Income from Other Sources

1. Income from Other Sources (IFOS)

1.1 Meaning and Scope (Sec. 56(1))

Any income which is not taxable under Salary, IFHP, PGBP, or Capital Gains shall be chargeable under IFOS.

1.2 Incomes Covered under IFOS (Sec. 56(2))

The following incomes are taxable under IFOS:

1.2.1 Dividend Income

Any dividend income received by an assessee is chargeable to tax under IFOS.

1.2.2 Winnings from Lotteries, Puzzles, Card Games, etc.

Income received by way of winnings from lotteries, crossword puzzles, races (including horse races), card games, and other games of any sort.

1.2.3 Interest on Securities

Interest received on securities is taxable under IFOS (Note: if shares/securities are held as Stock-in-Trade, then it is taxable under PGBP).

1.2.4 Rental Income from Plant, Machinery and Furniture

Rent derived from the letting out of Plant & Machinery or furniture, with or without a building, is taxable here if it is not chargeable under PGBP.

1.2.5 Keyman Insurance Policy Receipts

Any sum received under a Keyman Insurance Policy (including bonus), if it is not chargeable under PGBP or Salaries.

1.2.6 Interest on Compensation

Interest received on compensation or enhanced compensation due to the compulsory acquisition of a capital asset.

1.2.7 Gifts

Gifts received (subject to provisions under Sec. 56(2)(x)).

1.2.8 Other Incomes under IFOS

• Amount received under family pension.
• Interest on bank deposits & loans given.
• Interest on Income Tax refund.
• Income from sub-letting of house property.
• Royalty income.
• Agriculture income (in certain cases).
• Director sitting fee.
• Salary of MP / MLA / MLC, etc.

2. Taxation of Gifts

2.1 General Taxability Rules

2.1.1 Gifts from Employer

Gift received by an employee from their employer (due to the employee–employer relationship) is always taxable, even if received on marriage. It is taxed under Income from Salary.

2.1.2 Gifts under Business or Profession

Any gift, benefit, or perquisite arising from a Business or Profession is always taxable under PGBP.

2.1.3 Gifts under Section 56(2)(x)

All other gifts are governed by the provisions of Sec. 56(2)(x) as detailed below.

2.2 Taxability Based on Nature of Gift

Taxability of gifts or assets acquired for low consideration by any person under Sec. 56(2)(x):

2.2.1 Money Received without Consideration

If the aggregate money received without consideration exceeds ₹ 50,000, then the whole of the money shall be taxable.

2.2.2 Movable Property Received without or for Inadequate Consideration

• Without Consideration: If the aggregate Fair Market Value (FMV) > ₹ 50,000, the entire FMV is taxable.
• Inadequate Consideration: If the aggregate (FMV – Consideration) > ₹ 50,000, the difference between the FMV and the consideration is taxable.

2.2.3 Immovable Property Received without or for Inadequate Consideration

• Without Consideration: Examined per property. If the Stamp Duty Value (SDV) > ₹ 50,000, the entire SDV is taxable.
• Inadequate Consideration: Examined per property. If (SDV – Consideration) > ₹ 50,000 AND the SDV is more than 110% of the consideration, then the difference between the SDV and the consideration shall be taxable.

2.3 Exceptions Where Gift is Not Taxable

Cases where Sec. 56(2)(x) is NOT applicable (Mnemonic: M.R.I.D.H.U.T.L.A.I.T.C.). Money or property is not taxable if received:

2.3.1 Gift on the Occasion of Marriage

(M) Received on the occasion of the marriage of the individual.

2.3.2 Gift from Relative

(R) Received from any relative (refer to the definition of relative below).

2.3.3 Gift under Will or Inheritance

(I) Received under a Will or by way of Inheritance.

2.3.4 Gift in Contemplation of Death

(D) Received in contemplation of death of the payer.

2.3.5 Gift from Specified Institutions, Trusts, Universities and Local Authorities

• (H) From any Hospital or medical institution.
• (U) From any University or educational institution.
• (T) From or by any Trust registered u/s 12AA / 12AB.
• (LA) From any Local Authority u/s 10(20).
• (I) From an Individual by a trust created solely for the benefit of the relative of the individual.
• (T) By any Fund, Trust, Hospital, Medical Inst., University, Educational Institution referred u/s 10(23C).
• (C) Certain Exempt Transfers as per Sec. 47 (e.g., HUF Partition, Holding to Subsidiary, Subsidiary to Holding, Amalgamation & Demerger).

2.4 Amendments Relating to COVID-19 Relief

Sec. 56(2)(x) is not applicable in the following cases where money is received (w.e.f. AY 2020-21):

2.4.1 Amount Received for COVID-19 Treatment

By an individual, from any person, for expenses actually incurred on the treatment of a COVID-19 related illness of themselves or any family member.

2.4.2 Amount Received by Family Members of Deceased Person

Money received by the family member of a deceased person within 12 months of death (death must be due to COVID-19 illness, occurring within 6 months from the date of testing positive):

• (a) From the employer of the deceased person — without any limit.
• (b) From any other person — up to ₹ 10 Lakhs.

Note: Family means spouse, children, and dependent relatives (parents, brother, sister).

2.5 Meaning of Property

For the purposes of this section, "Property" is explicitly defined. The list of relevant property [S.S.J.D.P.S.A.O.B.V] includes:

2.5.1 Movable Property

• Shares & Securities
• Jewellery
• Drawing
• Painting
• Archaeological Collection
• Sculptures
• Any other work of art
• Bullion

2.5.2 Immovable Property

• Land, Building or Both

2.5.3 Virtual Digital Assets

• Virtual Digital Assets (VDA)

2.6 Meaning of Relative

2.6.1 Relative in Case of Individual

2.6.2 Relative in Case of HUF

Any member of the HUF is considered a relative in the case of a Hindu Undivided Family.

2.7 Special Notes and Provisions

2.7.1 Reference to Valuation Officer

If the assessee is not satisfied with the Stamp Duty Value (SDV), the case may be transferred to a Valuation Officer (VO) (similar to the provisions of Sec. 50C).

2.7.2 Applicability to Capital Asset and Stock-in-Trade

Sec. 56(2)(x) is applicable only if the property is in the nature of a capital asset of the recipient. If it is held as Stock-in-Trade, then Sec. 56(2)(x) is Not Applicable.

2.7.3 Cost of Acquisition under Section 49(4)

If any person receives an asset as a gift or acquires it for inadequate consideration, and has already been assessed u/s 56(2)(x) on FMV/SDV, then the Cost of Acquisition (COA) of such asset shall be the FMV/SDV considered under IFOS. When COA is computed as per Sec. 49(4), the period of holding of the previous owner shall NOT be included in the assessee's period of holding.

2.7.4 Stamp Duty Value on Date of Agreement and Registration

If the date of agreement and registration are not the same, the SDV on the date of agreement can be considered u/s 56(2)(x), provided full or part consideration is paid by Account Payee cheque, Account Payee DD, or ECS through a bank account up to the date of the agreement.

3. Special Provisions Related to Property and Shares

3.1 Section 43CA – Stamp Duty Value as Sales Consideration

In case of immovable property held as stock-in-trade, if SDV > 110% of consideration, then such SDV shall be deemed to be sales consideration for computing income under PGBP.

3.1.1 Applicability to Immovable Property Held as Stock-in-Trade

This section specifically governs transfers of land, building or both when they are not capital assets but held as Stock-in-Trade.

3.1.2 Conditions for Adoption of Stamp Duty Value

If the date of agreement and registration are not the same, the SDV on the date of agreement can be considered u/s 43CA, provided full or part consideration is received by Account Payee cheque, Account Payee DD, or ECS through a bank account up to the date of agreement.

3.1.3 Reference to Valuation Officer

If the assessee is not satisfied with the SDV, the case may be transferred to a Valuation Officer (V.O.), parallel to the procedures under Sec. 50C.

3.2 Section 56(2)(viib) – Shares Issued at Premium

If any closely held company (Unlisted Company) issues shares to any shareholder at a premium, then:

[Issue Price of Share − FMV of such Shares]

shall be taxable in the hands of the company under IFOS.

3.2.1 Applicability to Closely Held Company

This provision applies strictly to unlisted companies issuing shares at a premium.

3.2.2 Taxability of Excess Premium

The difference between the high issue price and the actual Fair Market Value is treated as income for the company.

3.3 Section 56(2)(xi) – Compensation on Termination of Employment

Any compensation received by any person due to termination of employment (or modification of terms of employment) is treated as income.

3.3.1 Compensation from Non-employer

This provision is applicable under IFOS only if the compensation is received from a person other than the employer.

3.3.2 Compensation from Employer

If the compensation is received from the employer, it is taxable u/s 17(3)(i) under the head "Salaries".

4. Deductions under Section 57

4.1 Deduction from Dividend Income

Dividend / Income from MF / UTI: Only interest expenses are allowed as a deduction, subject to a maximum of 20% of the dividend or income from MF/UTI.

4.2 Deduction from Family Pension

4.2.1 Normal Deduction Limit

Under the normal regime, the deduction shall be the lower of:

• 1/3rd of the family pension, or
• ₹ 15,000 p.a.

4.2.2 Deduction under Default Tax Regime

If the assessee opts for the default taxation regime u/s 115BAC, the standard deduction allowed is ₹ 25,000 instead of ₹ 15,000.

4.2.3 Exempt Family Pension Cases

• Family pension received by the widow, children, or nominated heirs of a member of the armed forces (including para-military forces), where death occurred in the course of operational duties — Exempt u/s 10(19).
• Family pension received by any family member of an individual who was in service of the Central Government or State Government and was awarded "Param Vir Chakra", "Vir Chakra", "Mahavir Chakra", or other notified gallantry awards — Exempt u/s 10(18)(ii).

4.3 Deduction for Interest on Compensation

For interest on compensation regarding compulsory acquisition, a flat deduction of 50% of such interest is allowed.

4.4 Other Expenditure Wholly and Exclusively for Earning Income

Any other expenditure is allowed as a deduction if it is:

• Not in the nature of capital expenditure, and
• Incurred wholly and exclusively for the purpose of earning such income.

5. Expenses Not Allowed under Section 58

5.1 Personal Expenses

Any personal expenses of the assessee are strictly disallowed.

5.2 Interest or Salary Payable Outside India without TDS

Any interest or salary payable outside India on which TDS has not been paid or deducted is disallowed.

5.3 Cash Expenditure Exceeding Prescribed Limit

Cash expenditure exceeding ₹ 10,000 is disallowed. The provisions of Sec. 40A(3) shall apply.

5.4 Payments to Resident without TDS

30% of any sum payable to a resident on which TDS has not been paid or deducted at source is disallowed. The provisions of Sec. 40(a)(ia) shall apply.

5.5 Expenditure Incurred in Connection with Casual Income

Any expenditure incurred in connection with casual income (like lotteries, races, card games) is completely disallowed.

6. Exempt Incomes

Certain incomes are entirely exempt under IFOS according to Section 10 provisions:

6.1 Interest on NRE Account – Section 10(4)(ii)

Interest on moneys standing to credit in a Non-Resident (External) Account (NRE A/c) is exempt in the hands of an individual who is a person resident outside India as per FEMA, 1999, or an individual permitted by RBI to maintain such an account.

6.2 Compensation on Account of Disaster – Section 10(10BC)

Compensation received or receivable from the Central Government, State Government, or a local authority by an individual or legal heir on account of any disaster is exempt, except to the extent of loss or damage already allowed as a deduction.

6.3 Scholarship for Education – Section 10(16)

The value of any scholarship granted to meet the cost of education is exempt from tax irrespective of the amount or the source of the scholarship.

6.4 Daily Allowance and Constituency Allowance of MPs/MLAs – Section 10(17)

Daily allowance and Constituency allowance received by any Member of Parliament or State Legislatures is completely exempt.

6.5 Awards and Rewards in Public Interest – Section 10(17A)

Payment (whether in cash or kind) given in pursuance of an award instituted in public interest by the Government, or a reward by the Government for approved purposes, is exempt.

6.6 Interest on Post Office Savings Bank Account – Section 10(15)

Exemption limits are as follows:

• ₹ 3,500 — in case of an individual account
• ₹ 7,000 — in case of a joint account

7. Taxability of Dividend

7.1 Meaning of Different Types of Companies

7.1.1 Indian Company

A company formed and registered under the Companies Act, 2013 or any corresponding previous law of a state.

7.1.2 Domestic Company

An Indian Company or any other company (including a foreign company) that has made prescribed arrangements for declaration and payment of dividend within India.

All Indian Companies are Domestic Companies, but not all Domestic Companies are Indian Companies. If a Foreign Company makes prescribed arrangements for payment of dividends in India, it shall be treated as a Domestic Company.

7.1.3 Foreign Company

A company that is not a Domestic Company.

7.2 Section 8 – Taxability of Dividend

Dividend income from a Domestic Company or a Foreign Company is taxable in the hands of the shareholder at the Normal Tax Rate.

7.2.1 Final Dividend

Taxable in the year of declaration at the AGM.

7.2.2 Deemed Dividend

Taxable in the year it is distributed or paid.

7.2.3 Interim Dividend

Taxable unconditionally in the year of actual receipt by the shareholder.

8. Deemed Dividend

8.1 Meaning and Objective

These payments are not dividend in reality, but are treated as dividends for Income Tax purposes to plug loopholes and check tax avoidance.

8.2 Types of Deemed Dividend under Section 2(22)

8.2.1 Distribution of Assets – Section 2(22)(a)

Any distribution of assets by a company to its shareholders, to the extent the company possesses accumulated profits (capitalised or not).

Note: In case of Bonus shares, there is no release of assets — hence, the issue of bonus shares is not deemed as dividend. When assets are distributed u/s 2(22)(a)/(c)/(d), the FMV of the asset on the date of distribution is taken for computing the dividend.

8.2.2 Distribution of Debentures or Deposit Certificates – Section 2(22)(b)

(a) Any distribution to shareholders of debentures, debenture stock, or deposit certificates, and
(b) Any distribution to preference shareholders of shares by way of Bonus.

(To the extent to which the company possesses accumulated profit, capitalised or not).

8.2.3 Distribution of Assets on Liquidation – Section 2(22)(c)

Any distribution of assets by a company on liquidation, to the extent to which the company possesses accumulated profit (capitalised or not).

8.2.4 Distribution on Reduction of Share Capital – Section 2(22)(d)

Any distribution to shareholders on reduction of capital, to the extent to which the company has accumulated profit (capitalised or not).

8.3 Comparison between Section 2(22)(a)/(b)/(c)/(d) and Section 2(22)(e)

8.4 Loans or Advances by Closely Held Company – Section 2(22)(e)

8.4.1 Conditions for Applicability

Loans or advances are treated as deemed dividend and taxable to the extent to which the company possesses accumulated profit (accounting profit as per Companies Act, not assessable profit). Even if the loan is repaid or the company charges a market rate of interest, the loan is still deemed as dividend at the point it is made.

8.4.2 Meaning of Concern and Substantial Interest

"Concern" means HUF, Firm, Company, or AOP/BOI. "Substantial interest" means holding 20% or more voting power/Profit Sharing Ratio (PSR) at any time during the Previous Year.

8.4.3 Taxability in Hands of Shareholder or Concern

If the loan/advance is given to a concern, it is treated as deemed dividend in the hands of the concern; however, per some court judgments, it can be taxed in the hands of the shareholder.

8.4.4 Exceptions for Trade Advances

Sec. 2(22)(e) is not applicable in the case of trade advances (i.e., advances in the nature of commercial transactions) as per CBDT Circular 19/2017. Example: Advances made to a sister concern for job work, or an advance to a shareholder to install P&M at their premises for an export order.

8.5 Items Not Treated as Dividend

8.5.1 Loans in Ordinary Course of Money-lending Business

Any advance or loan given by a company in the ordinary course of its business of money lending, where money lending is a "substantial part of the business" (SPOB). This is assessed on a case-by-case basis considering turnover, profits, manpower, capital employed, etc.

8.5.2 Dividend Set-off against Deemed Dividend Loan

Any dividend paid by a company that is set off against the loan which has already been deemed as dividend u/s 2(22)(e).

8.5.3 Buyback of Shares

Payments made by a company on the buy-back of its own shares.

8.5.4 Shares Issued under Demerger

Shares allotted to shareholders of a demerged company by the resulting company under Demerger.

8.5.5 Distribution Relating to Preference Shares

Any distribution made u/s 2(22)(c) or 2(22)(d) in respect of preference shares.

9. Special Notes under Default Tax Regime

The following benefits are not available when the assessee opts to pay taxes under the default tax regime u/s 115BAC:

9.1 Non-availability of Exemption under Section 10(32)

Exemption for the income of a minor child included in the income of the parent is withdrawn.

9.2 Non-availability of Exemption under Section 10(17)

Exemption for Daily and Constituency allowances of MPs/MLAs is withdrawn.