lottery winnings is 30% u/s 194B of the winning amount (plus applicable surcharge and cess). For game show winnings, the TDS rate is also 30% (plus surcharge and cess) unless the winner provides a valid Permanent Account Number (PAN), in which case the TDS rate is 31.2% (including surcharge and cess).
- Reporting and Filing of Income Tax Return: If the total income, including the lottery or game show winnings, exceeds the taxable income threshold, the individual is required to file an income tax return. The winnings should be reported as "income from other sources" in the income tax return.
- Deductions and Exemptions: No specific deductions or exemptions are allowed against lottery or game show income. The entire amount is subject to tax at the applicable rate.
- Record-keeping: It is important to maintain proper documentation and records of the lottery or game show winnings, including the TDS certificate received from the payer or organizer. These records should be retained for reference during income tax assessments or inquiries.
The Increasing Popularity of Online Gaming and its Tax Implications
The world of online gaming, particularly real-money rummy, poker, and other similar games, has seen a meteoric rise in popularity. This surge can be attributed to the widespread adoption of smartphones, which provide individuals with the freedom and access to a virtual world brimming with opportunities. This growth is driven by both players seeking thrills and excitement from games like cards and sports and businesses seeing a lucrative profit potential. Additionally, it has opened up a new route for individuals to earn money from the comfort of their homes, even leading some to pursue professional gaming careers.
However, with earning comes the responsibility to pay taxes. Section 194B of the Income Tax Act in India mandates the deduction of Tax Deducted at Source (TDS) on winnings from various sources, including crossword puzzles, card games, lotteries, quiz shows, and online gaming. This applies only when the winnings exceed Rs. 10,000.
Therefore, if you've won big in a game, contest, or lottery, understanding Section 194B is crucial. It clarifies who is responsible for deducting TDS, how much is to be deducted, and the consequences of non-compliance.
Simply put, Section 194B requires businesses or organizations distributing prizes to withhold income tax at the source before paying out winnings exceeding Rs. 10,000. The current TDS rate on such winnings is 30%, with the total tax liability, including surcharge and cess, amounting to 31.2%.
Winning award prizes for playing online games is undoubtedly a moment of joy despite the fact that the price comes with a tax cut. And if you are not tax savvy and tax always confuses you, our Tax Advisory Service can be a game changer for you.
Things You Need to Know Regarding TDS U/S 194B
- The section applies to winnings from crossword puzzles, card games (including online games like rummy and poker), lotteries, quiz shows, dancing and singing contests, and similar games of chance or skill.
- TDS only needs to be deducted if the winnings exceed Rs. 10,000.
- The responsibility to deduct TDS lies with the person or organization paying out the winnings. This could be the casino, gaming platform, competition organizer, etc.
- The payer (who deducts TDS) needs to deposit the deducted amount with the government and issue a Form 16A to the winner, which they can use to claim the deducted amount while filing their income tax return.
Frequently Asked Questions
Q- Who is required to deduct TDS from winnings?
TDS deduction should be made by the authority paying the winnings to the winner. The prize-giving organization is responsible for deducting TDS and then paying the winnings.
Q- Would the winnings be taxed at the tax slab rate?
No, winnings are taxed at a flat rate of 31.2%. They are not taxed at the tax slab rate of the individual.
Q- When will awards be tax-free?
Awards would be tax-free only if they are approved by the Government.
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