Section 57 of Income Tax Act

Section 57 of the Income Tax Act meaning refers to specific deductions that can be applied when calculating taxable income under the category "Income from Other Sources." This category serves as a catch-all for income that does not fit into the other four heads. It includes all income sources other than salaries, income from business or profession, house property income and capital gains.

Section 56 of the Income Tax Act defines the different types of income taxed under the head ‘income from other sources. It includes:

• Interest on securities
• Interest from fixed deposits and recurring deposits
• Interest from tax refunds
• Family pensions
• Dividends from shares and mutual funds
• Winnings from lotteries, games, horse races and betting
• Rental income for plant and machinery
• Royalty for copyrights, patents and trademarks
• Commissions and brokerage income
• Gifts over ₹50,000 in a financial year
• Compensation received upon termination of one’s employment
• All other sources not covered by the other heads of income

The deductions specified in Section 57 - found in clauses (i), (ia), (ii), (iia), (iii) and (iv) - are designed to help taxpayers accurately compute their taxable income while ensuring that they are not taxed more than necessary on these income streams.

Income classified under "Income from Other Sources" is generally taxed at the rates specified by the applicable income tax bracket. By making use of the deductions outlined in Section 57, you can significantly reduce your taxable income, thereby lowering your overall tax liability.

Also Read: Section 28 of Income Tax Act

The following is the full list of Section 57 income tax deductions allowed under the head ‘income from other sources’ and their conditions:

[Section 57(i)] Dividends and Interest on Securities

Under this, commission or remuneration paid to a bank or other person to realise income from dividends and interest on financial assets is allowed as a tax deduction. Dividends on share buybacks by a company are not eligible.

[Section 57(ia)] Employee’s Contribution to Welfare Schemes

Employee’s contribution to welfare schemes, such as Employee State Insurance (ESI), Provident Fund (PF) and superannuation funds, deposited in an employer’s account, are treated as income of the employer but are allowed as deductions. However, the contributions have to be credited to the respective accounts on or before the due date.

[Section 57(ii)] Rental Income from Plant and Machinery

This subsection of Section 57 of the IT Act allows deductions on repairs and insurance for machinery, furniture, plant and attached buildings that are rented out. These deductions are permitted when such income is taxed under “Income from Other Sources” and are subject to applicable conditions.

[Section 57(iia)] Deduction on Family Pension

This subsection provides a standard deduction for family pensions received by family members of a deceased employee or pensioner. The deduction limit is ₹15,000 or 33.33% under the old regime and ₹25,000 or 33.33% under the new regime, whichever is lower.

[Section 57(iii)] Expenses on Other Income

Any expense spent entirely and exclusively for the purpose of earning income under the ‘other sources’ head is deductible except for capital expenditure and personal expenses. Legal fees paid to recover overdue rent or accountant fees to manage other income are some examples of allowed expenses under Section 57.

[Section 57(iii)] Interest on Compensation

This subsection allows deductions on interest on delayed compensation or enhanced compensation offered for delayed payment. A flat 50% of the interest is allowed as a deduction, with no other interest allowed for deduction.

Also Read: Income Tax Exemptions for Salaried Individuals

Before 2021, taxpayers could claim deductions such as banker’s commission, legal fees and administrative expenses, on different investments. However, the Finance Act 2020, which came into force from April 1 2021, disallowed such deductions. Here is a summary of the changes:

• Deduction of Interest Allowed: Taxpayers can claim deductions on dividend income only for interest paid on money borrowed to make such investments.
• Removal of Other Expenses: No other deductions are allowed for dividends from equity shares, income from mutual funds and income from specified companies.
• 20% Cap on Deductions: Deduction of interest income for dividends is limited to 20% of the total dividend/income received.

While Section 57 of the Income Tax Act outlines deductions that taxpayers can claim against income from other sources, there are certain expenses that are explicitly not eligible for deduction. Section 58 of the IT Act outlines the following exceptions to deductions allowed u/s Section 57 on ‘other sources’ income:

Personal Expenses

Private and non-business expenses of the assessee, including household expenses, personal travel, medical care, home rent and personal investments, are disallowed for Section 57 deductions.

Interest Payable Outside India

Section 57 disallows deductions on interest payable outside India on which TDS has not been paid or deducted under Chapter XVII-B. An exception existed for loans for public subscription before April 1938.

Salary Payable Outside India

Section 57 deductions are also not available on salaries paid outside India and are chargeable at the hands of the recipient, for which TDS has not been deducted or paid to the government.

Penalty Under Section 40 -Late TDS Payment

If a taxpayer fails to deduct or deposit TDS on certain payments within the due date, the penalty rule under Section 40 (ia) and (iia) is applicable. Under this penalty, the taxpayer cannot deduct 30% of the expenditure against ‘income from other sources’.

Deductions on excessive and unreasonable payments based on the fair value of goods and services are disallowed u/s 40A. This restricts deductions on cash payments above the prescribed limits.

Royalties for Foreign Companies

Foreign companies are disallowed from deducting expenses related to royalties and technical service fees under the head ‘income from other sources’. This is because these expenses are considered ‘income from business’ under Section 44D.

Lotteries, Games & Gambling

For income from other sources, Section 57 of the IT Act doesn’t allow any deductions on winnings from lotteries, horse races, gambling, card games, crossword puzzles and any other betting games. The only exception to this is the cost of owning and maintaining horses for racing under Section 58(4).

To claim deductions under Section 57 of the Income Tax Act, you can follow these simple yet effective steps:

Step 1: Maintain Proper Records

Keep all necessary documentation in place for the expenses you want to claim. This includes receipts, invoices or any other records that prove the expenses you incurred. Accurate record-keeping is crucial for verifying your deductions at the time of tax filing.

Step 2: Provide Proof When Filing Returns

When filing your tax returns, you need to submit evidence of the expenses claimed. This means attaching copies of your receipts and invoices as supporting documents to back up your deductions.

Step 3: Consult a Tax Professional

A tax professional can help you understand which expenses qualify for deductions and guide you through the process. They ensure you comply with tax rules and help maximise your deductions, reducing the chance of errors or issues with tax authorities.

Section 57 of the Income Tax Act provides valuable deductions for income from other sources, helping taxpayers reduce their overall tax burden. By understanding these deductions effectively, you can manage multiple income sources, including bank interest, dividends, interest on securities, royalties, commissions and others. With professional guidance and tax planning, you can ensure compliance and maximise tax savings.

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