Section 56 of Income Tax Act

Section 56 of the Income-tax Act, 1961, classifies income into five heads: salaries, house property, business/profession, capital gains, and other sources.
Section 56 of Income Tax Act
3 min
28-June-2024

Section 56 of the Income Tax Act of 1961 deals with "Income from other sources." This section defines taxation rules for all kinds of income that do not specifically fall under any other heads of income: salary, house property, business/profession, and capital gains.

You can think of it as a general provision for taxing miscellaneous/ residuary incomes. Let us understand Sec 56 of the Income Tax Act in detail and learn some of its key provisions.

What is Section 56 of the Income Tax Act?

The Income Tax Act of 1961 categorises the incomes earned into five different heads:

  1. Salary
  2. House Property
  3. Profits and Gains from Business or Profession (PGBP)
  4. Capital Gains
  5. Other Sources (Sec 56)

Sec 56 of the Income Tax Act represents the head of “Income from other sources” and taxes all the residuary incomes or profit receipts that cannot be taxed under other heads. Some common examples are:

  • Winnings from lotteries, board games, or puzzles
  • Dividends received
  • Interest earned from securities
  • Income earned from renting plant, machinery, and equipment
  • Gifts exceeding Rs. 50,000
  • Insurance commission
  • Income from the transfer of shares and securities

Also read about: Short-term capital gains tax

Understanding Section 56 of Income Tax Act with an example

Let's understand this section better through a hypothetical example involving Mr. A, an Indian resident, who has received the following types of income in a financial year:

  • Received a dividend of Rs. 1,00,000 from an Indian company
  • Won Rs. 5,00,000 from a state lottery
  • Earned Rs. 50,000 as interest from government bonds
  • Received a gift of Rs. 1,00,000 from a friend (non-relative) on his birthday
  • Earned Rs. 1,20,000 by renting out his machinery
  • Received an advance of Rs. 2,00,000 for selling his land, but the deal was not completed, and the advance was forfeited

Now, let’s see what incomes are taxable under Sec 56 of the Income Tax Act.

  • Dividend income
    • Taxable under Section 56(2)(i).
    • Mr. A will include Rs. 1,00,000 as "Income from Other Sources" in his taxable income.
  • Lottery winnings
    • Taxable under Section 56(2)(ib).
    • Mr. A’s lottery winnings of Rs. 5,00,000 are taxed at a flat rate of 30% plus 4% cess (effective rate 31.20%).
  • Interest on securities:
    • Taxable under Section 56(2)(id).
    • Mr. A will include Rs. 50,000 as "Income from Other Sources" in his taxable income.
  • Gift:
    • Taxable under Section 56(2)(x).
    • Since the gift from his friend exceeds Rs. 50,000, the entire amount of Rs. 1,00,000 is taxable.
    • The benefit of exemption will not be available.
  • Rent from machinery:
    • Taxable under Section 56(2)(ii).
    • Mr. A will include Rs. 1,20,000 as "Income from Other Sources" in his taxable income.
  • Advance money forfeited:
    • Taxable under Section 56(2)(ix).
    • The forfeited advance of Rs. 2,00,000 is taxable as "Income from Other Sources."

To obtain the total income from other sources, we can add all the above incomes:

  • Rs. 1,00,000 + Rs. 5,00,000 + Rs. 50,000 + Rs. 1,00,000 + Rs. 1,20,000 + Rs. 2,00,000 = Rs. 10,70,000

Keynote:

  • Mr. A’s total taxable income from other sources would be Rs. 10,70,000.
  • Out of it, Rs. 5,00,000 from the lottery winnings will be taxed at a flat rate of 30% plus cess.
  • The rest will be taxed as per his applicable income tax slab rate.

What is income from other sources?

“Income from other sources” refers to any income that doesn't fit into the specific categories of salary, house property, business or profession, and capital gains. This head covers a wide range of income types, such as:

  • Income from interest on bank deposits, dividends from mutual funds, and returns generated from other investments.
  • Income from renting out a property, as long as it's not part of a business.
  • Money won from lotteries, gambling, or other games of chance.
  • Gifts received, especially those not from close relatives or under certain exempt circumstances.

Also read about: What is section 80C in income tax

Types of taxable income under ‘Income from other Sources’

Section 56 of the Income Tax Act represents the last head of “Income from other sources”. As discussed above, it taxes all the incomes that cannot be classified under the other four heads. Let us look at some specific incomes taxed under it:

  • Dividends
    • Dividends received from companies are taxed under this section based on the company's residential status.
  • Winnings from contests
    • Any “one-time income” is taxed at a flat rate of 30% plus a 4% cess, resulting in an effective tax rate of 31.2%.
    • Some common examples are incomes earned from:
      • Lotteries
      • Crossword puzzles
      • Horse races
      • Card games
      • Gambling
      • Betting
  • Employee contributions not deposited
    • If an employer does not deposit contributions received from employees towards a provident fund, employee state insurance, or superannuation fund into the respective accounts, such amounts become taxable.
  • Interest on securities
    • Income received as interest from various securities falls under this head.
  • Forfeited advance for capital asset
    • Any advance money received for a capital asset that is forfeited due to the non-completion of the deal is taxable.
  • Rent from machinery, plant, or furniture
    • Income from renting out machinery, plant, or furniture is taxable under this section.
  • Combined letting of furniture and building
    • If machinery or furniture is rented out along with a building and they are inseparable, the income is taxed under this head.
  • Keyman insurance policy
    • Any sum, including bonuses, received under a Keyman insurance policy is taxable.
  • Compensation for employment termination
    • Any compensation received due to the termination of employment is taxed under this section.
  • Debt repayment by business trusts
    • Repayments made by Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InVITs) are taxable to the extent they exceed the acquisition price of the debt.
  • Life insurance proceeds
    • Any amount received from a life insurance policy exceeding the total premiums paid is taxable, except for amounts exempt under Section 10(10D).
  • Gifts
    • If an individual receives gifts (movable or immovable property) exceeding Rs. 50,000, the amount is taxable.
    • Some exceptions are gift received:
      • From relatives
      • On the occasion of marriage
      • Through inheritance or under a will

Taxation of capital transactions under Section 56(2)(x)

Section 56(2)(x) of the Income Tax Act deals with the taxation of property transactions, both movable and immovable. It defines the associated income tax and stamp duty implications. Let’s see how it happens:

In the case of immovable property:

  • Received without consideration
    • If you receive an immovable property (like land or buildings) without paying anything for it, and its stamp duty value (the value used by authorities for stamp duty purposes) is more than Rs. 50,000, the full stamp duty value becomes taxable for you as the recipient.
  • Received for consideration
    • If you buy a property and the stamp duty value exceeds Rs. 50,000 or is more than 10% of what you paid, the difference between the stamp duty value and the amount you paid is taxable as income.

Important note:

  • As per the Finance Act 2021, for residential properties costing up to Rs. 2 crore, the allowable difference between the stamp duty value and the actual sale price was increased to 20% for transactions between November 12, 2020, and June 30, 2021.
  • In other cases, the allowed difference remains 10%.

Let’s understand the above provisions better through a hypothetical example:

  • Assume that Mr. A is buying a property for Rs. 50,00,000.
  • There are two scenarios:
    • Scenario 1
      • Stamp duty value: Rs. 54,00,00
      • Difference: 8% (within the 10% threshold)
      • Taxable income: None 
    • Scenario 2
      • Stamp duty value: Rs. 60,00,000
      • Difference: 20% (exceeds the 10% threshold)
      • Taxable income: Rs. 10,00,000 (the difference between the stamp duty value and the paid amount)

Since the difference in Scenario 2 is more than 10%, the excess amount (Rs. 10,00,000) will be taxed as "Income from other sources."

Also read about: Tax on short-term capital gains

In the case of movable property

For the uninitiated, movable property includes items like:

  • Jewellery
  • Gold
  • Shares
  • Securities,
  • Art collections
  • Paintings
  • Bullions

The related taxation rules are:

  • Received without consideration
    • If you receive such property for free and its total fair market value (FMV) exceeds Rs. 50,000, the entire FMV is taxable.
  • Received for consideration
    • If you purchase such property at a price significantly lower than its FMV (by more than Rs. 50,000), the difference between the FMV and the amount paid is taxable.

Primary objective

It is essential to note that the primary aim of taxing these transactions is to curb the use of “black money”. By taxing the recipient for the difference between the property's actual market value and the amount paid (or not paid), section 56 seeks to bring transparency to property transactions.

Also read about: Income tax slabs for FY24-25

Taxation of Gifts received under Section 56(2)(x)

Section 56(2)(x) of the Income Tax Act also deals with the taxation of gifts.

As per the section, gifts received are taxed if their total value exceeds Rs. 50,000 in a financial year. These gifts can be received in various forms, such as:

  • Cash
  • Online transfers
  • Fixed deposits
  • Demand drafts, or
  • Property (both movable and immovable)

For applicability of the limit of Rs. 50,000, the combined value of all gifts received in a year is considered. For example,

  • Say a person receives:
    • Rs. 15,000 in gifts on April 1, 2024
      and
    • Another Rs. 40,000 on March 31, 2025
  • Now, the total of Rs. 55,000 exceeds the exemption limit and makes the entire Rs. 55,000 taxable.

Furthermore, any “cash gift” received from an employer is fully taxable as part of the employee’s salary, regardless of the amount. The “gifts in kind” from employers are also fully taxable if their value exceeds Rs. 50,000.

Exemptions under Section 56(2)(x)

Section 56(2)(x) of the Income Tax Act also offers several exemptions in relation to gifts received by individuals or Hindu Undivided Families (HUFs) without adequate consideration. Let’s study some specific situations where gifts received are not taxed:

  • From relatives
    • Gifts from family members such as your:
      • Spouse
      • Siblings
      • Parents, and
      • Direct ancestors or descendants
  • On marriage
    • Gifts received during your marriage
  • Under a will or inheritance
    • Gifts you receive through a will or by inheriting them\
  • From local authorities
    • Gifts from entities like
      • Panchayats
      • Municipalities, or
      • District Boards
  • From educational or medical institutions
    • Gifts from:
      • Universities
      • Schools
      • Hospitals, and other such institutions
  • From charitable trusts
    • Gifts from charitable or religious trusts registered under Section 12A or 12AA
  • From trusts for the relative benefit
    • Gifts from trusts established solely for the benefit of your relatives

Also read: What is a long-term capital gain tax on property

Tax relief in the aftermath of COVID-19

It is worth mentioning that after the pandemic, the Finance Act 2022 made changes to Article 56(2)(x). Starting from the 2019-2020 financial year, these changes aim to provide tax relief due to the impact of the COVID-19 pandemic. Let’s study them:

  • Any money received from your employer or any other person to cover COVID-19 treatment costs is not taxable.
  • If a family receives money from the employer or another person following the death of the family's main income earner due to COVID-19, this money is also exempt from tax.
  • There is no limit on the amount of money received from an employer exempt from tax.
  • If the money is received from someone other than the employer, the exemption is limited to Rs. 10 lakh.

Conclusion

Section 56 of the Income Tax Act of 1961 refers to "Income from Other Sources". It taxes various incomes not categorised under salary, house property, business/profession, or capital gains. Some common examples include earnings from dividends, lottery winnings, interest on securities, rent from machinery, and gifts over Rs. 50,000.

Additionally, this section provides specific exemptions related to gifts from relatives, marriage gifts, inheritances, and certain institutional donations. Recently, some amendments were introduced in the aftermath of COVID-19 that exempted amounts received for treatment or death benefits.

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Frequently asked questions

What is the Section 56 exemption limit?
Section 56 exempts gifts received up to Rs. 50,000 in a financial year.
What is Section 56 of the Income Tax Act gift example?
Say you received Rs. 55,000 as gifts from non-relatives in the entire financial year. Now, as per Sec 56, the entire amount will be taxable, as it crossed the threshold of Rs. 50,000
Who are the relatives under Section 56 of Income Tax Act?

Under Section 56 of the Income Tax Act, relatives include:

  • Spouse
  • Siblings (brother or sister)
  • Siblings of the spouse
  • Siblings of either parent
  • Any lineal ascendant or descendant
  • Lineal ascendant or descendant of the spouse
  • Spouse of the above persons
What is income from other sources?
Income from other sources refers to earnings not classified under salary, house property, business/profession, or capital gains. Some common examples of such earnings are interest, dividends and lottery winnings.
What is the tax rate for income from other sources?
The tax rate for income from other sources is based on the individual's applicable income tax slab rate. However, winnings from lotteries, horse racing, crossword puzzles, and gambling are taxed at a flat rate of 30% plus cess.
What is clubbing of income?
Clubbing of income refers to the process by which the income of one person is added to the income of another person and is taxed in the hands of the latter.
What documentation should be maintained for gifts and other receipts?
You can maintain these documents: gift deeds, receipts, bank statements, and valuation reports for gifts.
If a person gives a cash gift to his wife, will that be taxable under Section 56(2)(x)?
No, gifts between spouses are not taxable under Section 56(2)(x) of the Income Tax Act.
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