Section 56 of Income-tax Act, 1961 (ITA)-Income From Other Sources

The Income-tax Act, 1961 (ITA) classifies sources of income under five main heads: income from salaries, income from house property, profits and gains from business or profession, capital gain, and income from other sources.

The last head (IFOS) is a category of residuary incomes, which are receipts of earnings that cannot be classified under any other heads of income.

Let’s gather an overview of incomes that are generally taxable under the head, ‘income from other sources’:

• Dividends are reported under the head ‘income from other sources’ and are taxed under Section 56(2)(i) of the ITA. This is based on the residential status of the source company that paid out the dividend.
• One-time income earned from winning lotteries, crossword puzzles, and races, including horse races, card games, gambling, or betting. These incomes are chargeable to tax at a flat rate of 30% and cess at 4%. The effective total tax rate will be 31.2%. 

• The amount an employer receives from his employees as a contribution towards provident fund (PF), employees’ state insurance (ESI), and superannuation fund, among others. Such an amount will be taxable if the employer does not credit the amount received from the employee towards the respective funds’ account.
• Income received as interest on securities (Section 56(2)(id))
• Advance money received or money received in negotiation for transfer of a capital asset (provided the money is forfeited and it doesn’t result in the transfer of such asset)
• Income from letting out of plant, machinery, or furniture belonging to a taxpayer (Section 56(2)(ii))
• Income from renting out machinery or furniture with buildings, where such letting is inseparable(Section 56(2)(iii))
• Any sum received under the Keyman insurance policy, including bonus (Section 56 (2)(iv))
• As per Section 56(2)(viib) of the ITA, when a privately held company issues a share at a particular price which is greater than the Fair Market Value (FMV), tax is chargeable to the amount received in excess of FMV. As per the Finance Act 2023, this provision is now applicable for the issue of shares to both Residents and Non-Residents
• Any compensation received by a person in connection with the termination of his employment shall be taxable under other sources (Section 56(2)(xi))
• Distribution as a repayment of a debt by a business trust shall be taxable in the hands of the unit holders.Section 56(2)(xii) was introduced in the Finance Act 2023 to tax the repayment of a debt by REITs and InVITs. Repayment of SPV level debt will be first reduced from the acquisition price. Amount exceeding such acquisition price will now be taxable under other source income
• Any amount received from a life insurance policy exceeding the total premium paid will be taxable under another source. However, this excludes payment receipts exempt under section 10(10D) of the Income tax act (Section 56(2)(xiii))
• The amount received as a gift exceeding Rs 50,000 in the form of movable or immovable property. (However, the exemption is provided on gifts received from relatives, gifts received at the time of marriage, under will or inheritance, etc)

Tax On Gifts Received Under Section 56(2)(x)

Gifts received in the form of cash (cheque, online transfer, fixed deposit, demand draft or any other form) and cash equivalents or property (moveable or immovable) or in-kind during a financial year are taxable. As per Section 56 (2)(x) of the Income-tax Act, 1961 (ITA), you are required to pay taxes if the gift value is greater than Rs 50,000. While gifts received up to Rs 50,000 are completely tax-free, if this limit is crossed, the whole amount of gifts received becomes taxable in the hands of the recipient.

The aggregate value of gifts received during the financial year is taken into account for taxability, and it is not based on individual gifts. In a case where the aggregate value of gifts received during the year is greater than Rs 50,000, the aggregate value of these gifts will be charged to tax.​ For example, an individual received gifts worth Rs 15,000 on April 1, 2023, and Rs 40,000 on March 31, 2024. In this case, the entire Rs 55,000 is taxable under Section 56(2)(x), as the aggregate value of gifts exceeds Rs 50,000 during a financial year under the head ‘income from other sources’.

Similarly, a cash gift from an employer is fully taxable in the hands of the employee under the head of salaries, as per the ITA. However, in the case of a gift received in kind, the amount is fully taxable if the value exceeds Rs 50,000.

Tax On Property Transactions Under Section 56(2)(x)

Any property transaction (movable and immovable) is chargeable to income tax and stamp duty implications. 

Any immovable property, which could be land and buildings or both, received without consideration (without paying anything for it) has a stamp duty value (the value adopted by the authorities for payment of stamp duty) exceeding Rs 50,000. The full stamp duty value of such property will be taxable in the hands of the beneficiary. 

On the other hand, if the property is received for consideration and the stamp duty value of such property exceeds Rs 50,000 or 10% of the consideration, then the stamp duty value in excess of consideration will be taxable as income in the hands of the buyer.

Note: As per the Finance Act 2021, the rate of variation allowable between the stamp duty value and actual sale consideration value has been raised from 10% to 20%. However, the said provision was invoked for the period  November 12, 2020, to June 30, 2021, in the case of residential properties costing up to Rs 2 crore. In other cases, the rate of variation allowed is 10% of the consideration.

Example:

Mr A is planning to purchase property for a consideration of Rs. 50,00,000. Take two scenarios with a Stamp value of Rs. 54,00,000 and a Stamp value of Rs. 60,00,000. Is there any tax liability on the above transaction

Since in Scenario 2, the Stamp value of the property is more than 10% of the consideration such difference amount will be taxable under the head Income from Other sources.

Movable property such as jewellery, gold, shares, securities, archaeological collections, drawings, paintings, sculptures, any work of art, and bullion, among others, when received at a reduced price or without consideration, the aggregate FMV of which is greater than Rs 50,000, the aggregate FMV falls under the tax ambit. However, for a consideration, which is less than the aggregate fair market value of the property by an amount exceeding Rs 50,000, the entire excess fair market value will be taxable.

The main objective of taxing transactions without consideration or inadequate consideration is to curb black money usage. This is enabled by taxing the recipient for the difference between the asset's actual value and the consideration paid for it.

Exemptions Under Section 56 (2)(x)

The following exemption is provided in Section 56(2)(x), where transactions that take place without consideration or inadequate consideration will not be taxable.

1. Money or property received from a relative as a gift. In case a relative offers a gift, it is exempt from tax under Section 56(2)(x). According to the ITA, the following persons are considered relatives in the case of an individual: 
   1. Spouse of the individual, 
   2. brother/sister of the individual, 
   3. brother/sister of the spouse of the individual, 
   4. brother/sister of either of the parents of the individual, 
   5. any blood relative/offspring (Lineal ascendant or descendant of the individual)
   6. any blood relative/offspring of the spouse (Lineal ascendant or descendant of the spouse of the individual)
   7. spouse of the individuals referred to above. 
   8. For a Hindu undivided family (HUF), any member thereof

Friends, however, are not included in the list of relatives, so any gifts received from them are taxable.

2. Further, gifts that a couple receives during their marriage are non-taxable. At the same time, gifts that an individual gets on occasions such as birthdays or anniversaries remain taxable.​​
3. On the other hand, gifts received under a will or by way of inheritance and gifts received in contemplation of the death of the donor (for example, a terminally ill person anticipating death in the near future) are also tax-free.
4. Sale of movable property, Personal effects other than shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures, works of art or bullion are not taxable. Thus, if you sell personal effect movable in nature like Vehicle, Furniture, and Fixtures are not taxable

The income tax provision of taxation of gifts will not be applicable if any sum of money or property is received from:

• Any local authority, as per  Section 10(20) (defines what kind of income is exempt from tax) of the ITA
• Fund/foundation, university/other educational institution, hospital/other medical institution, and  trust/institution referred to in Section 10(23)
• Trust/institution that is registered under Section 12A, Section 12AA or Section 12AB
• Fund/ trust/institution, university/other educational institution and hospital/other medical institution as per Section 10(23C)
• The transaction, which is not regarded as transfer under Section 47, or from any individual by a trust that is created/established with the sole intention to benefit the relative of the individual

Tax Relief In The Aftermath Of Covid-19

The Finance Act, 2022 introduced amendments to Section 56 (2)(x) to provide tax relief to taxpayers to tide over the Covid-19 health crisis during the financial year 2019-20 and subsequent years. As per the amendment, the amount received from the employer or any well-wisher for COVID-19 treatment is tax-free. Further, money received by the family members from the employer or any other person in case of demise of a breadwinner of the family will be exempt from tax. There is no exemption limit if the money is received from the employer. But there is an exemption limit of Rs 10 lakh for money received from any other person.

Disclosure In ITR Form

Details of income taxable under Section 56(2)(x) due to inadequate consideration on receipt of movable or immovable property must be declared by the recipient in Schedule OS of your ITR 2 or 3.

Other Heads Of Income:

1. Income From Salaries
2. Income From House Property
3. Profits And Gains Of Business & Profession
4. Capital Gains