Income from Other Sources Under Income Tax Act 2025: Key Rules, Taxable Incomes and Deductions

Not every income earned by a taxpayer neatly falls under salary, house property, business or profession, or capital gains. The Income-tax Act, 2025 provides a separate residual category known as "Income from Other Sources" for such income.

The Income Tax Department's explanatory document states that this head covers income that is not exempt from tax and is not chargeable under the other four heads of income - Salaries, Income from House Property, Profits and Gains from Business or Profession and Capital Gains. Certain receipts, including lottery winnings, gifts and interest on enhanced compensation, are specifically taxable under this head.

The following are some of the important provisions taxpayers and professionals should keep in mind under the new tax framework.

A. Dividend Income

Dividend income is taxable in the hands of shareholders. The document also explains that the concept of deemed dividend covers certain specified distributions, including distribution involving the release of company assets, distribution of debentures or deposit certificates to preference shareholders, distribution on liquidation, reduction of capital, and certain loans or advances to shareholders.

An important point relates to deductions from dividend income. Under Section 93(2), expenses such as interest, commission or remuneration paid to a banker or another person for realising the dividend are not deductible.

Further, from 1 April 2026, the gross amount of dividend declared and paid by the company is taxable.

B. Lottery, Gambling and Online Game Winnings

The gross income from specified gambling-related activities is taxable under the head "Income from Other Sources" at a flat rate of 30%, as referred to in Section 194(1), Table Serial No. 1.

This includes winnings from:

• Lotteries and crossword puzzles
• Horse races, other than the activity of owning and maintaining racehorses
• Card games and other games
• Gambling or betting of any form or nature
• Specified winnings from online games

The document makes it clear that such income is taxed on a gross basis. Taxpayers cannot claim deductions for expenses incurred to earn such winnings or set off losses against this income.

C. Employee Contributions to Welfare Funds

Amounts received by an employer from employees towards provident funds, superannuation funds, Employees' State Insurance or other employee welfare funds are treated as income of the employer.

However, a deduction can be available where the employer deposits the contribution into the employee's account in the relevant fund on or before the prescribed due date for filing the return.

Where an employee contribution to EPF is not deposited by the applicable due date, the amount not deposited can become taxable under "Income from Other Sources" if it is not taxable as business income.

D. Keyman Insurance and Interest on Securities

Amounts received under a Keyman Insurance Policy, including bonus allocations, can be taxable under "Income from Other Sources" where the income is not chargeable under business or profession or salaries.

Similarly, interest on securities is taxable under this head when it is not taxable as business income. This covers interest on specified government securities, debentures and other securities issued by local authorities, companies or statutory corporations.

The applicable tax rate depends on the taxpayer's circumstances, with certain concessional rates applicable to specified interest income of non-residents.

E. Rental Income from Machinery, Plant or Furniture

Income earned from leasing or renting machinery, plant or furniture may be taxable under "Income from Other Sources" when it is not chargeable as business income.

The same treatment can apply where a building is let along with machinery, plant or furniture and the letting is inseparable, provided the income is not taxable as business income.

F. Forfeited Advance on Transfer of Capital Asset

If an advance or other amount received during negotiations for transferring a capital asset is subsequently forfeited because the transaction does not take place, the forfeited amount is taxable under the head "Income from Other Sources."

This is an important provision for taxpayers involved in property or other capital-asset transactions where negotiations fail after an advance has been received.

G. Interest on Compensation or Enhanced Compensation

Interest received on compensation or enhanced compensation is taxable under "Income from Other Sources".

A significant relief is available here: 50% of such interest income can be claimed as a deduction under Section 93. The income is taxable in the tax year in which the interest is actually received.

H. Compensation Related to Loss of Employment

Compensation or any other payment connected with termination of employment or modification of employment terms can also fall under "Income from Other Sources", depending on the circumstances.

The document distinguishes this provision from the corresponding salary provision. Section 18(1)(a) deals with compensation from an employer or former employer, while Section 92(2)(j) has a wider reference to "any person" and also covers "any other payment".

For example, where a company agrees to employ an individual as its CEO but later does not commence the employment and pays compensation, the payment may be taxable under "Income from Other Sources" because an employer-employee relationship never came into existence.

I. Gifts and Other Deemed Income

The new framework also contains provisions dealing with certain benefits received without or for inadequate consideration.

Under Section 92(2)(m), a benefit received from another person in the form of cash, movable property or immovable property can give rise to deemed income where the prescribed value exceeds ₹50,000.

The ₹50,000 threshold is applied differently depending on the nature of the transaction. For example, sums of money received without consideration and certain movable properties are considered on an aggregate basis, whereas immovable property received without consideration or for inadequate consideration is considered separately for each transaction.

J. Family Pension

Family pension is another important income covered under this head.

While pension received by an employee is taxable under "Salaries", family pension received by the family or heir of a deceased employee is taxable under "Income from Other Sources."

A standard deduction is available to the extent of the lower of:

• One-third of the family pension; or
• ₹15,000.

Where income tax is computed under the new tax regime under Section 202(1), the enhanced threshold mentioned in the document is ₹25,000.

K. Pension Fund and Death-cum-Retirement Gratuity

Certain pension-fund receipts can also fall under "Income from Other Sources". The document states that income in the nature of commutation of pension received from specified pension arrangements is chargeable under this head, although the entire amount received is allowed as a deduction under Section 93(1)(g).

Similarly, death-cum-retirement gratuity received by a family member after the death of an employee is chargeable under this head, with the entire amount received allowed as a deduction under Section 93(1)(h).

L. Bank Interest and Other Residual Income

The residuary nature of this head means that income not falling under any of the other four heads can generally be taxed here.

The document specifically mentions interest on bank deposits and income from investments in small saving schemes as examples of income generally taxable under "Income from Other Sources."

What Expenses Can Be Deducted?

Section 93 specifies expenses that can be deducted while computing income under this head.

Broadly, expenditure incurred wholly and exclusively for earning the income may be deductible, provided it:

• Is not personal expenditure;
• Is not capital expenditure; and
• Has been wholly and exclusively incurred to earn the relevant income.

However, taxpayers need to be careful because several categories of expenditure are specifically disallowed.

Expenses That Cannot Be Deducted

The document identifies several restrictions, including:

• Certain interest payments outside India where the applicable TDS requirements have not been complied with;
• Certain salary payments outside India where tax has not been properly deducted and paid;
• Expenses subject to disallowance because of TDS defaults;
• Personal expenses;
• Specified disallowances under Sections 36 and 29.

For income from lotteries, horse races, card games, gambling and similar winnings, no deduction is allowed for expenditure incurred to earn the winnings.

Recovery of Previously Allowed Loss or Expenditure

Another provision taxpayers should note is Section 95.

Where a deduction has previously been allowed for a loss, expenditure or trading liability and the taxpayer subsequently receives an amount or benefit because of remission or cessation of that liability, the amount or benefit can become taxable in the year in which it is received.

This taxability can arise even if the original source of income no longer exists in that year.

Why "Income from Other Sources" Matters

"Income from Other Sources" may appear to be a catch-all category, but the Income-tax Act, 2025 contains detailed provisions determining what gets included, what deductions are available and which expenses are specifically disallowed.

For taxpayers, the key takeaway is that income should not be classified merely because it does not appear to be salary or business income. The nature of the receipt and the specific provisions governing it need to be examined.

With the new Income-tax Act framework applicable from the relevant tax year, understanding these provisions will be particularly important for taxpayers, tax professionals and businesses dealing with dividends, investments, gifts, compensation, pension-related receipts and other miscellaneous income.