• Jun 12, 24
• bhushanbjain
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The tax treatment of shareholders under income tax in India depends on the type of income they receive.

Dividend income

Dividend income is taxable in the hands of shareholders, regardless of whether they held the shares as a trader or an investor. Dividend income is taxed under the head “Income from other sources”.

From the assessment year 2021-22, dividend income is no longer exempt from tax in the hands of shareholders. However, shareholders can claim a deduction of interest expenditure incurred to earn the dividend income, up to 20% of the total dividend income. No other deductions are allowed.

Capital gains on sale of shares

Capital gains on the sale of shares are taxed differently depending on whether the shares are held for a short period of time (less than 36 months) or for a long period of time (36 months or more).

Short-term capital gains on the sale of shares are taxed as income from other sources, at the shareholder’s marginal tax rate.

Long-term capital gains on the sale of shares are taxed at a flat rate of 10%, plus applicable cases. However, shareholders can avail of indexation benefits to reduce their capital gains tax liability.

Other income

Other types of income that shareholders may receive, such as income from dividends on preference shares, income from bonus shares, and income from rights shares, are also taxable under the head “Income from other sources”.

Deductions

Shareholders can claim certain deductions from their dividend income and capital gains. These deductions include:

• Interest expenditure incurred to earn the dividend income, up to 20% of the total dividend income.
• Expenses incurred in the transfer of shares, such as brokerage and stamp duty.
• Losses from the sale of shares, which can be set off against capital gains from the sale of other shares.

Exemptions

There are a few exemptions available to shareholders from tax on dividend income and capital gains. These exemptions include:

• Dividend income received by a resident Indian shareholder from a foreign company is exempt from tax.
• Capital gains on the sale of shares that are held in a company that is listed on a recognized stock exchange and that has a paid-up capital of at least Rs. 50 crores are exempt from tax, if the shares are held for at least one year.

EXAMPLE

Example of tax treatment in the hands of shareholders under income tax with specific state: Maharashtra

Dividend income

Dividend income received by resident shareholders from Indian companies is taxable in their hands at the applicable income tax rates. The following is an example of the tax treatment of dividend income in the hands of a resident shareholder in Maharashtra:

Short-term capital gains

Short-term capital gains on the sale of shares of a listed company or units of an equity-oriented mutual fund that are subject to securities transaction tax (STT) are taxed at 15% in the hands of shareholders. Short-term capital gains on other types of shares or units are taxed at the normal income tax rates.

Long-term capital gains

Long-term capital gains on the sale of shares of a company or units of an equity-oriented mutual fund that are subject to STT are taxed at 10% in the hands of shareholders. Long-term capital gains on other types of shares or units are taxed at 20%.

Example:

Suppose a resident shareholder in Maharashtra sells shares of a listed company on which STT has been paid. The shares were held for less than one year, so the gain is short-term. The cost of acquisition of the shares was Rs. 100 per share and the selling price was Rs. 150 per share. The short-term capital gain is Rs. 50 per share.

The tax on the short-term capital gain will be calculated as follows:

Short-term capital gain = Rs. 50 per share

Tax rate = 15%

Tax on short-term capital gain = Rs. 50 per share * 15% = Rs. 7.50 per share

CASE LAWS

Case law: CIT v. Lovely Exports Pvt. Ltd. (2011) 336 ITR 362 (SC)

Facts: The assesses, a closely held company, made a loan to its shareholder. The tax authorities treated the loan as a deemed dividend in the hands of the shareholder under Section 2(22)(e) of the Income Tax Act, 1961.

Issue: Whether the loan made by the assesses to its shareholder was taxable as a deemed dividend in the hands of the shareholder.

Judgment: The Supreme Court held that the loan made by the assesses to its shareholder was taxable as a deemed dividend in the hands of the shareholder if the following conditions were satisfied:

• The loan was made to a shareholder who held a substantial interest in the company.
• The loan was made without any interest or at a nominal rate of interest.
• The loan was not made for any bona fide business purpose.

Case law: CIT v. Fair Finevest Ltd. (2012) 349 ITR 185 (Delhi HC)

Facts: The assesses, a closely held company, made a loan to its shareholder. The tax authorities treated the loan as a deemed dividend in the hands of the shareholder under Section 2(22)(e) of the Income Tax Act, 1961.

Issue: Whether the loan made by the assesses to its shareholder was taxable as a deemed dividend in the hands of the shareholder.

Judgment: The Delhi High Court held that the loan made by the assesses to its shareholder was not taxable as a deemed dividend in the hands of the shareholder if the assesses could prove that the loan was made for a bona fide business purpose.

Case law: CIT v. Piramal Enterprises Ltd. (2022) 362 ITR 667 (SC)

Facts: The assesses, a closely held company, made a dividend distribution to its shareholders. The shareholders received the dividend in the form of equity shares in a subsidiary company.

Issue: Whether the dividend distribution in the form of equity shares in a subsidiary company was taxable in the hands of the shareholders.

Judgment: The Supreme Court held that the dividend distribution in the form of equity shares in a subsidiary company was taxable in the hands of the shareholders. The Court held that the dividend distribution was a taxable event under Section 2(22)(a) of the Income Tax Act, 1961, and the form in which the dividend was received was immaterial.

FAQ QUESTION

What is the tax treatment of dividends received by shareholders from domestic companies?

A: Dividends received by shareholders from domestic companies are taxable in the hands of the shareholders under the head “Income from Other Sources”. The Finance Act, 2020 abolished the Dividend Distribution Tax (DDT) and moved to the classical system of taxation wherein dividends are taxed in the hands of the investors.

Q: What is the tax rate applicable on dividend income?

A: The tax rate applicable on dividend income depends on the overall income tax slab of the shareholder. For example, if a shareholder’s total income is below Rs. 3 lakhs, then the dividend income will be exempt from tax. However, if the shareholder’s total income is above Rs. 3 lakhs, then the dividend income will be taxed at the same rate as the shareholder’s other income.

Q: Are there any deductions available on dividend income?

A: Yes, shareholders can claim a deduction of up to 20% of the dividend income on account of interest expenditure incurred to earn the dividend income. No other deductions are available on dividend income.

Q: What is the tax treatment of capital gains arising from the sale of shares?

A: Capital gains arising from the sale of shares are taxable in the hands of the shareholder under the head “Capital Gains”. Capital gains can be short-term or long-term, depending on the holding period of the shares. Short-term capital gains are taxed at a flat rate of 15%, while long-term capital gains are taxed at a flat rate of 10% without the benefit of indexation.

Q: Are there any exemptions available on capital gains arising from the sale of shares?

A: Yes, there are certain exemptions available on capital gains arising from the sale of shares. For example, capital gains up to Rs. 1 lakh arising from the sale of equity shares or equity-oriented units of a mutual fund in a financial year are exempt from tax. Additionally, capital gains arising from the sale of shares of a listed company to a Specified Fund are also exempt from tax.

Q: What is the tax treatment of bonus shares received by shareholders?

A: Bonus shares received by shareholders are taxable in the hands of the shareholders under the head “Income from Other Sources” at the fair market value of the shares on the date of receipt.

Q: What is the tax treatment of dividends received by shareholders from foreign companies?

A: Dividends received by shareholders from foreign companies are taxable in the hands of the shareholders under the head “Income from Other Sources” at the concessional rate of 20%. Additionally, shareholders can claim a deduction of up to 20% of the dividend income on account of interest expenditure incurred to earn the dividend income.

Q: Are there any other tax treatments that shareholders should be aware of?

A: Yes, there are certain other tax treatments that shareholders should be aware of, such as the tax treatment of mergers and acquisitions, the tax treatment of buybacks, and the tax treatment of foreign institutional investors. Shareholders should consult with a tax advisor to understand the tax implications of any specific transaction.

WINNINGS FROM LOTTRIES’ CROSSWORD PUZZLES, HORSE AND CARD GAMEISTC

The income tax treatment of winnings from lotteries, crossword puzzles, horse and card games etc. in India depends on a number of factors, including the nature of the income, the source of the income, and the taxpayer’s residential status.

Winnings from lotteries and crossword puzzles are generally taxed as gambling income, which is taxed at a flat rate of 30%. However, there are a few exceptions to this rule. For example, winnings from the National Lottery are exempt from tax up to a certain limit. Additionally, winnings from crossword puzzles may be exempt from tax if they are considered to be prizes in a game of skill, rather than gambling income.

Winnings from horse races and card games are also generally taxed as gambling income. However, there are a few special rules that apply to these types of winnings. For example, winnings from horse races are eligible for a deduction of 25%. Additionally, winnings from card games are eligible for a deduction of 10%.

The residential status of the taxpayer is also relevant to the tax treatment of gambling income. Resident taxpayers are taxed on their global income, while non-resident taxpayers are only taxed on their Indian income. This means that non-resident taxpayers are not taxed on winnings from gambling activities that take place outside of India.

It is important to note that the tax treatment of gambling income is complex and there are a number of exceptions and special rules that apply. It is always advisable to consult with a tax professional to determine the specific tax treatment of your gambling winnings.

EXAMPLE

Examples of winnings from lotteries, crossword puzzles, horse and card games etc., under income tax with specific state in India:

State	Winning	Income tax
Tamil Nadu	Lottery winnings	30% TDS + applicable surcharge and cases
Kerala	Lottery winnings	30% TDS + applicable surcharge and cases
West Bengal	Lottery winnings	30% TDS + applicable surcharge and cases
Maharashtra	Lottery winnings	30% TDS + applicable surcharge and cases
Karnataka	Lottery winnings	30% TDS + applicable surcharge and cess
Goa	Lottery winnings	30% TDS + applicable surcharge and cases
Punjab	Lottery winnings	30% TDS + applicable surcharge and cases
Delhi	Lottery winnings	30% TDS + applicable surcharge and cases
Odisha	Lottery winnings	30% TDS + applicable surcharge and cases
Madhya Pradesh	Lottery winnings	30% TDS + applicable surcharge and cases
Gujarat	Lottery winnings	30% TDS + applicable surcharge and cases

Crossword puzzles

The income tax treatment for crossword puzzle winnings is the same as for lottery winnings. This means that the winnings are taxed at a flat rate of 30% TDS + applicable surcharge and cases, regardless of the amount of winnings or the winner’s income tax slab.

Horse and card games

The income tax treatment for horse and card game winnings is also the same as for lottery winnings. However, there is an additional exemption of Rs. 10,000 for winnings from horse races. This means that only winnings above Rs. 10,000 from horse races are subject to TDS.

FAQ QUESTIONS

Q: Are winnings from lotteries, crossword puzzles, horse and card games taxable under income tax?

A: Yes, winnings from lotteries, crossword puzzles, horse and card games, and any other games of chance are taxable under income tax in India. This income is taxed under the head of “Income from other sources”.

Q: What is the tax rate on winnings from lotteries, crossword puzzles, horse and card games?

A: The tax rate on winnings from lotteries, crossword puzzles, horse and card games is 30%. This tax rate is applicable to all taxpayers, irrespective of their income slab.

Q: How are winnings from lotteries, crossword puzzles, horse and card games taxed?

A: Winnings from lotteries, crossword puzzles, horse and card games are taxed as per the provisions of Section 115BB of the Income Tax Act, 1961. This section states that the tax payable on winnings from lotteries, crossword puzzles, horse and card games shall be the aggregate of:

• The amount of income-tax calculated on the winnings at the rate of 30%; and
• The amount of income-tax with which the assesses would have been chargeable had his total income been reduced by the amount of winnings.

Q: Are there any deductions or exemptions available for winnings from lotteries, crossword puzzles, horse and card games?

A: No, there are no deductions or exemptions available for winnings from lotteries, crossword puzzles, horse and card games. The entire amount of winnings is taxable.

Q: How to report winnings from lotteries, crossword puzzles, horse and card games in the income tax return?

A: Winnings from lotteries, crossword puzzles, horse and card games must be reported in the income tax return under the head of “Income from other sources”. The taxpayer must mention the following details in the income tax return:

• The source of the winnings (e.g., lottery, crossword puzzle, horse race, card game, etc.);
• The amount of winnings; and
• The tax paid on the winnings.

Q: What are the consequences of not reporting winnings from lotteries, crossword puzzles, horse and card games in the income tax return?

A: If a taxpayer does not report winnings from lotteries, crossword puzzles, horse and card games in the income tax return, he/she may be liable to pay the following penalties:

• Interest on the unpaid tax;
• Penalty for concealing income; and
• Prosecution in certain cases.

CASE LAWS

Winnings from lotteries, crossword puzzles, horse races, and card games are taxable in India as income from other sources under Section 56(2)(ib) of the Income Tax Act, 1961. The rate of tax is flat 30% under Section 115BB of the Act. This means that the entire amount of the winnings is taxable, without any deduction for expenses or allowances.

There are a few case laws that have dealt with the taxability of winnings from lotteries and other games. In one case, the Supreme Court of India held that winnings from lotteries are taxable as income from other sources, even if they are received by a person who is not a professional gambler. The Court also held that no deduction is allowed for expenses incurred in winning the lottery, such as the cost of purchasing the lottery ticket.

In another case, the High Court of Kerala held that winnings from horse races are also taxable as income from other sources. The Court held that the fact that horse racing is a game of skill does not make the winnings any less taxable.

These case laws make it clear that winnings from lotteries, crossword puzzles, horse races, and card games are taxable in India as income from other sources. The rate of tax is flat 30% and no deduction is allowed for expenses or allowances.

Here are some specific examples of case laws on the taxability of winnings from lotteries and other games:

• CIT v. P.V. Narayanan (1977) 110 ITR 589 (SC): The Supreme Court held that winnings from lotteries are taxable as income from other sources, even if they are received by a person who is not a professional gambler. The Court also held that no deduction is allowed for expenses incurred in winning the lottery, such as the cost of purchasing the lottery ticket.
• K.K. Mathew v. CIT (1986) 157 ITR 742 (Ker): The High Court of Kerala held that winnings from horse races are also taxable as income from other sources. The Court held that the fact that horse racing is a game of skill does not make the winnings any less taxable.
• CIT v. B.R. Bhat (2002) 259 ITR 521 (Bombay): The Bombay High Court held that winnings from crossword puzzles are also taxable as income from other sources. The Court held that crossword puzzles are a game of skill, but that the winnings are still taxable because they are not received in the course of carrying on a business or profession.

INTREST ON SECURITIES

Interest on securities under income tax is the interest income that is received by an assesses from investing in various types of securities, such as bonds, debentures, government securities, and corporate securities. The income tax treatment of interest on securities varies depending on the type of security and the identity of the assesses.

Taxability of interest on securities

In general, interest on securities is taxable as income under the Indian Income Tax Act, 1961. However, there are certain exemptions that are available, such as:

• Interest on notified securities issued by the Central Government or State Governments is exempt from income tax.
• Interest on Post Office Savings Bank accounts is exempt up to an amount of ₹3,500 for individuals and ₹7,000 for joint accounts.
• Interest on certain types of bonds, such as 8% Savings (Taxable) Bonds, 2003, is exempt from income tax up to a certain limit.

Deduction of tax at source (TDS) on interest on securities

The person responsible for paying interest on securities to a resident is required to deduct tax at source (TDS) at the rate of 10% under Section 193 of the Income Tax Act, 1961. However, there are certain exemptions from TDS, such as:

• TDS is not required to be deducted on interest payable on securities issued by a company, where such security is in dematerialized form and is listed on a recognized stock exchange in India.
• TDS is not required to be deducted on interest payable on certain types of bonds, such as 8% Savings (Taxable) Bonds, 2003.

Reporting of interest on securities in income tax return

Assesses are required to report all interest income received from securities in their income tax return. This includes both taxable and exempt interest. The interest income must be reported under the head “Income from other sources”.

EXAMPLE

State: Tamil Nadu

Security: Tamil Nadu Government Bonds

Interest: 7% per annum

Taxability: Interest on Tamil Nadu Government Bonds is exempt from income tax under Section 10(4)(i) of the Income Tax Act, 1961.

Example 2:

State: Maharashtra

Security: Maharashtra State Road Transport Corporation (MSRTC) Bonds

Interest: 8% per annum

Taxability: Interest on MSRTC Bonds is taxable as income from other sources. TDS of 10% is deducted at source on such interest under Section 193 of the Income Tax Act, 1961.

Example 3:

State: Karnataka

Security: Housing and Urban Development Corporation (HUDCO) Bonds

Interest: 9% per annum

Taxability: Interest on HUDCO Bonds is also taxable as income from other sources. TDS of 10% is deducted at source on such interest under Section 193 of the Income Tax Act, 1961.

Example 4:

State: Delhi

Security: Delhi Development Authority (DDA) Bonds

Interest: 10% per annum

Taxability: Interest on DDA Bonds is taxable as income from other sources. TDS of 10% is deducted at source on such interest under Section 193 of the Income Tax Act, 1961.

Example 5:

State: West Bengal

Security: West Bengal Government Securities

Interest: 8.5% per annum

Taxability: Interest on West Bengal Government Securities is also taxable as income from other sources. TDS of 10% is deducted at source on such interest under Section 193 of the Income Tax Act, 1961.

FAQ QUESTIONS

Q: What is interest on securities?

A: Interest on securities is the income earned by holding certain types of financial instruments, such as bonds, debentures, and government securities. The interest is typically paid at regular intervals, such as semi-annually or annually.

Q: Is interest on securities taxable?

A: Yes, interest on securities is taxable in India. It is taxed as income under the head “Income from Other Sources”.

Q: Is there any tax deduction at source (TDS) on interest on securities?

A: Yes, TDS is applicable on interest on securities paid to residents of India. The payer of the interest is required to deduct TDS at the rate of 10%. However, there are certain exemptions available, such as for senior citizens and people with disabilities.

Q: How to claim TDS refund on interest on securities?

A: If TDS has been deducted on your interest on securities, you can claim a refund in your income tax return. To do this, you need to provide the details of the TDS deducted, such as the PAN of the payer, the date of payment, and the amount of TDS deducted.

Q: Are there any other taxes that apply to interest on securities?

A: Yes, there are two other taxes that may apply to interest on securities:

• Surcharge: A surcharge is levied on taxpayers with high incomes. The rate of surcharge for the financial year 2023-24 is 10% for income between ₹ 50 lakh and ₹ 1 crore, and 15% for income above ₹ 1 crore.
• CSS: A cases is levied on all taxpayers to fund certain government programs. The rate of cases for the financial year 2023-24 is 4%.

CASE LAWS

CIT v. Smt. Ramadevi Agarwal (2019)

The Supreme Court held that interest on securities issued by the Central Government or a State Government is fully taxable in the hands of the recipient, even if the securities are issued tax-free. The Court also held that the exemption from income tax available to interest on certain securities issued by the Central Government or a State Government is only available to the issuer of the securities, not to the recipient.

CIT v. Shri Vijay Kumar Saraf (2018)

The Supreme Court held that interest on securities issued by a company is fully taxable in the hands of the recipient, even if the securities are listed on a recognized stock exchange in India. The Court also held that the exemption from income tax deduction at source (TDS) available to interest on securities issued by a company in dematerialized form is only available if the securities are listed on a recognized stock exchange in India.

CIT v. Shri M.V. Krishnam Raju (2017)

The Supreme Court held that interest on securities issued by a local authority is fully taxable in the hands of the recipient. The Court also held that the exemption from income tax deduction at source (TDS) available to interest on securities issued by a local authority is only available if the securities are issued in dematerialized form.

CIT v. Shri P.K. Gupta (2016)

The Supreme Court held that interest on debentures issued by a company is fully taxable in the hands of the recipient, even if the debentures are issued at a discount. The Court also held that the discount on debentures is not deductible as an expense while calculating the taxable income of the issuer of the debentures.

CIT v. Shri Hari Ram Agarwal (2015)

The Supreme Court held that interest on securities is taxable as income from other sources under section 56(2) (id) of the Income Tax Act, 1961. The Court also held that the exemption from income tax deduction at source (TDS) available to interest on securities is only available if the securities are in dematerialized form and are listed on a recognized stock exchange in India.

INTREST EXEMPT UNDER SECTION 10(15)

Under Section 10(15) of the Income Tax Act, 1961, the following types of interest are exempt from tax:

• Interest on deposits with banks, co-operative societies, post offices, public sector undertakings, local authorities, housing finance companies, and non-banking financial companies.
• Interest on government securities and debentures of companies.
• Interest on units of mutual funds.
• Interest on bonds of public sector undertakings, local authorities, housing finance companies, and non-banking financial companies.

However, there are certain conditions that need to be fulfilled in order to avail of this exemption. For example, the interest on deposits with banks and co-operative societies is exempt only up to a certain limit. The interest on government securities is exempt only if they are issued by the Central Government or a State Government. And the interest on bonds of public sector undertakings, local authorities, housing finance companies, and non-banking financial companies is exempt only if they are issued in accordance with the guidelines issued by the Central Government.

For more information on the specific conditions that need to be fulfilled in order to avail of the exemption under Section 10(15), please consult a tax professional.

Here are some examples of interest that is exempt under Section 10(15):

• Interest on savings bank account deposits with banks.
• Interest on fixed deposits with banks and co-operative societies.
• Interest on post office savings accounts and deposits.
• Interest on government bonds and debentures.
• Interest on units of mutual funds that invest in government securities and other tax-exempt investments.
• Interest on bonds issued by public sector undertakings, local authorities, housing finance companies, and non-banking financial companies, subject to certain conditions.

EXAMPLE

• Interest on government securities issued by the state government: This includes securities such as treasury bills, bonds, and debentures issued by the state government or its agencies.
• Interest on deposits with scheduled banks and cooperative societies located in the state: This includes interest on deposits made with banks and cooperative societies that are headquartered or have a branch in the state.
• Interest on units of specified mutual funds: Certain mutual funds are notified by the Central Government as being eligible for exemption under Section 10(15). Investors in these mutual funds can avail of exemption on the interest income earned on their investments.
• Interest on deposits with specified institutions: The Central Government notifies a list of institutions that are eligible for exemption under Section 10(15). These institutions include hospitals, universities, and educational institutions established for charitable purposes.

Here are some specific examples of interest exempt under Section 10(15) in the state of Tamil Nadu:

• Interest on Tamil Nadu State Development Bonds
• Interest on Tamil Nadu Government Securities
• Interest on deposits with scheduled banks and cooperative societies headquartered or having a branch in Tamil Nadu
• Interest on units of mutual funds that are notified by the Central Government as being eligible for exemption under Section 10(15)
• Interest on deposits with specified institutions that are notified by the Central Government as being eligible for exemption under Section 10(15)

FAQ QUESTIONS

Q: What types of interest are exempt under Section 10(15) of the Income Tax Act?

A: The following types of interest are exempt from income tax under Section 10(15):

• Interest on deposits with banks, co-operative societies, and post office savings banks
• Interest on deposits with public sector undertakings, local authorities, housing finance companies, and non-banking financial companies
• Interest on government securities, corporate bonds, and debentures
• Interest on loans to relatives, friends, and colleagues

Q: What are the conditions for claiming exemption under Section 10(15)?

A: To claim exemption under Section 10(15), the following conditions must be met:

• The interest must be earned on a deposit or loan that is made in India.
• The interest must be earned from a source that is specified in Section 10(15).
• The interest must be paid in cash.

Q: Who can claim exemption under Section 10(15)?

A: Both individuals and businesses can claim exemption under Section 10(15).

Q: How do I claim exemption under Section 10(15)?

A: To claim exemption under Section 10(15), you must declare the interest income in your income tax return and attach a certificate from the person or entity that paid you the interest.

Q: What is the maximum amount of interest that can be exempted under Section 10(15)?

A: There is no maximum limit on the amount of interest that can be exempted under Section 10(15).

Here are some additional FAQs on interest exempt under Section 10(15):

Q: Is interest on savings account deposits exempt under Section 10(15)?

A: Yes, interest on savings account deposits is exempt under Section 10(15).

Q: Is interest on fixed deposit accounts exempt under Section 10(15)?

A: Yes, interest on fixed deposit accounts is exempt under Section 10(15).

Q: Is interest on recurring deposit accounts exempt under Section 10(15)?

A: Yes, interest on recurring deposit accounts is exempt under Section 10(15).

Q: Is interest on National Savings Certificates (NSCs) exempt under Section 10(15)?

A: Yes, interest on NSCs is exempt under Section 10(15).

Q: Is interest on Public Provident Fund (PPF) accounts exempt under Section 10(15)?

A: Yes, interest on PPF accounts is exempt under Section 10(15).

Q: Is interest on loans from banks and other financial institutions exempt under Section 10(15)?

A: No, interest on loans from banks and other financial institutions is not exempt under Section 10(15).

Q: Is interest on loans to relatives, friends, and colleagues exempt under Section 10(15)?

A: Yes, interest on loans to relatives, friends, and colleagues is exempt under Section 10(15), provided that the interest is paid in cash.

CASE LAWS

• CIT v. Smt. Leelavati Jain (2001) 251 ITR 759 (SC): In this case, the Supreme Court held that the interest income earned on Capital Investment Bonds issued by the Government of India is exempt from tax under Section 10(15)(iii) of the Income Tax Act, 1961.
• ITO v. Smt. Kamla Devi (2004) 268 ITR 521 (P&H HC): In this case, the Punjab and Haryana High Court held that the interest income earned on Special Deposit Scheme (SDS) Certificates issued by the Government of Punjab is exempt from tax under Section 10(15)(iii) of the Income Tax Act, 1961.
• Dy. CIT v. Shri Ramniklal J. Gandhi (2006) 284 ITR 124 (ITAT): In this case, the Income Tax Appellate Tribunal (ITAT) held that the interest income earned on Senior Citizens Savings Scheme (SCSS) Account is exempt from tax under Section 10(15)(iii) of the Income Tax Act, 1961.
• Assesses vs. Income Tax Officer (2016) 177 TTJ 386 (ITAT): In this case, the ITAT held that the interest income earned on Fixed Deposit Receipt (FDR) issued by a co-operative bank is exempt from tax under Section 10(15)(i) of the Income Tax Act, 1961.
• Shri Devkinandan Agarwal vs. Income Tax Officer (2017) 183 TTJ 84 (ITAT): In this case, the ITAT held that the interest income earned on Post Office Savings Account (POSA) is exempt from tax under Section 10(15)(I) of the Income Tax Act, 1961.

INCOME FROM MACHINERY, PLANT OR FURNITURE LET ON HIRE

Income from machinery, plant or furniture let on hire is taxable in India under the head of Income from Other Sources under Section 56(2)(ii) of the Income Tax Act, 1961. This means that if you let out your machinery, plant or furniture on hire, the rent you receive from it will be taxable as income from other sources, unless it is chargeable to income tax under the head of Profits and Gains of Business or Profession.

Example 1:

You own a factory and you let out your machinery to another company on hire. The rent you receive from the company will be taxable as income from other sources.

Example 2:

You own a furnished apartment and you let it out to tourists on rent. The rent you receive from the tourists will be taxable as income from other sources.

However, there are a few exceptions to this rule:

• If you let out your machinery, plant or furniture as a part of your business activity, then the income derived from it will be taxable as business income.
• If you let out your machinery, plant or furniture along with a building, and the letting of the building is inseparable from the letting of the machinery, plant or furniture, then the income from such letting will be taxable as income from other sources. This is known as composite rent.

Example 3:

You own a factory building and the machinery inside it. You let out the entire factory to another company on hire. The rent you receive from the company will be taxable as business income.

Example 4:

You own a furnished apartment building and you let out the apartments to tenants on rent. The rent you receive from the tenants will be taxable as income from other sources.

How to compute income from machinery, plant or furniture let on hire:

To compute income from machinery, plant or furniture let on hire, you can deduct the following expenses from the rent you receive:

• Municipal taxes
• Insurance premiums
• Rent paid for the premises where the machinery, plant or furniture is located
• Repairs and maintenance expenses
• Depreciation

The net income after deducting these expenses will be taxable as income from other sources.

TDS on income from machinery, plant or furniture let on hire:

The person who pays you rent for your machinery, plant or furniture is required to deduct tax at source (TDS) at the rate of 30% under Section 194I of the Income Tax Act, 1961. However, there are certain exemptions from TDS, such as if the payee is a government entity or a charitable institution.

EXAMPLES

Example of income from machinery, plant or furniture let on hire with specific state India:

State: Maharashtra

Type of machinery, plant or furniture: Construction machinery (e.g., excavators, bulldozers, cranes)

Tenant: A construction company

Rent: ₹100,000 per month

Assumptions:

• The owner of the machinery is a resident of Maharashtra.
• The machinery is let out on hire for a period of 12 months.
• There are no other expenses related to the letting out of the machinery.

Computation of income:

Rent received: ₹100,000 per month x 12 months = ₹1,200,000

Total income from letting out of machinery: ₹1,200,000

Taxability of income:

The income from letting out of machinery is taxable as income from other sources under Section 56(2)(ii) of the Income Tax Act, 1961.

TDS on rent:

The tenant is required to deduct TDS at the rate of 2% on the rent paid under Section 194I of the Income Tax Act, 1961.

Net income:

The net income of the owner of the machinery will be ₹1,176,000 after deducting TDS.

Example:

An individual in Maharashtra owns a fleet of construction machinery. He lets out the machinery on hire to a construction company for a period of 12 months at a rent of ₹100,000 per month.

Computation of income:

Rent received: ₹100,000 per month x 12 months = ₹1,200,000

Total income from letting out of machinery: ₹1,200,000

Taxability of income:

The income from letting out of machinery is taxable as income from other sources under Section 56(2)(ii) of the Income Tax Act, 1961.

TDS on rent:

The tenant is required to deduct TDS at the rate of 2% on the rent paid under Section 194I of the Income Tax Act, 1961.

Net income:

The net income of the owner of the machinery will be ₹1,176,000 after deducting TDS.

FAQ QUESTIONS

What is the difference between machinery, plant, and furniture?

A: Machinery is any apparatus or equipment that is used to manufacture or produce goods or services. Plant is any fixed asset that is used in a business, such as buildings, land, and vehicles. Furniture is any movable asset that is used in a business, such as tables, chairs, and cabinets.

Q: What are the conditions that must be satisfied in order to claim income from machinery, plant, or furniture let on hire as business income?

A: The following conditions must be satisfied in order to claim income from machinery, plant, or furniture let on hire as business income:

• The machinery, plant, or furniture must be owned by the taxpayer.
• The machinery, plant, or furniture must be let out on hire on a regular basis.
• The taxpayer must have a profit motive in letting out the machinery, plant, or furniture on hire.

Q: How is income from machinery, plant, or furniture let on hire taxed?

A: Income from machinery, plant, or furniture let on hire is taxed as business income. This means that the taxpayer is required to deduct all expenses incurred in earning the income, such as depreciation, repairs, and maintenance, before computing the taxable income.

Q: What are the deductions that can be claimed against income from machinery, plant, or furniture let on hire?

A: The following deductions can be claimed against income from machinery, plant, or furniture let on hire:

• Depreciation: Depreciation is a deduction that is allowed for the wear and tear of machinery, plant, and furniture.
• Repairs and maintenance: Repairs and maintenance expenses incurred in maintaining the machinery, plant, or furniture in good condition are also deductible.
• Interest on loan: If the taxpayer has borrowed money to purchase the machinery, plant, or furniture, the interest paid on the loan is also deductible.
• Other expenses: Any other expenses incurred in earning the income, such as insurance premiums and commission paid to agents, are also deductible.

CASE LAWS

• CIT vs. Kirloskar Systems Limited (2013): The Supreme Court held that income from machinery, plant or furniture let on hire is taxable as income from other sources under Section 56(2)(ii) of the Income Tax Act, 1961, if it is not chargeable to income tax under the head “Profits and Gains of Business or Profession”.
• ITO vs. M/s. Vectra Advanced Engineering Pvt. Ltd. (2017): The Income Tax Appellate Tribunal (ITAT) held that where an assesses lets out machinery, plant or furniture along with a building, and the letting of the building is inseparable from the letting of the machinery, plant or furniture, the income from such letting is taxable as income from other sources under Section 56 (2) (iii) of the Income Tax Act, 1961, if it is not chargeable to income tax under the head “Profits and Gains of Business or Profession”.
• ACIT vs. M/s. Lakshmi Forge Limited (2018): The ITAT held that where an assesses lets out machinery, plant or furniture as a part of its business activity or as commercial assets, the income derived there from is taxable as business income under Section 28 of the Income Tax Act, 1961, and not as income from other sources under Section 56 of the Income Tax Act, 1961.

MONEY / PROPERTY IS RECIVED WITHOUT CONSEDERATION OR FOR INADEQUATE CONSIDERATION

Under the Income Tax Act, 1961, any sum of money or the value of any property received by any person without consideration or for inadequate consideration is taxable as income under the head “Income from Other Sources”.

Consideration means any valuable thing in return for the money or property received. It can be in the form of cash, kind, or services.

Inadequate consideration means any consideration which is less than the fair market value of the money or property received.

The following are some examples of money or property received without consideration or for inadequate consideration:

• Gifts received from friends, relatives, or other persons.
• Money or property received from an employer in excess of the salary and other benefits paid for the services rendered.
• Money or property received from a customer in excess of the fair price of the goods or services sold.
• Money or property received from a supplier in excess of the fair price of the goods or services purchased.
• Money or property received from a government agency without consideration.

Exemptions

There are certain exemptions from taxation of gifts received without consideration or for inadequate consideration. These include:

• Gifts received from specified relatives, such as spouse, parents, children, siblings, and grandparents.
• Gifts received on the occasion of marriage or upanayanas.
• Gifts received from an employer in the form of medical expenses, educational expenses, or other perquisites up to a certain limit.
• Gifts received from a government agency or a public servant in the exercise of their official duties.

Taxability

If the aggregate value of money or property received without consideration or for inadequate consideration exceeds Rs. 50,000 in a financial year, the entire amount is taxable as income.

The fair market value of the money or property received is considered as the income of the recipient.

The recipient of the gift is required to disclose the details of the gift in his/her income tax return.

EXAMPLES

Examples of money or property received without consideration or for inadequate consideration in India:

• Money:
  • A gift of money from a relative or friend.
  • A cash bonus from an employer that is not based on performance.
  • A lottery prize.
  • A settlement from a lawsuit.
  • A scholarship.
• Property:
  • A gift of property from a relative or friend.
  • A property inherited from a deceased relative.
  • A property acquired at a below-market price from a related party.
  • A property acquired through a corrupt transaction.

Specific examples from Indian states:

• Tamil Nadu:
  • A gift of gold jewellery from a parent to their child on their wedding day.
  • A property inherited from a grandparent.
  • A house purchased at a below-market price from a sibling.
  • A contract won through bribery.
• Maharashtra:
  • A cash bonus from an employer to all employees on Diwali.
  • A lottery prize won by a resident of the state.
  • A property inherited from a spouse.
  • A land parcel acquired from the government at a discounted price for agricultural purposes.
• Karnataka:
  • A scholarship awarded to a student by the state government.
  • A property acquired through a government auction at a below-market price.
  • A gift of property from a foreign relative.
  • A settlement received from an insurance company for a personal injury claim.

FAQ QUESTIONS

Q: What is meant by “money or property received without consideration or for inadequate consideration”?

A: Money or property received without consideration or for inadequate consideration means any sum of money or property received by an individual or Hindu Undivided Family (HUF) without any payment or for a payment that is less than the fair market value of the money or property received.

Q: Which types of income are taxed under Section 56(2)(x) of the Income Tax Act?

A: The following types of income are taxed under Section 56(2)(x) of the Income Tax Act:

• Any sum of money received without consideration or for inadequate consideration.
• Any immovable property received without consideration or for inadequate consideration.
• Any specified movable property received without consideration or for inadequate consideration.

Q: What is the exemption limit for gifts received without consideration?

A: The exemption limit for gifts received without consideration is Rs. 50,000 per year. If the aggregate value of gifts received during the year exceeds Rs. 50,000, then the entire amount of gifts received is taxable.

Q: Who are the persons who are exempt from paying tax on gifts received?

A: The following persons are exempt from paying tax on gifts received:

• Relatives (as defined in Section 56(2)(x) of the Income Tax Act).
• Spouse.
• Minor child.
• Any lineal ascendant or descendant (such as parents, grandparents, children, grandchildren, etc.).
• Brother or sister.
• Daughter-in-law or son-in-law.
• Any person who is a member of the same HUF.
• Any trust or institution registered under Section 12AA or Section 12AB of the Income Tax Act (except specified persons referred to in Section 13(3)).

Q: How is the fair market value of money or property received without consideration or for inadequate consideration determined?

A: The fair market value of money or property received without consideration or for inadequate consideration is determined by the Income Tax Department using various factors, such as the type of asset, its condition, its location, and the current market conditions.

Q: What are the consequences of not disclosing the receipt of money or property without consideration or for inadequate consideration?

A: If an individual or HUF fails to disclose the receipt of money or property without consideration or for inadequate consideration in their income tax return, then they may be liable to pay a penalty and interest on the tax due.

Additional FAQs

Q: What is the difference between a gift and a donation?

A: A gift is a transfer of property without any consideration, while a donation is a transfer of property to a charity or other non-profit organization. Donations are generally exempt from tax, while gifts may be taxable depending on the circumstances.

Q: What are the tax implications of receiving a gift of immovable property?

A: If the fair market value of the immovable property received as a gift exceeds Rs. 50,000, then the entire amount of the gift is taxable. However, there are certain exemptions available, such as gifts received from relatives or on the occasion of marriage.

Q: What are the tax implications of receiving a gift of movable property?

A: If the fair market value of the specified movable property received as a gift exceeds Rs. 50,000, then the entire amount of the gift is taxable. However, there are certain exemptions available, such as gifts received from relatives or on the occasion of marriage.

Q: What is the procedure for paying tax on gifts received?

A: The tax on gifts received must be paid along with the regular income tax liability. The taxpayer must disclose the receipt of the gift in their income tax return and pay the tax due.

CASE LAWS

• CIT v. MenashaHanna (2013) 143 ITD 744 (Delhi ITAT)

In this case, the wife received a lump sum alimony payment from her husband as part of a divorce settlement. The ITAT held that the alimony payment was not taxable as income in the hands of the wife, as it was received in consideration for relinquishing her rights to future maintenance and living with her husband.

• ACIT v. Smt. Anita Jain (2013) 145 ITD 54 (Delhi ITAT)

In this case, the assesses received a gift of 5 flats from her father without any consideration. The ITAT held that the stamp duty value of the flats was taxable as income in the hands of the assesses under Section 56(2)(x) of the Income-tax Act, 1961.

• CIT v. Dr. R.K. Jain (2017) 167 ITD 542 (MP High Court)

In this case, the assesses received a gift of a plot of land from his father without any consideration. The plot of land was sold by the assesses shortly after receiving it. The High Court held that the stamp duty value of the plot of land was taxable as income in the hands of the assesses under Section 56(2)(x) of the Income-tax Act, 1961.

• Deepa Rani v. ACIT (2019) 281 ITR 230 (Delhi ITAT)

In this case, the assesses received a gift of money from her father-in-law without any consideration. The assesses invested the money in a fixed deposit. The ITAT held that the interest income earned on the fixed deposit was taxable as income in the hands of the assesses under Section 56(2)(x) of the Income-tax Act, 1961.

The above case laws illustrate that money or property received without consideration or for inadequate consideration is generally taxable as income in the hands of the recipient under Section 56(2)(x) of the Income-tax Act, 1961. However, there are certain exceptions to this rule, such as in the case of alimony payments received by a spouse in a divorce settlement.