Income From Other Sources: Tax, Deductions, and Exemption Guide

The “Income from Other Sources” category under India’s Income Tax Act is an important but often overlooked part of taxation. It covers various types of income that don’t fit into categories like Salary, House Property, Business or Profession, or Capital Gains, making sure all taxable earnings are accounted for.

We have put together a detailed guide, including taxability, deductions, examples, and reporting tips to help you manage your taxes with confidence.

What is Income from Other Sources?

Defined under Section 56(1) of the Income Tax Act, 1961, “Income from Other Sources” is essentially a residual category for earnings that do not fit within the other four heads of income. 

Here is the common income from other sources list:

• Interest income (savings accounts, fixed deposits, recurring deposits)

• Dividends from investments

• Rental income from machinery, furniture, or equipment

• Family pensions

• Lottery and gambling winnings

• Royalties

• Gifts exceeding tax-exempt thresholds

• Awards or prizes

This category includes both recurring and one-time earnings, ensuring that even infrequent income sources are taxed.

Income from Other Sources Tax Rate

The tax rate for income under this category depends on your applicable income tax slab rate, except in cases like lottery winnings, casual income, and cryptocurrencies, which have specified rates. 

Let’s explore some key income types and their tax implications:

1) Interest Income

Interest income refers to the earnings you receive from various deposit accounts such as savings accounts, fixed deposits (FDs), and recurring deposits (RDs). This is one of the most common types of income categorized under “Income from Other Sources.”

Here’s how they are taxed:

• Savings Accounts: Interest is taxable, but individuals can claim deductions under Section 80TTA (up to ₹10,000 per annum) or Section 80TTB (up to ₹50,000 per annum for senior citizens).

• Fixed Deposits/Recurring Deposits: Taxed at your slab rate. TDS is deducted if the interest exceeds ₹40,000 annually (₹50,000 for seniors).

Example:

Suppose you earn ₹8,000 from a savings account and ₹25,000 from a recurring deposit in a year.

• Savings account interest deduction under Section 80TTA = ₹8,000 (fully deductible).

• RD interest = ₹25,000 (fully taxable based on your slab rate).

2) Dividend Income

Dividends are income distributions made by companies to their shareholders from profits. This also includes dividends from mutual funds.

Dividends from Indian companies are now taxable following the removal of the Dividend Distribution Tax (DDT). 

Indian company dividends are taxed at your applicable slab rate, and TDS is deducted at 10% if the total dividend income exceeds ₹5,000 annually.

Dividends from foreign companies are also fully taxable at slab rates and may be subject to Double Taxation Avoidance Agreements (DTAA).

Example:

If you earn ₹8,000 in Indian company dividends and ₹12,000 from foreign company dividends in a financial year, the entire ₹20,000 will be included under “Income from Other Sources” and taxed as per your slab rate.

3) Lottery, Game Shows, and Casual Income

Winnings from lotteries, TV game shows, crossword puzzles, and betting are taxed at a flat rate of 30% (+ applicable cess and surcharge). 

No exemptions or deductions can be claimed against such income.

Example:

You win ₹1,00,000 as a cash prize from a TV game show. After 30% TDS (₹30,000) and applicable surcharge and cess, the remaining amount paid to you would be approximately ₹68,400. 

The full ₹1,00,000 must be declared as “Income from Other Sources.”

4) Family Pension

Family pension received by a dependent after the death of an employee is taxable under this head.

• Family pension is taxable under “Income from Other Sources,” but a standard deduction is allowed.

• The deduction is the lower of ₹15,000 or one-third of the pension amount received annually.

Example:

If the total family pension received is ₹60,000 annually, the allowable deduction will be ₹15,000 (lower of ₹15,000/₹20,000 = 1/3rd). The taxable income will be ₹45,000.

5) Income from Gifts

Gifts include cash, property, or valuables received without consideration. They are taxable unless they meet exemption criteria.

• Gifts are exempt if received from specified relatives, on the occasion of marriage, in contemplation of death, or below ₹50,000 in value from non-relatives during a financial year.

• Gifts exceeding ₹50,000 in aggregate from non-relatives are fully taxable.

Example:

You receive ₹60,000 as cash gifts from friends. Taxable portion = ₹60,000 – ₹50,000 (exemption threshold) = ₹10,000.

6) Interest on Income Tax Refunds

If you receive a refund of excess income tax paid, the interest component on the refund is taxable as “Income from Other Sources.” This is taxable at the applicable slab rate in the year it is credited to your account.

For example:

If the tax department pays you a refund of ₹50,000, including ₹5,000 as interest, the ₹5,000 is taxable in that financial year.

Check Form 26AS for the interest amount on tax refunds and include it under “Income from Other Sources.”

7) Agricultural Income

Agricultural income refers to earnings from rent or revenue derived from agricultural land, as well as sales of produce grown on such land.

• Pure agricultural income is fully exempt from tax under Section 10(1).

• However, if agricultural income exceeds ₹5,000 and total income (excluding agriculture) is above ₹2,50,000, it is used to determine the tax slab rate under the partial integration method.

Example:

Suppose your non-agriculture income is ₹7,00,000, and agricultural income is ₹1,00,000. The slab rate will be calculated on ₹8,00,000, and post that, relief is applied.

Disclose agricultural income separately under “Exempt Income” and verify slab impact on taxable income.

8) Virtual Digital Assets (VDAs)

Virtual Digital Assets (VDAs) are digital representations of value, uniquely identifiable and supported by emerging technologies like blockchain. According to the Income Tax Act, 1961, a VDA refers to any information, code, number, or token (not Indian legal tender) generated through cryptographic means. VDAs can be transferred, traded, or used for investment purposes.

Indian tax laws recognize VDAs following the budget announcement in 2022. They are governed by stringent rules:

• Gains on VDAs are taxed at a flat 30% rate.

• Losses cannot be offset against other incomes or carried forward.

• Gifted VDAs are also taxable in the hands of the recipient if they exceed specified limits.

Example:

If you earn ₹1,00,000 from trading cryptocurrency and incur a cost of ₹20,000, your taxable gain will be ₹80,000. Tax = 30% of ₹80,000 = ₹24,000.

Report VDA income under “Income from Other Sources” with comprehensive trading logs for substantiation.

Exemptions on Income from Other Sources

Certain types of income classified as “Income from Other Sources” may be fully or partially exempt from taxes. These exemptions are designed to promote savings, reward specific actions, or account for situations where taxation may not apply due to social or economic factors. 

Knowing about these exemptions can help you make the most of available benefits while staying compliant with the Income Tax Act, 1961.

Certain types of income from this category are exempt. Examples include:

1. Withdrawals from Public Provident Fund (PPF): Withdrawals from the PPF account, whether at maturity or after a specified tenure, are fully exempt under Section 10(11) of the Income Tax Act. Contributions to PPF also qualify for deductions under Section 80C, making them a tax-efficient investment. Only individuals (residents) can claim these exemptions, and HUFs are not eligible to open PPF accounts post-2005.
2. Withdrawals from Employees’ Provident Fund (EPF): Amounts withdrawn from the EPF are exempt under Section 10(12) if the employee has completed five years of continuous service. If withdrawn before five years, it becomes taxable unless the termination is due to ill health or other specified reasons.
3. Gifts Received from Relatives or on Marital: Gifts (in cash or kind) received from relatives such as parents, siblings, or spouse are fully tax-exempt, irrespective of the amount. Gifts received on the occasion of marriage are also exempt, regardless of whether they are from relatives or friends. However, non-relatives can only gift up to ₹50,000 per financial year tax-free. Beyond this threshold, the entire amount becomes taxable.
4. Agricultural Income: Agricultural income is generally exempt from tax under Section 10(1) of the Income Tax Act. This includes income from renting agricultural land, selling crops, or activities like pruning, sowing, and harvesting. However, agricultural income exceeding ₹5,000 is considered for calculating the tax slab rate under the partial integration method, if total income (excluding agriculture) exceeds ₹2,50,000.
5. Income from HUFs (Hindu Undivided Families): Income received from HUF members, in the nature of a gift or share in family assets, is generally exempt, provided the received amount aligns with family income.
6. Interest and Earnings from Certain Bonds: Some government-issued bonds and schemes like Sukanya Samriddhi Yojana (SSY) offer exempt returns upon maturity. Not all bonds qualify, so it’s essential to check tax benefits at purchase.
7. Income from Scholarships: Scholarships granted for academic purposes are tax-exempt under Section 10(16) without any upper limit.
8. Compensation Received in Natural Disasters: Any compensation received for damage or loss during natural disasters, such as floods or earthquakes, is not taxable under certain government schemes or legal decrees.

Deduction of Expenses Under Section 57

Under Section 57, certain expenses incurred to earn income from other sources are deductible:

• Commission or brokerage paid.

• Depreciation of machinery or assets used for income generation.

• Repairs, maintenance, or insurance of rented plant and machinery.

Tax Deductions NOT Allowed

Certain expenses cannot be claimed as deductions for computing income under this category:

• Personal expenditures.

• Interest amounts paid outside India if TDS hasn’t been deducted.

• Penal charges or fines.

How to Compute Net Income from Other Sources?

Follow these steps to calculate net income from other sources precisely:

Step 1 – List All Eligible Income Sources: Identify and document all incomes categorized under “Income from Other Sources,” such as interest, dividends, rental income, or other miscellaneous earnings.

Step 2 – Calculate Gross Income: Add up all the income items listed in Step 1 to determine the total gross income.

Step 3- Identify Deductible Expenses: Mark expenses directly related to earning the above incomes that qualify for deductions under Section 57 of the Income Tax Act, such as maintenance costs, interest on loans, or administrative fees (subject to specific limits where applicable).

Step 4 – Sum Deductible Expenses: Calculate the total of all deductible expenses identified in Step 3.

Step 5 – Compute Net Income: Subtract the total deductible expenses (Step 4) from the gross income (Step 2).

Formula Example

Net Income from Other Sources = Gross Income – Allowable Deductions under Section 57

Note: Certain incomes like lottery winnings or gifts may not allow any deductions. Ensure deductions are applied as per the corresponding rules.

P2P Lending and Income Tax Implications

Peer to Peer lending, a growing fintech trend, allows individuals to lend directly to borrowers via platforms like LenDenClub. The interest earned from such loans is taxable as “Income from Other Sources.” Points to consider:

• Taxability: Interest is added to your gross income and taxed based on your slab rate.

• TDS: If the platform deducts TDS, include it while reporting income.

• Expenses: Any processing charges or service fees paid to the platform can be claimed under Section 57.

With proper documentation, you can ensure compliance while maximizing returns from this source of earnings.