Section 56 of Income Tax Act

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?

Section 56 of the Income Tax Act, 1961, addresses income that doesn’t fall under the traditional heads of salary, house property, business or profession, and capital gains. Known as "Income from Other Sources," this section covers earnings from miscellaneous sources such as gifts, lottery winnings, interest on deposits, and even rental income from certain assets.

Taxpayers must be aware of Section 56 to ensure they comply with tax laws regarding these diverse income types. This section also outlines the tax treatment for gifts, especially those received from non-relatives, and other financial gains. Understanding these provisions can help individuals and businesses manage their tax obligations better.

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: Income tax return extended date for AY 2024-25

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.

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

Also read: Section 112A of Income Tax Act

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: Section 111A of Income Tax Act

Tax on Property Transactions

All real estate transactions, whether involving movable or immovable property, are subject to income tax and stamp duty. If you acquire immovable property—such as land or buildings—without paying for it and its stamp duty value exceeds Rs. 50,000, the full stamp duty value becomes taxable. However, if the property is purchased, and its stamp duty value exceeds Rs. 50,000 or 10% of the purchase price, the buyer must pay tax on the amount above the stamp duty value.

For movable property like jewellery, gold, shares, securities, artwork, or bullion, taxation applies if the fair market value (FMV) exceeds Rs. 50,000 and it was acquired at a discounted price or for free. In cases where the consideration paid is lower than the FMV by more than Rs. 50,000, the difference is fully taxable.

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.

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.

Also read: Section 43B of Income Tax Act

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

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.

Also read: Section 195 of Income Tax Act

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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