Section 56 Of Income-tax Act

Section 56 of the Income Tax Act, 1961 deals with taxation on residuary or miscellaneous incomes that cannot be taxed under income from salary, business or profession, capital gains, or house property.

Some examples of such incomes include winnings from gambling, lotteries or games, interest from securities or bank deposits, dividend earnings, gifts, etc. Section 56 applies to every taxpayer including individuals, companies, Hindu Undivided Families (HUFs) and other entities.

Here is a list of incomes that form “income from other sources“ and are taxed under Section 56 of the Income Tax Act:

• Dividends come under income from other sources section and are taxable under Section 56 (2)(i) of the Income Tax Act. This depends on the residential status of the company at the time of dividend payout.

• Income from interest on securities is taxed under Section 56(2)(id).

• Money received in advance or while negotiating the transfer of a capital asset required the amount is forfeited and the transfer does not take place.

• One-time income from winning lotteries, races (including horse races), card games, crossword puzzles, betting or gambling. Income from other sources tax rate in such cases is 30% plus 4% cess leading to an effective tax rate of 31.2%.

• Income received from letting out machinery, plant or furniture is taxed under Section 56(2)(ii).

• Money received by employers from employee contributions towards provident funds, superannuation funds, employees’ state insurance, etc. but not credited to the respective funds’ accounts.

• Income received from letting out furniture or machinery with buildings where both are inseparable.

• The amount received from the Keyman insurance policy along with the bonus is taxed under Section 56(2)(iv).

• According to Section 56(2)(viib), when a private company issues shares at a price higher than the fair market value, tax is levied on the amount above the fair market value. The Finance Act 2023 has made this provision applicable to the issue of shares to both residents and non-residents.

• Any kind of compensation you may receive due to employment termination is taxable under Section 56(2)(xi).

• Proceeds from a life insurance policy that exceeds the amount of premiums paid. However, payment receipts exempt under Section 10 (10D) are not included.

• Gifts of value of more than ₹50,000 received (immovable or movable) are taxable. However, gifts received at weddings, from relatives or will or inheritance, etc. are not included.

• Distribution as debt repayments by business trusts are taxed in the hands of unit holders. The Finance Act, of 2023 introduced the provision to tax debt repayment by Infrastructure Investment Trusts (InVITs) and Real Estate Investment Trusts (REITs). However, SPV-level debt repayment will be subtracted from the acquisition cost. Sum more than the acquisition price is then taxed.

Let us have a look at a few important provisions of Section 56 of the Income Tax Act:

Tax on Gifts

Section 56 (2 )(x) deals with tax on gifts received. According to the section, you are required to pay tax on gifts received if their value is over ₹50,000 in a financial year. The gifts can be in cash or cash equivalent, property (movable or immovable) or kind in a financial year.

However, gifts up to ₹50,000 are tax-free. Also, the aggregate value of gifts received in a financial year is considered for taxation purposes instead of the value of individual gifts. For instance; you received gifts worth ₹50,000 and ₹15,000 on April 1, 2023, and March 31, 2024, respectively.

The total value of gifts here is more than ₹50,000 in a financial year which comes under “income from other sources”. Thus, the aggregate value of the presents which amounts to ₹65,000 is subject to taxation under Section 56 2 x of Income Tax Act.

Furthermore, gifts received in cash from an employer are also taxable in your hands. They will be taxed as part of your salary no matter the amount. However, gifts received in kind from an employer are taxed if the value is more than ₹50,000.

Tax on Property Transactions

Taxation of capital or property transactions (movable or immovable) is also explained in Section 56 2 x of Income Tax Act. Here is how it deals with taxation and stamp duty implications in both scenarios:

Case 1: Immovable Property

The entire stamp duty value will be taxable if you receive an immovable property like land or building without paying consideration and its stamp duty value exceeds ₹50,000. However, if you paid consideration for the property and the value of stamp duty exceeds ₹50,000 or 10% of consideration, you have to pay tax on the difference between the stamp duty value and the consideration.

Note: According to the Finance Act 2021, in the case of residential properties up to ₹2 crore, the permitted difference between the sale value and the stamp duty value was raised from 10% to 20% for property transactions occurring between November 12, 2020, and June 30, 2021. However, it remains 10% for other scenarios.

Case 2: Movable Property

Transactions in case of movable property such as jewellery, shares, gold, paintings, sculptures, works of art or bullion, etc. are dealt with in the following manner:

• If received at a discounted price or without consideration:

• If you receive movable property at a discounted price or without paying for it and its fair market value is more than ₹50,000, then the entire fair market value is taxable.

• If received for consideration

• If you receive a movable property for consideration lower than its fair market value by more than ₹50,000, the difference between the fair market value and the consideration will be taxable.

Note: The goal behind taxing property transactions with lower consideration or without consideration is to curb “black money” use. By taxing you for the difference between the property’s actual value and the consideration paid, Section 56 ensures transparency in property transactions.

Section 56 2x of Income Tax Act also offers certain exemptions where transactions happen without or insufficient consideration. Here is everything that falls out of the purview of taxation under Section 56:

• Money or property gifted by a relative is not taxed. Gifts from relatives exempt under Section 56 include those from your siblings, spouses, parents, siblings of your spouse and parents, your or your spouse's direct descendants or ancestors. However, gifts received from friends are taxable.

• Gifts received at a wedding are tax-exempt. However, those received on occasions like anniversaries or birthdays are taxable.

• Gifts received through will or inheritance are not taxed.

• Proceeds from the sale of movable personal effects such as furniture, fixtures or vehicles are not taxable.

• The provision of tax on gifts does not apply if money or property is received from the following:

• Local authorities as per Section 10(20) of the Income Tax Act.

• Foundations/Trusts/Institutions, Universities/Other Educational Institutions and Hospitals/Other Medical Institutions under Section 10(23C).

• Trust/institution, hospital/other medical institution, university/other educational institution and fund/foundation referred to in Section 10(23).

• Religious or charitable trusts registered under Section 12A, Section 12AA or Section 12AB.

• Trusts established for the benefit of your relatives.

The Finance Act, of 2022 made certain changes in Section 56 2x of the Income Tax Act post-COVID-19 pandemic. This was done to relieve taxpayers from the dreadful effects of the pandemic. Here is a list of the changes that started from the financial year 2019-2020:

• Money received from employers or other people for COVID-19 treatment is exempt from tax.

• Money received by a family from an employer or other individual due to the death of the breadwinner from COVID-19 is tax-free.

Note: There is no limit on the amount received from an employer which is tax-free. However, if money is received from someone else, the exemption limit is ₹10 lakh.

In conclusion, Section 56 is a critical aspect of the Income Tax Act. It includes income from winnings from gambling, lotteries or games, interest from securities, dividend earnings, property transactions, etc. Section 56 ensures that income from other sources does not go unnoticed and is duly taxed. Learning about its various rules and exemptions can help you avoid tax-related issues.

The income tax laws of India also provide tax benefits under various sections. One such is Section 80D. It allows you to claim tax deductions of up to ₹25,000 for health insurance premiums paid in a financial year. The benefits extend to medical insurance for yourself, your parents, spouse and kids. For senior citizens, tax benefits go up to ₹50,000. This is done to encourage investments in health insurance policies.

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