Income tax rules amended to ensure accurate taxation of online gaming winnings

The Central Board of Direct Taxes (CBDT) has amended income tax rules to streamline and standardize the calculation and reporting of winnings from online gaming to improve tax compliance.

The Income Tax (Fifth Amendment) Rules, 2023, notified by the direct tax authority, specifies a formula for computing the net winnings from online games in a financial year which is liable to a 30% income tax.

The new rule said that net taxable winning in a year would be the difference between the sum of the amount withdrawn from the user account and the closing balance and the sum of non-taxable deposits made in the user account and the opening balance.

The rule also prescribes formulas for the tax to be deducted at source (TDS) at various stages, such as first and subsequent withdrawals from the user account.

The new rules also define terms like non-taxable deposit in the user account, such as borrowed amounts deposited in it. The rules also define the taxability of bonuses, referral bonuses and incentives etc.

On Monday, CBDT issued a set of guidelines explaining these terms to help both online gamers and gaming companies.

According to this, online gaming platforms need not deduct tax at source on winnings withdrawn by players if the amount is less than ₹100 a month and meets certain riders.

The guidelines had made it clear that net winnings below ₹100 in a month will not be subject to tax deducted at source (TDS) at the time of withdrawal, provided the tax liability will be deducted when the net winnings are withdrawn exceeds this limit in the same or the subsequent month or at the end of the fiscal year.

Also, to be eligible for this concession, the tax deductor has to undertake the responsibility of paying the difference if the balance in the user account is not sufficient to meet the tax liability at the time of deduction, CBDT explained in the guidelines.

Experts said that the guidelines and the new set of rules bring more clarity to the tax regime and plug certain loopholes but could lead to a dip in online gaming activities.