Section 57 of the Income-tax Act, 1961 (ITA) explored

As a taxpayer, you can claim certain deductions of expenses while calculating the ‘income from other sources’. Such deductions fall under Section 57 of the Income-tax Act, 1961 (ITA).

Let’s gain insight on various deductions that are allowed to a taxpayer under Section 57 while computing any income chargeable under the head, ‘income from other sources’.

• Dividend or interest earned on tradable financial assets (securities): Any reasonable sum spent by way of commission or remuneration to a banker or any other person as collection charges to realise such dividend or interest on behalf of the taxpayer is allowed as deduction. 
• Deduction in the form of employee’s contribution towards welfare schemes: An employee’s contribution towards provident fund (PF), superannuation fund (SF), or employee state insurance (ESI), and such other welfare schemes in the accounts of an employer is deemed as income if not taxable under the head, ‘profits and gains of business or profession’. In case the employer deposits any amount towards such funds, which gets credited before or on the due date, then such an amount is allowed as a deduction to a taxpayer.
• Deduction in the form of expenditure incurred on rental income: When any rental income is earned from letting out of plant, furniture, machinery, or building. Any expenditure incurred on current repairs of the above mentioned assets as well as insurance paid regarding them is allowed as a deduction. Depreciation applicable to such a plant, machinery, and furniture. However, depreciation in the case of a building will be only allowed if the taxpayer is the actual owner of the property.
• Standard deduction out of family pension: In the case of family pension, one-third of such income or Rs 15,000, whichever is less, is allowed as deduction. For example, if a family member receives a pension of Rs 60,000, the exemption available is Rs 15,000 or Rs 20,000 (1/3rd of Rs 60,000), whichever is less. Therefore, the taxable family pension will be Rs 60,000 – Rs 15,000 = Rs 45,000.
• Deduction from any other income: Any other expenditure (not a capital expenditure or personal expense) spent to earn an income chargeable to tax under the head, ‘income from other sources’. However, this deduction is not admissible in cases where the taxpayer is a foreign company.
• Deduction related to interest on compensation or enhanced compensation: For interest on compensation or enhanced compensation received – 50% of such interest received is allowed as a deduction but subject to specific conditions.

Finance Act, 2020: Amendments to Section 57(i) of ITA

The Finance Act, 2020 amended Section 57(i), effective from April 1, 2021. As per this, a taxpayer can claim a deduction of interest expenses for earning a dividend income. Interest on money borrowed for investing in the shares can be claimed as a deduction subject to a maximum of 20% of dividends or income in respect of units of a mutual fund. 

However, a shareholder is not permissible to further claim a deduction for any other expenditure paid for gaining the dividend income. 

Before this, dividend income remained exempt in the hands of shareholders under Section 10(34). The company had to pay tax on such dividends under Section 115-O.

In other words, a taxpayer cannot claim a deduction of any expense against dividend income, except interest expense on cash borrowed for investment. The deduction of interest expense will also be subject to a maximum limit of 20% of the amount of gross dividends. In the hands of a taxpayer, the dividend income will be taxable, irrespective of the sum received at applicable income tax slab rates.

For example, an individual received a dividend of Rs 20,000 from a domestic company on April 15, 2021. The company will deduct tax at 10% as the dividend amount exceeds Rs 5,000. The individual will receive the balance amount as a dividend, which is Rs 18,000 (20,000-Rs 2,000). 

Now, suppose the individual borrowed some funds to invest in equity shares and paid interest of Rs 6,000 during the financial year. So, as per the amendment to Section 57, the deduction should not exceed 20% of the amount of gross dividend. In this case, only Rs 4,000 (20% of Rs 20,000) is allowed as an interest deduction. 

Frequently Asked Questions (FAQs)

• In case an individual has a dispute with the assessing officer over the reasonable sum paid to a third-party person as commission for gaining a dividend, what is the further course of action?

The taxpayer can approach the Commissioner of Income-tax (Appeals), who is the first appellate authority. The Central Board of Direct Taxes (CBDT) has issued a form of appeal, Form No. 35. 

• In the case of a family pension, which is received on a monthly basis, will the deduction allowed be on a monthly or a lump-sum annual amount?

Deduction on family pension is calculated based on an annual amount and not on a monthly total.

• How is a pension different from a family pension?

Pension is treated as salary as it is a benefit an employee draws after retiring, while in the case of family pension the retirement benefit is passed on to the family members after the demise of the individual. Family pension is treated as income.