Types of Income Taxable under Section 56 of the Income-tax Act, 1961

 Types of Income Taxable under Section 56 of the Income-tax Act, 1961

When you file your Indian Income-tax return, one head you cannot ignore is Income from Other Sources under Section 56. This head catches all miscellaneous receipts that do not fit under Salaries, House Property, Business & Profession, or Capital Gains. In this article, we’ll explore the specific categories of income that Section 56(2) expressly brings into its scope, the applicable tax rates, and practical examples to help you report correctly and plan your taxes better.

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1. Overview of Section 56(2)

While Section 56(1) tells us that any income not chargeable under the other four heads is taxable here, Section 56(2) gives a clear list of particular receipts that must be taxed under this head. These are:

1. Dividends
2. Winnings from lotteries, crossword puzzles, card games, and horse races
3. Interest on securities
4. Rent from plant, machinery, furniture, or vehicles
5. Sum received under keyman insurance policies
6. Shares issued at a premium by closely held companies
7. Gifts received (above specified thresholds)
8. Forfeited advances or security deposits
9. Compensation or other receipts on account of non-compete agreements
10. Any other sum specifically covered by law under this clause

Each of these categories carries its own tax rate or threshold. Understanding these helps you compute tax accurately.

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2. Detailed List with Rates and Thresholds

Below is a quick reference table for the major receipts under Section 56(2):

Clause	Type of Receipt	Tax Rate / Threshold
2(i)	Dividends	Taxed at your slab rate
2(ib)	Lotteries, Crossword, Horse Race Winnings	Flat 30% + 4% Health & Education Cess
2(id)	Interest on Securities (e.g., Government Bonds)	Taxed at your slab rate
2(ii)/(iii)	Rent (plant, machinery, furniture, vehicles)	Taxed at your slab rate
2(iv)	Keyman Insurance Proceeds	Taxed at your slab rate
2(viib)	Shares Issued at Premium (closely held company)	Taxed at your slab rate
2(x)	Gifts	Gift value exceeding ₹ 50,000 in FY is taxable
2(ix)/(xi)	Forfeited Advances/Security Deposits	Taxed at your slab rate
2(xi)(c)	Compensation on Non-Compete Agreements	Taxed at your slab rate

Note: “Slab rate” refers to your normal income-tax slab for that year, ranging from 0% up to 30% depending on total taxable income.

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3. Examples of Common Section 56 Incomes

Let’s look at some everyday scenarios:

Dividend Income 

• Dividend Income:- You hold shares in Company X and receive ₹ 5,000 as dividend. Since dividends now form part of your total income, you add ₹ 5,000 under “Income from Other Sources” and pay tax according to your slab rate.

Winnings From Lottery

• Lottery Winnings:- You win ₹ 1,00,000 in a state lottery. Tax of 30% plus cess (i.e., 31.2%) is deducted at source by the lottery authority, so you receive ₹ 68,800. You must still report ₹ 1,00,000 as income; credit the TDS already deducted when calculating your final tax liability.

Interest on Securities

• Interest on Securities:- Interest of ₹ 10,000 from a Government of India bond is taxable at your slab rate and must be reported here.
• Rent from Machinery:- If you lease out your excavator to a contractor for ₹ 2,00,000 in a year, this amount is taxable under Section 56(2)(ii)/(iii).

Gifts Threshold Visual

• Gifts:- You receive ₹ 60,000 cash from a friend (non-relative). Since it exceeds ₹ 50,000 in the financial year, the entire ₹ 60,000 becomes taxable in your hands.

Forfeited Deposit Scenario 

• Forfeited Security Deposit:- A buyer forfeits ₹ 50,000 deposit on a property deal that falls through. That ₹ 50,000 is taxable under Section 56(2)(ix).

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4. Exemptions and Thresholds

Not every receipt under Section 56 is fully taxable. Here are common exemptions:

• Gifts from Relatives
• Any amount received from specified relatives—spouse, siblings, parents, lineal ascendants/descendants, and in-laws—is fully exempt, regardless of value.
• Gifts on Marriage
• Gifts received by an individual on the occasion of their marriage are fully exempt.
• Inheritance
• Property inherited through a will or by succession is exempt.
• Nominal Gifts
• Gifts in kind (movable or immovable property) whose stamp-duty value does not exceed ₹ 50,000 are exempt. Above this threshold, the entire value becomes taxable.
• Prizes Below ₹ 10,000
• Certain small prizes (e.g., from competitions) below ₹ 10,000 may be exempt as per CBDT notifications—always check the latest circulars.

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5. Reporting and Compliance Tips

1. Schedule OS in ITR:- All Section 56 incomes go into Schedule OS of your ITR-1 to ITR-4.
2. TDS Credit:- Claim credit for any tax deducted at source (e.g., TDS on lottery, rent or interest).
3. Maintain Records:- Keep gift deeds, policy statements, deposit agreements, lottery certificates, and bank statements for verification.
4. Valuation:- For gifts of property, use the stamp-duty value on the date of transfer to determine taxable amount.
5. Plan Timing:- You can time receipts (like interest payment dates) to stay within the same financial year for better cash-flow management.

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Conclusion
Section 56(2) of the Income-tax Act casts a wide net over many miscellaneous incomes—dividends, winnings, interest, gifts, and more. By knowing exactly which receipts are taxable here, and at what rates or thresholds, you can ensure accurate reporting, avoid penalties, and optimize your tax planning. In the next article of this series, we’ll discuss the deductions under Section 57 and the non-deductible items under Section 58 so you can maximize your net taxable income and minimize your tax liability.

Published on Commerce Tutors – simplifying tax concepts for students, teachers, and professionals alike.