There are five heads of income listed in the Income Tax Act, the fifth of which is Income from Other Sources.
Any income that is not eligible for tax under any other head of income and cannot be excluded from the total income is taxed as residual income under the head "Income from Other Sources".
How do you classify income from other sources?
The following three conditions must be satisfied according to Section 56 of the Income Tax Act for an income to qualify as income from other sources.
Income is generated.
Any other provision of the Income Tax Act does not exempt such income.
Income from such sources cannot be claimed as salary, house property income, profits and gains from business or profession, or capital gains.
Section 56- Table Incomes under ‘Income from Other Sources’
Here’s a list of taxable income under the head “Income from other sources”:
Dividends
Depending on the company's residential status, dividends are subject to taxation as income from other sources.Dividend from an Indian company: The dividend is tax-free if the company has paid Dividend Distribution Tax. Under section 115BBDA of the income tax act, however, if an individual/HUF/firm receives dividends from Indian companies that exceed ₹ 10 lakh, the excess is taxable at 10%.
Dividend from a foreign company: Dividends received from foreign companies are taxed as income from other sources.
One-time Income
A one-time income such as winnings from lotteries, crossword puzzles, horse races, card games, or betting of any kind is considered income from other sources.Interest on compensation
In situations like compulsory acquisition, taxpayers may be taxed on interest received on compensation or reimbursements received.Gifts
Gifts such as any sum of money and movable or immovable property that’s received without consideration which exceeds ₹50,000 are taxable.
However, any sum of money or value of property received, in the following circumstances would be tax free:From any relative; or
On the occasion of the marriage of the individual; or
Under a will or by way of inheritance; or
In contemplation of death of the payer or donor, as the case may be; or
From any local authority; or
From any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution; or
From or by any trust or institution registered; or
By any fund or trust or institution or any university or other educational institution or any hospital or other medical institution.
By way of transaction not regarded as transfer under section 47(i)/(iv)/(v)/(vi)/(vib)/(vid)/(vii).
Shares received by a firm
When shares of a closely held company are received by a firm or another closely held company without consideration or for inadequate consideration, the aggregate fair market value of those shares, decreased by the consideration paid, if any, shall be taxed.
Note: Nothing will be taxed if the taxable amount does not exceed ₹ 50,000.Money or movable/immovable property received
Received money or movable/immovable property without consideration or with inadequate consideration in the previous year.Compensation
When a person receives compensation in connection with the termination of his employment or the modification of his terms and conditions.Under this head, money received as an advance or otherwise in the course of negotiations for the transfer of a capital asset will be taxed, if:
This amount is forfeited; and
As a result of the negotiations, the capital asset is not transferred.
The following receipts are classified as income from other sources only if they’re not chargeable as “profits and gains of business or profession.”
Employees’ contribution to welfare schemes
Interest on securities like government bonds or debentures
Rental income from letting out plant, machinery, or furniture owned by the assessee
Rental income from letting out plant, machinery, or furniture, along with a building, where these two cases of letting out are inseparable
Receipts under Keyman Insurance Policy