Income from Other Sources plays a vital role in India’s taxation system. It refers to the income that does not fall under the other four heads of income, namely Salary, House Property, Business/Profession, and Capital Gains. Such income is taxed as per the provisions of the Income Tax Act, 1961.
Heads of Income
- Income from Salary: This includes earnings from employment, such as basic salary, allowances, bonuses, commissions, and any other benefits received from an employer.
- Income from House Property: This head includes income generated from owning and renting out a house property, whether residential or commercial. Rental income and deemed rental income from self-occupied properties are considered under this head.
- Income from Business or Profession: This head includes income earned from running a business or carrying out a profession, such as consulting, freelancing, or any trade-related activities.
- Income from Capital Gains: Capital gains arise when there is a profit or loss from the sale of capital assets like property, stocks, mutual funds, or other investments.
- Income from Other Sources: This head encompasses all residual income sources that do not fall under the other four heads. It includes interest income, dividends, lottery winnings, and any other income not covered elsewhere.
Savings Account
Interest earned on a savings account is a common type of income under the head ‘Income from Other Sources’. This income is taxable as per the income tax slab rates applicable to the individual. It is important to note that the bank or financial institution where the savings account is held deducts tax at source (TDS) on the interest earned on the savings account if the interest earned exceeds Rs.5,000 for individuals and Rs. 40,000 for senior citizens per year.
Individuals are required to report the interest earned on their savings account while filing their income tax returns. The interest earned on a savings account can be easily calculated by referring to the bank statement or by checking the passbook entries.
Deduction on Interest Income Under Section 80TTA
Individuals can claim a deduction on the interest income earned from savings accounts under section 80TTA of the Income Tax Act.
The deduction under section 80TTA is available for interest earned on savings accounts held with a bank, cooperative society, or post office. The maximum deduction that can be claimed under this section is Rs. 10,000 in a financial year.
If the interest earned on the savings account exceeds Rs. 10,000 in a financial year, then the excess amount will be considered as taxable income under the head ‘Income from Other Sources’. It is important to note that the deduction under section 80TTA is not available on interest earned on fixed deposits, recurring deposits, or any other type of deposits.
Tax on Fixed Deposits
Interest earned on fixed deposits is considered as income under the head ‘Income from Other Sources’ and is taxable as per the individual’s income tax slab rate. The bank or financial institution where the fixed deposit is held deducts tax at source (TDS) on the interest earned on fixed deposits if the interest earned exceeds Rs. 5000 (for individuals) and Rs.40,000 (for senior citizens) per year. Senior citizens can enjoy an income tax exemption of upto Rs 50,000 on the interest income they receive from fixed deposits with banks, post offices, etc., under Section 80TTB.
It is important to note that TDS is deducted on the total interest earned on fixed deposits during the year exceeds the specified threshold. However, even if the interest earned on a fixed deposit is less than the specified threshold individuals are required to report the interest earned while filing their income tax returns before the last date to file ITR.
What is Income from Other Sources?
According to section 56(1) of the Income Tax (IT) Act, 1961, Income from other sources includes all income you earn from other sources. In simple words, if any income can not be declared under any other income head. it will come under this head. Income from Other Sources is a category of income that includes all types of income that cannot be classified under any other head of income, such as salary, house property, business or profession, and capital gain.
Some common examples of income from other sources are:
- Interest earned on the savings account, fixed deposits, recurring deposits, and other financial instruments
- Rental income earned from a property owned by an individual
- Dividend income earned from shares and mutual funds
- Income earned from winning lotteries, races, card games, other games like gambling or betting.
- Income earned from letting out machinery or equipment
- Any gift received that exceeds Rs. 50,000 in a financial year.
What is income from other sources?
Interest Income: Interest income is a common component of Income from Other Sources. It includes interest earned on savings accounts, fixed deposits, recurring deposits, and other financial instruments. The interest income is added to the taxpayer’s total income and taxed at the applicable slab rates.
Rental Income: Rental income from letting out properties is another significant part of Income from Other Sources. Whether you own residential or commercial property, the rent received is subject to taxation after deducting standard deductions and municipal taxes.
Dividends and Mutual Funds: Income earned from dividends and mutual funds is considered under this head. While dividends from domestic companies are tax-free, those from foreign companies are taxable. Additionally, capital gains from mutual funds are also accounted for under this category.
Family Pension: Pension received by family members after the taxpayer’s demise is taxable under Income from Other Sources. The taxable amount is determined based on the pension rules and the individual’s relationship with the deceased.
Lottery and Gambling Winnings: Any winnings from lotteries, card games, betting, or gambling are subject to taxation under this head. The tax rate is typically higher for such earnings, and TDS (Tax Deducted at Source) is often deducted by the payer.
Gifts and Cash Prizes: Gifts and cash prizes exceeding a specified limit are treated as taxable income under Income from Other Sources. However, certain gifts from relatives and on specific occasions may be exempted.
Income from Royalties: Authors, artists, and creators who receive royalties for their intellectual property fall under this category. Royalties are taxed at different rates based on the nature of the work and the agreement.
Club Membership Fees: Fees received from club memberships are considered as Income from Other Sources. These fees are added to the taxpayer’s income and taxed accordingly.
Income from Agricultural Activities: Agricultural income is generally exempt from income tax. However, if the total agricultural income exceeds a specific limit, it is taxable under this head.
Commission Income: Income earned through commissions and brokerage is classified under this head. Whether it’s a commission from stockbroking, real estate, or any other service, it is taxable.
Annuity Payments: Annuity payments received from insurance companies or other financial institutions are taxable under Income from Other Sources.
Income from Subletting: If you earn income by subletting a property you’ve rented, it is taxable under this head. The sublet income needs to be added to your total income for taxation.
Interest on Income Tax Refunds: Interest received on income tax refunds falls under Income from Other Sources. It is essential to report this income while filing tax returns.
Scholarships and Fellowships: Scholarships and fellowships granted to individuals for academic or research purposes are included in this category and taxed accordingly.
Income from Freelancing and Consultancy: Professionals earning income from freelancing or providing consultancy services must account for this income under the head of Income from Other Sources.
Prizes and Awards: Prizes and awards received in cash or kind, such as in competitions or ceremonies, are taxable under this head.
Income from Savings Bonds: Interest income from government savings bonds and other similar instruments is taxed as part of Income from Other Sources.
Income from Foreign Assets: Income from assets held overseas, including foreign bank accounts, investments, or properties, must be reported under this category and taxed accordingly.
Advances and Gifts on Occasions: Certain gifts received during occasions like weddings may be taxable if they exceed the exemption limit.
Income from Intellectual Property Transfer: If you transfer the rights to your intellectual property, such as patents, copyrights, or trademarks, the consideration received is taxable under this head.
Income from Lease: Lease income, such as income from leasing machinery, equipment, or land, is classified under this head for taxation.
Earnings from Digital Platforms: Income earned by content creators, influencers, or individuals on digital platforms is considered under this category.
Income from Crowdfunding: Income generated from crowdfunding activities is taxed as part of Income from Other Sources.
Honorarium: Payments received as an honorarium for services rendered are considered taxable income.
Interest on Loans: Interest received on loans given to individuals or businesses is included in this category for taxation purposes.
Avoiding TDS on Fixed Deposits
- Submit Form 15G/15H: If you are below the taxable income threshold, you can submit Form 15G (for individuals below 60 years of age) or Form 15H (for senior citizens above 60 years) to the bank. These forms declare that your total income is below the taxable limit, and the bank will not deduct TDS on your fixed deposit interest.
- Distribute Investments Across Banks: Each bank applies TDS separately on the fixed deposit interest. By distributing your fixed deposits across different banks, you can stay below the TDS threshold for each bank and avoid TDS on your interest income.
- Opt for Cumulative Fixed Deposits: Instead of opting for regular fixed deposits with periodic interest payouts, consider choosing cumulative fixed deposits. In cumulative fixed deposits, the interest is reinvested, and you receive the entire interest amount along with the principal at maturity. This helps defer the TDS liability until the maturity date.
- Invest in Tax-Free Bonds: If you are looking for fixed-income investments with no TDS, consider investing in tax-free bonds issued by certain government entities. The interest income from these bonds is tax-free, and there is no TDS deduction.
- Invest in Tax-Saving Fixed Deposits: Under Section 80C of the Income Tax Act, you can invest in tax-saving fixed deposits offered by banks for a lock-in period of five years. The interest earned is eligible for a deduction up to Rs. 1.5 lakh and there is no TDS deduction.
- Plan Your Interest Payouts: If you have multiple fixed deposits, consider staggering the interest payout dates to keep the income below the TDS threshold in each financial year.
FAQs
Under which head pension income & family pension income are taxable?
Pension income is taxable under “Income from Salary,” while family pension income is taxable under “Income from other Sources”.
Do I have to show interest income in ITR 1 if TDS is already deducted?
Yes, you should disclose interest income under the head Income from Other Sources in ITR 1 irrespective of tax deduction and later claim the tax credit using Form 16A.
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