Section 57 of Income Tax Act

Section 57 of the Income Tax Act of 1961 outlines 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.

These four heads, as defined by the Act are: salaries, income from real estate, business and professional profits and capital gains.

Common examples of income from other sources include dividends, interest income, lottery winnings and family pensions.

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.

As mentioned earlier, Section 57 of the Income Tax Act outlines specific deductions that can be claimed against income classified under "Income from Other Sources." These deductions help reduce taxable income, ensuring that taxpayers are only taxed on their net income after accounting for necessary expenses. For better clarity, let us get into the specifics of the key deductions allowed under this section.

-Dividends or Interest on Securities - Section 57(i)

Suppose you earn dividends or interest on tradable financial assets like securities. In that case, you can claim a deduction for any commission or compensation paid to a banker or a third party to collect that income.

This allows you to deduct reasonable costs incurred in realising your dividend or interest income, thus lowering your taxable income from these sources.

-Employee Contributions to Welfare Schemes - Section 57(ia)

If an employer makes contributions to welfare schemes such as Provident Fund (PF), Employee State Insurance (ESI) or Superannuation Fund (SF) on behalf of an employee, and these contributions are credited on or before the due date, they are considered tax-deductible.

This ensures that employee contributions to these welfare schemes can be deducted from their income, provided the contributions are made within the prescribed deadlines.

-Expenses on Rental Income - Section 57(ii)

For income earned by renting out assets such as machinery, furniture or plant, any expenses incurred for maintenance, repairs or insurance of these assets can be claimed as a deduction. However, for a building, depreciation can only be claimed if the taxpayer is the actual owner. These deductions help reduce the taxable income from rental activities.

-Standard Deduction on Family Pension - Section 57(iia)

In the case of family pensions, a standard deduction of either one-third of the total pension or ₹15,000, whichever is lower, is allowed. For example, if a family member receives ₹60,000 in pension, the allowable deduction would be ₹15,000, making the taxable pension amount ₹45,000. This deduction provides financial relief to the legal heirs of deceased employees.

-Other Expenses - Section 57(iii)

Any other additional expenses that are incurred specifically to earn income under the "Income from Other Sources" category can be deducted, too. However, this will not include capital or personal expenses that are made from the business account.

This deduction is aimed at offsetting important costs that contribute directly to earning income from non-business activities, but foreign firms are not eligible for this deduction.

-Interest on Compensation or Enhanced Compensation - Section 57(iv)

If you receive compensation or enhanced compensation (for example, in land acquisition cases), you can claim a deduction of 50% on the interest received from that compensation. This deduction is subject to certain conditions and helps reduce the tax burden on income from such compensations.

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.

These exclusions, primarily mentioned under Section 58, help ensure compliance with tax laws and prevent the misuse of deductions. Understanding these non-allowable deductions is crucial to filing accurate tax returns and avoiding penalties. Here are the key deductions that cannot be claimed under Section 57:

-Personal Expenses

Personal expenses incurred for non-business or non-income-generating purposes are not allowed as deductions. This includes individual travel, entertainment or any costs that do not directly contribute to generating taxable income from other sources. For instance, personal vacations are outside the scope of permissible deductions.

-Interest Payable Outside India Without Tax Payment

In case you have incurred interest expenses payable outside India, you can only claim a deduction if the corresponding taxes have been withheld or paid at the source. This rule ensures that taxpayers adhere to the tax withholding requirements when making payments to non-residents. If the required taxes have not been paid, the deduction for such interest payments will be disallowed.

-Salaries Payable Outside India Without Tax Payment

Similar to interest payments, any salaries payable to employees outside India can only be deducted if the corresponding taxes have been remitted or withheld at the source. This regulation is designed to prevent taxpayers from evading their responsibility to pay or deduct taxes when making payments to non-residents.

-Wealth Tax

Wealth tax paid by the taxpayer is not deductible under Section 57. Although wealth tax is a separate tax liability unrelated to earned income, it cannot be deducted to reduce taxable income from other sources. This distinction ensures that wealth tax remains its own obligation, independent of the taxpayer's regular income.

-Expenses Related to Lottery, Racing and Gambling

Income earned from activities like lotteries, horse racing and gambling is fully taxable, and you cannot deduct any expenses associated with earning that income. In other words, costs such as ticket purchases or participation fees will not reduce the amount of taxable income.

The Finance Act, 2020, introduced changes to Section 57(i) that took effect on April 1, 2021. Under the new rules, taxpayers can claim a deduction for interest expenses incurred on borrowed funds used to earn dividend income. However, the deduction is capped at 20% of the total dividends or income from mutual fund units.

No other expenses, except interest on borrowed money, can be deducted for earning dividend income.

Prior to this amendment, dividend income was exempt for shareholders under Section 10(34), and companies were responsible for paying the tax under Section 115-O.

Now, only interest on borrowed money qualifies for the deduction, and this deduction is limited to 20% of the gross dividend income. Dividends are now fully taxable at the applicable income tax rates.

For example, if a person receives a dividend of ₹20,000 from a domestic company and has borrowed money to invest in shares, they can deduct the interest paid, but only up to 20% of the gross dividend. If the interest paid was ₹6,000, only ₹4,000 (20% of ₹20,000) will be allowed as a deduction. The remaining dividend income will be taxed as per the individual's income tax slab.

This amendment limits deductions and ensures that dividends are fully taxable in the hands of the taxpayer.

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

-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.

-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.

-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.

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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 your non-business income more efficiently and save on taxes.

Proper record-keeping and professional guidance are key to claiming these benefits. Leveraging Section 57 allows you to optimise your tax planning and ensure compliance with the law.