Introduction
In compliance with the Income Tax Act of 1961, the income an individual earns undergoes categorization into distinct heads of income. While the entirety of gross income isn’t typically subject to taxation, the Income Tax Act incorporates provisions allowing deductions against the earned income. Section 57 of Income Tax Act specifically addresses deductions applicable to income falling under the “Income from other sources” category. This section, encompassing clauses (i), (ia), (ii), (iia), (iii), and (iv), outlines deductions that contribute to the calculation of income chargeable under “Income from other sources.” Generally taxed based on applicable slab rates, income from other sources becomes more nuanced with deductions, a crucial aspect for reducing tax liabilities. Let’s explore the intricacies of deductions under Section 57 to optimize your tax position.
Under the ambit of the Income Tax Act, income is systematically classified into five heads, namely Salaries, Income from house property, Profits and gains of business or profession, Capital gains, and Income from other sources.
The last category, “Income from other sources,” serves as a residual head encompassing income that doesn’t fit within the first four classifications. Examples include dividends, lottery winnings, interest income, and family pension.
The pertinent question arises: Can taxpayers deduct expenses from this residual income? Section 57 of the Income Tax Act provides clarity by offering specific deductions applicable to various taxable categories falling under “Income from other sources.” In contrast this section demystifies the eligibility for deductions, particularly for income in this distinct category, providing a structured framework for taxpayers.
Deductions that Allowed Under Section 57 of Income Tax Act
1. Deduction for Dividends or Interest on Securities [Sec 57(i)of Income Tax Act]:
Reasonable commissions or remunerations to bankers or individuals realizing interest on securities are deductible.
Post the 2020 Finance Act amendment, taxpayers receiving dividend income can only deduct interest expenses related to receiving dividends, limited to 20% of the dividend amount.
2. Deduction for Employee’s Contributions to Welfare Schemes [57(ia)]:
However Contributions from employees to provident, superannuation, or E.S.I. funds. If not taxable under “Profits and gains of business or profession,” are considered income from other sources.
Employer contributions from these incomes to the mentioned funds are eligible for deduction under Section 57(ia) of the Income Tax Act.
3. Deduction for Repairs, Depreciation, etc. for Assets Let-out [Sec 57(ii)]:
Additionally Applicable to income earned from leasing machinery, plant, or furniture with or without a building.
Includes costs of recent repairs, insurance premiums, and depreciation, provided the taxpayer is the asset owner.
4. Deduction for Family Pension [Sec 57(iia)]:
Offers a standard deduction of up to ₹15,000 or 1/3rd of the family pension, whichever is less.
Pertains to consistent monthly sums paid by employers to legal heirs of deceased employees.
5. Deduction for any Other Income [Sec 57(iii)]:
Expenditure incurred exclusively to earn taxable income under this head is deductible, provided it meets specific conditions.
Should be wholly and exclusively related to income generation, excluding capital and personal expenses.
6. Deduction for Interest on Compensation or Enhanced Compensation [Sec 57(iv)]:
Likewise applicable when the government pays interest on compensation or enhanced compensation for acquired property.
Permits a deduction equal to 50% of the interest amount.
Navigating these deductions ensures a comprehensive understanding of their application, optimising tax positions within the framework of Section 57 of Income Tax Act.
Deductions Not Allowed Under Section 58:
- Section 58 of the Income Tax Act explicitly restricts the deduction of certain expenses against income from other sources. The following expenditures are ineligible for deduction:
- Personal Expenses:
- Expenses of a personal nature incurred by the taxpayer are not deductible.
- Interest Payable Outside India without Tax Payment:
- Interest payable outside India, where no tax has been paid or withheld at the source, cannot be deducted.
- Payments under “Salaries” Outside India without Tax Payment:
- Payments falling under the “Salaries” category and payable outside India are not deductible unless tax has been paid or withheld at the source.
- Income from Specified Sources (Lotteries, Puzzles, Races, Games, Gambling, Betting, etc.):
- If the assessee receives income from lotteries, crossword puzzles, races (including horse races), card games, and other forms of gambling or betting, no deductions for related expenses are allowed.
- Navigating Section 58 ensures awareness of the disallowed expenses, contributing to a precise understanding of the tax implications related to income from other sources.
Conclusion
In adherence to the provisions of the Income Tax Act of 1961, understanding the dynamics of income categorization and deductions is paramount. Section 57 of the Income Tax Act emerges as a pivotal guide, delineating deductions for “Income from other sources” and optimising tax positions. From dividends to family pension. Each clause within this section unfolds opportunities for taxpayers to strategically reduce their tax liabilities. Simultaneously, Section 58 outlines restrictions, emphasising the importance of discerning disallowed expenses. Navigating this interplay ensures a nuanced comprehension. Allowing individuals to make informed decisions, ultimately contributing to a well-optimised and tax-efficient financial strategy.
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