Budget 2024 Update
In India, lottery winnings continue to attract a flat tax rate of 30% under Section 115BB of the Income Tax Act. This tax is applied without any deductions or exemptions, making it unique compared to other income types.
Additionally, a 4% health and education cess is imposed on the tax amount, effectively increasing the overall tax burden.
For those fortunate enough to win prizes exceeding INR 50 lakh, a surcharge is applicable:
- 10% for winnings between INR 50 lakh and INR 1 crore
- 15% for winnings exceeding INR 1 crore
Awards and their Tax implication
When it comes to awards, they are considered to be tax-free if the Government of India approves them. The taxability of awards depends on the reason why the award was given, who is giving the award, and whether the Central or the State Government approved the award. CBDT clarified in a 2014 notification that rewards from the central or state governments to Olympics, Commonwealth, or Asian Games medalists are exempt under Section 10 (17A) of the Income-Tax (I-T) 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 the Government notifies it under Section 10 (17A) of the Income Tax Act
- The Government awards 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 an unapproved authority gives it, 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.
Tax Rate on Award Prizes
Awards that the Government does not approve 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 individual tax slab rate. 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.
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.
Did You Know?
With Olympic medallists receiving substantial prize money, many might wonder whether these awards are subject to taxation. In India, athletes like Manu Bhaker, Neeraj Chopra, Sarabjot Singh, Swapnil Kusale, the men's hockey team's bronze medallists, and Aman Sehrawat can rest easy. Cash rewards and gifts from the government are exempt from taxes. This policy also extends to past Olympic heroes such as Abhinav Bindra and PV Sindhu, who have not been taxed on their prize money.
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.
TDS Applicability On Lottery Or Game Show Income
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.
Example
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% |
INR 374,400 |
Tax on income
| Salary income |
INR 10 lakhs |
| Income from other sources (FD interest) |
INR 50,000 |
| Income from other sources (winnings) |
INR 12 lakhs |
| Gross total income |
INR 22,50,000 |
| Less: Standard deduction on salary |
INR 50,000 |
| Less: Section 80C deductions |
INR 1,50,000 |
| Less: Section 80D deductions |
INR 20,000 |
| Net total income |
INR 830,000 |
| Tax payable |
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/-
Types of Lottery Winnings Subject to Tax
Lottery winnings are subject to a fixed flat tax of 30% under Section 194B.This rate does not change according to the amount won or the receiver's tax bracket.
- State Lotteries: Each Indian state that operates its own lottery schemes that works as per the regulation of its respective state government. These lotteries are legal but are restricted to the state’s boundaries.
- Central Lotteries: The Central Government can authorize larger-scale lotteries that span multiple states. The tax implications for these central lotteries are the same as for state lotteries, with winnings taxed at 30%, along with cess and surcharge.
- Online Lotteries: The rise of digital platforms has led to the popularity of online lotteries, which can be hosted either within India or abroad. Online lottery winnings are taxed at a standard rate of 30%, plus cess and surcharge.
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.
Tax On Winnings From Online Games
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%.
When it comes to reporting these winnings, "Income from other sources" is the designated category in the income tax returns. Missing reporting this can lead to notices and scrutiny. Consult Tax Experts.
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.
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