Income from other sources: A complete guide to taxation in India

In the Indian taxation framework, income is classified into five distinct categories. These are income from salary, income from house property, profits and gains from business or profession, capital gains, and income from other sources. The first four categories are relatively straightforward in their scope. However, there are numerous receipts and earnings that do not fall neatly into them. To ensure comprehensive coverage, these are grouped under the head known as income from other sources.

This head is not merely a residual category but a crucial component of the Income Tax Act, 1961. It ensures that no revenue escapes taxation and that all financial activities, particularly those related to investment and market operations, are properly accounted for. For stockbrokers, intermediaries, and investors, proper recognition and reporting of such income play an important role in maintaining regulatory compliance, transparency, and credibility in the financial system.

The following discussion explains what constitutes income from other sources, its tax treatment, available deductions and exemptions, methods of calculation, and practical tax planning insights.

What is income from other sources?

Income from other sources refers to any earnings that cannot be classified under the other four heads of income. Section 56 of the Income Tax Act, 1961, specifically governs this category. Broadly, it includes income from interest, dividends, casual winnings, certain pensions, gifts, and other miscellaneous receipts.

By including such diverse income streams, this head ensures that the taxation framework remains exhaustive. It prevents gaps where certain receipts might otherwise remain untaxed. Thus, income from other sources acts as a safeguard to uphold the completeness and fairness of India’s tax structure.

Examples of income from other sources

The law specifies several types of income that fall under this category. Some common and relevant examples, particularly for individuals engaged in financial markets, are:

• Interest income: Interest earned from savings accounts, fixed deposits, recurring deposits, corporate bonds, and debentures.
• Dividends: Dividends received from Indian companies or foreign-listed entities.
• Gifts: Monetary or non-monetary gifts received by an individual above a value of ₹50,000, unless exempt under specified circumstances.
• Casual winnings: Winnings from lotteries, betting, horse races, online fantasy sports, game shows, or contests.
• Family pension: Pension received by family members after the death of a taxpayer.
• Rental income of assets: Rent received from machinery, plant, or furniture, not falling within house property income.
• Brokerage or commission: Any commission income that does not form part of professional receipts.

The table below illustrates the taxability of some typical receipts:

Taxability of income from other sources

The tax on income from other sources is levied as per the individual’s applicable tax regime and slab. For the Financial Year 2025–26, the new regime prescribes the following rates:

It is important to note that certain types of income, such as lottery winnings or game show prizes, are taxed at special flat rates regardless of the individual’s income slab.

Deductions allowed under income from other sources

Although all income is generally taxable, Section 57 of the Act provides specific deductions that may be claimed from gross receipts under this head. Some of the key deductions include:

• Commission or brokerage paid for earning the income.
• Rent paid for assets such as plant or machinery that are leased out.
• Legal or clerical expenses incurred to realise the income.
• Depreciation on machinery, plant, or furniture used to earn the income.
• Interest paid on borrowed capital, if the funds were used to earn such income.

Illustrative Example:

If machinery is rented out for ₹10,000 in a year, and expenses of ₹2,000 are incurred for its maintenance and related costs, the taxable income is calculated as:

Net Income = Gross Income − Allowed Deductions
= ₹10,000 − ₹2,000
= ₹8,000

Thus, only ₹8,000 will be taxed under this head.

Exemptions under income from other sources

Not all receipts classified as income from other sources are taxable. The law provides certain exemptions and reliefs to ensure fairness:

• Dividend income: Certain dividends from Indian companies are exempt up to specified limits.
• Agricultural income: Fully exempt in most cases, though it may be considered for rate purposes in specific scenarios.
• Gifts from relatives: Gifts received from close relatives, or on special occasions such as marriage, are exempt.
• Scholarships: Stipends, grants, or fellowships for educational purposes are not taxable.

Calculation of income from other sources

The computation of taxable income under this head follows a systematic approach:

1. Identify and list all incomes that fall under this head.
2. Sum the gross income for the financial year.
3. Subtract deductions allowable under Section 57.
4. Determine net taxable income.
5. Apply the appropriate slab or special tax rate.

Worked Example:

A stockbroker earns the following during the year:

• Interest on fixed deposits: ₹7,000
• Commission income: ₹5,000
• Dividend from Indian companies: ₹6,000
• Expenses incurred (brokerage charges): ₹2,000

Calculation:

• Gross Income = ₹7,000 + ₹5,000 + ₹6,000 = ₹18,000
• Net Income = ₹18,000 − ₹2,000 = ₹16,000

The tax on ₹16,000 will then be computed as per the applicable slab.

Filing and reporting of income from other sources

Taxpayers are required to disclose income from other sources accurately in their Income Tax Returns (ITR). Proper filing ensures transparency and avoids potential disputes. Key aspects include:

• Disclosing all relevant income in the correct ITR form (ITR-1, ITR-2, etc.).
• Maintaining supporting documentation such as interest certificates, dividend statements, or rental agreements.
• Clearly distinguishing between exempt and taxable receipts.
• Using updated returns (ITR-U) to correct any omissions or errors within the permissible time frame of four years.

For professionals and intermediaries such as stockbrokers, strict compliance with disclosure rules is particularly vital. It not only avoids penalties but also reinforces credibility with regulators.

Practical tax planning tips

Effective management of tax on income from other sources requires foresight and diligence. The following measures are recommended:

• Maintain records: Keep detailed documentation of receipts, expenses, and exemptions claimed.
• Digitise accounts: Use accounting software or digital ledgers to track recurring receipts such as interest or dividends.
• Stay informed: Monitor budget announcements and amendments to Section 56 and related provisions.
• Claim exemptions wisely: Ensure that all eligible deductions and exemptions are availed without error.
• Audit regularly: Undertake periodic reviews or reconciliations to detect discrepancies early.

Conclusion

The concept of income from other sources, though often overlooked, is fundamental to the integrity of the Indian taxation system. Its wide scope ensures that diverse streams of revenue, from casual winnings to interest receipts, are subject to taxation. Understanding the tax on income from other sources is therefore essential not only for salaried individuals and investors but also for intermediaries such as stockbrokers, who must maintain stringent compliance standards.

Accurate classification, timely reporting, and correct utilisation of deductions and exemptions safeguard taxpayers against regulatory challenges and penalties. Moreover, they strengthen the transparency and stability of financial markets. With tax laws subject to frequent changes, staying informed and adopting methodical practices will enable taxpayers to manage obligations efficiently while supporting responsible financial growth.