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Income Tax on winning lottery, crossword puzzles, game shows, horse race

Winning big on shows like KBC or Indian Idol can be life-changing, but it’s crucial to remember that taxes come into play with such windfalls. Income from winning awards, prizes, or lotteries, whether from TV game shows, online gaming, or other sources, falls under the category of Income From Other Sources (IFOS) in the tax code. These winnings could be received in cash or as non-monetary rewards.

According to Section 115BB of the Income Tax Act, a flat tax rate of 30% is applied to such income. So, while dreaming about all the possibilities with your prize money, it’s wise to factor in the tax obligations that come with it.

Income Tax on Awards & Prizes

Income earned in the form of awards, prizes, or winnings can be subject to different tax treatments based on various factors:

Awards:

1. Government-approved Awards: Awards of public interest sanctioned by the Government, such as National awards, Nobel Prize, Arjuna Award, Bharat Ratna, and others notified under Sec 10(17A), are exempt from tax for the recipient.
2. Non-Government Approved Awards: Awards like Filmfare, ICC Cricket awards, etc., which are not approved by the Government, are taxed as Income From Other Sources (IFOS) in the hands of the recipient.

Prizes:

Prizes obtained through various means such as lotteries, puzzles, betting, gambling, sports events, horse races, and others are taxable as Income From Other Sources (IFOS) as per Sec 56(2) of the Income Tax Act.

Tax Rate on winning lottery, puzzle, game show, horse race

The tax on lottery winnings, crossword puzzles, card games, etc. is calculated at a flat rate of 30%. After adding the health and education cess of 4%, the effective tax rate becomes 31.2%. This tax rate applies to the total amount won, regardless of the individual’s income slab.

If the prize is received in kind, such as a valuable item, the tax is determined based on the market value of the item received.

Example

Ajay won a lottery and received INR 5 lakh in cash and a diamond ring worth INR 1 lakh. He also has a Fixed Deposit Interest income of INR 1 lakh. He has invested INR 1.5 lakhs in Section 80C and also paid INR 25,000 as Mediclaim. Calculate the tax liability.

TDS on prizes & winnings

TDS, or Tax Deducted at Source, is a mechanism through which the government ensures tax collection at the source of income itself. Sections 194B and 194BB of the Income Tax Act, 1961, outline specific scenarios where TDS is applicable.

Under Section 194B, TDS is applicable on income from lottery, betting, gambling, and similar activities. If the income from these sources exceeds INR 10,000 during the financial year, the entity distributing the prize is responsible for deducting TDS at a rate of 31.2% at the time of payment.

Similarly, Section 194BB mandates TDS on income from owning and maintaining horse races. If the income exceeds INR 10,000 in a financial year, the organizer of the horse race must deduct TDS at a rate of 31.2% while making the payment.

These provisions ensure that taxes are collected upfront from certain high-risk income sources, minimizing the possibility of tax evasion and ensuring compliance with tax regulations. It’s essential for both the payer and the recipient to understand these TDS provisions to avoid any penalties or non-compliance issues.

ITR Form & Due Date

When it comes to filing income tax returns (ITR) for winnings from lottery, puzzles, betting, and similar activities, they are categorized as Income from Other Sources. Here’s a simplified guide on the ITR form and due dates:

1. ITR Form: Winnings from these activities fall under the purview of Income from Other Sources. Taxpayers should file ITR-1 if their income is up to INR 50 lakhs, and ITR-2 if their income exceeds INR 50 lakhs. These forms are available on the Income Tax Website.
2. Due Date: The due date for filing income tax returns is typically the 31st of July of the Assessment Year. For instance, for the financial year 2023-24 (Assessment Year 2024-25), the due date to file the ITR is 31st July 2024.

It’s crucial to adhere to these deadlines to avoid penalties or legal implications. Filing taxes accurately and on time ensures compliance with tax regulations and contributes to the smooth functioning of the taxation system.

Special Provisions for tax on winning lottery, puzzle, game show, horse race

When a taxpayer earns income from winning a lottery, puzzle, card game, or gambling, there are specific considerations they must keep in mind:

1. Deductions Not Allowed: The taxpayer cannot claim deductions under Chapter VI-A, including popular ones like Sec 80C (investment in specified instruments), 80D (health insurance premiums), or 80G (donations to specified funds or charities).
2. Inability to Claim Expenses: Any expenses incurred cannot be offset against this income. Unlike other types of income where expenses can sometimes be deducted to reduce taxable income, no such provision applies here.
3. Flat Tax Rate: Tax on such income is levied at a flat rate of 31.2%. This means that the taxpayer cannot avail of the benefit of basic exemption limits or the tax slab rates applicable to regular income.
4. Non-Refundable TDS: Any Tax Deducted at Source (TDS) on such income is non-refundable. Once deducted, the taxpayer cannot claim a refund of the TDS amount, as is possible in certain other cases.
5. Treatment of Losses: Losses incurred from owning and maintaining a horse race cannot be set off against any other income except income from horse races. However, the taxpayer can carry forward any remaining losses for up to four years, to be offset against future income from horse races.

These considerations underscore the unique tax treatment of income from certain activities, highlighting the importance of careful tax planning and compliance.

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Official Income Tax Return filing website: https://incometaxindia.gov.in/