Section 194B – TDS on Winnings from Lottery
According to section 194B of the Income Tax Act 1956, ‘The person responsible for paying to any person any income by way of winnings from lottery or crossword puzzle or card game and other game of any sort in an amount exceeding ten thousand rupees shall at the time of payment thereof, deduct income tax thereon at the rates in force’.
The cut off limit was five thousand rupees and it has been change to ten thousand rupees with effect from 01.07.2010. The rate of deduction is currently thirty percent.
However if the recipient is a non resident other than a foreign company, the tax shall be deductible at the rate of 30.90%, i.e., including education cess of two percent and secondary and higher education cess of one percent. Further if the recipient is a non domestic company and the payment does not exceed one crore rupees the tax shall be deducted at the rate of 30.9% and if the payment exceed one crore rupees the tax shall be deducted at the rate of 31.6725%, i.e., including a surcharge if 2.5%.
It has to be understood that the definition of income includes not only money payment but also the value of any benefit or perquisite, whether convertible into money or not. It means that if an assessee has won a maruthi car in a lottery, then the value of such winnings shall be subject to deduction of tax under section 194B.
Where the payment is wholly in kind, the payer shall, before releasing the winnings ensure that the tax has been paid in respect of the winnings. This means that the payer must recover the tax from the winner and then release the winnings or himself bear the tax liability and then pay the tax due to the credit of Government.
Where the payment is partly in cash and partly in kind, tax can be deducted on the total value of cash and kind from the cash portion and remitted to the government. If the cash portion is found insufficient to meet the tax due, the payer must either recover the deficit in tax from the winner before releasing the winnings, or himself bear such deficit, and then pay the tax due to the credit of the government.
Where the payment is made in instalments, the deduction will be made at the time of actual payment of each installment.
No tax shall however be deducted under section 194B from the income by way of bonus or commission payable to lottery agents or sellers of lottery tickets on sale made by them.
Where the Director of State Lotteries refunded to the organising agents the prize money in respect of unsold tickets or unclaimed prize money, such a refund might be an income accruing to the agent, but it does not constitute an income from lottery as mentioned in section 2(24)(ix) so as to attract deduction of tax at source under section 194B.Since the agent did not become the purchaser of the ticket, it could not be said that the unsold tickets in the hands of the agent were participating the lottery.
For the purpose of section 194B, ‘lottery includes winnings from prizes awarded to any person by draw of lots or by chance or in any other manner whatsoever, under any scheme or arrangement by whatever name called’. The essential elements to constitute a lottery are –
(i) a prize or some advantage in the nature of the prize,
(ii) distribution of property by chance or lot in among the participants, and
(iii) participants have paid or agreed to pay a valuable consideration for the privilege of participating in the scheme.
It has to be specifically noted that any transaction requiring skill for winning prizes is not lottery. For example, a winning from motor rally is not a lottery income.
In another example (i.e., ITO vs Malayala Monorama Co. Ltd.94 ITD 195(Cochin –Trib.)), the company has conducted a ‘world cup forecast contest’. Out of 10 Lakhs entries received, there were only 22 correct entries, out of which three entries were selected by lot. The tribunal held that the company was not liable to deduct tax at source from the prizes given because (i) The contestants did not pay any price for participating in the scheme, (ii) skill was an integral part of the scheme, and (iii) choosing a person by lot out of skilled persons could not be termed as pure and simple chance.
The payer is liable to deduct tax at source only if the quantum of payment exceeds ten thousand rupees. However no tax shall be deductible if a person makes payment of different lottery prizes of ten thousand rupees or less to the same person, though the total amount of prize in a particular financial year to the same person exceeds ten thousand rupees, i.e., limit of ten thousand rupees is to be applied in each case of payment and not on entire winnings throughout the year.