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 on Prize Money Received in Cash or Kind
When the prize money is received in kind (cars, bikes, or other products), it is subject to TDS. In such a case, the prize distributor is required to deduct the TDS at source before the item is handed over to the recipient. The tax is levied and calculated based on the market value of the goods. The prize distributor can either recover the tax amount from the recipient or bear it themselves.
Such winnings attract a tax rate of 30% plus a cess, like health and education cess, at 4%, thus making the effective tax rate 31.2%.
If the income is received in cash or in both cash and kind, the total tax will be calculated on the cash portion of the prize and the market value of the prize received in kind at the effective rate of 31.2%. The total tax amount is deducted from the prize received.
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 at 31.2% before paying it to the winner according to the provisions of Section 194B.
The benefit of the basic exemption limit and the tax slab rates will not be applicable to this income. The entire amount received will be subject to tax at 31.2%. No deduction or expenditure is allowed for such income. Here’s an example to help you understand better -
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/-
As per the Budget 2024 update, if the income exceeds Rs. 50 lakhs, a surcharge is levied. 10% surcharge is levied for prizes between Rs. 50 lakhs and Rs. 1 crore and 15% for winnings exceeding Rs. 1 crore.
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%.
Sections 115BBJ and 194BA address the tax withholdings on net winnings from online games and are driven by the rapid growth of the online gaming industry. Earlier, there was a threshold of Rs. 10,000 for the deduction of TDS under section 194BA. This threshold has been removed and TDS is required to be deducted at a flat rate of 31.2% on the net winnings.
Here’s an example -
| Particular |
Amount |
| Amount withdrawn from user account in a year |
XXXX |
| Add: Closing balance in user account at the end of the year |
XXXX |
| Less: Non Taxable deposit made during the year |
XXXX |
| Less : Opening balance in the user account |
XXXX |
| Net Winnings |
XXXX |
Tax on Joining or Referral Bonus
Joining or referral bonus paid to the user is not subject to tax under Section 115BBJ. These are considered taxable and included in the net win based on the formula. The person responsible for paying the net winning just deducts TDS at 30% before making the payment.
While it is important to pay income tax on the winnings from the lottery, prizes, awards, etc, you must also make sure to report this income in the ITR. However, we understand that taxes can be complicated. But don’t worry! If you are among those who find taxes dreadful, our experts are here to help. From tax planning to tax filing, our CAs provide end-to-end services tailored to your needs. Hire an eCA from tax2win and experience a seamless ITR filing journey. Book online CA now!
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