Handling cash windfall

If you are reading this space today, then chances are that you have had a stroke of good fortune. Hit a jackpot? Or maybe won a lottery? Well, time for some sobriety — discount your happiness by a factor of 30% — yes, that is the basic tax rate applicable to such income!

The net of the taxman is wide enough to catch, inter alia, various items of lottery and windfall gains. While all receipts are not necessarily ‘income’ for tax purposes, any receipt which has an element of gain comes under the definition of income and is liable to tax.

Winnings from lotteries, crossword puzzles and card games are deemed as income under clause (IX) of Section 2(24) of the Income-tax Act, 1961, which is the provision that captures the definition of income which also covers races, and other games of any sort including gambling and even betting.

The term ‘lottery’ has been defined in the Corpus Juris Secundum which says that “pooling the proceeds derived from chances or tickets taken or purchased and then allotting such proceeds or a part of them or their equivalent by chance to one or more such takers or purchasers are indicia of a lottery”.

It has been held by the Karnataka High Court in the case of Visveswaraiah Lucky Centre vs CIT [1991] 56 Taxman 80/189 ITR 698 (Karnatake) that all the ingredients which are set out in the definition in Corpus Juris Secundum must be present to identify the winner and the winnings of the lottery.

Lottery also includes winnings from prizes awarded to any person by draw of lots or by chance or by any other manner; card games and other games of any sort including any game show, entertainment programme on television or electronic mode in which people compete to win prizes or any other similar game.

A flat rate of 30% (effective rate is up to 33.66%, thanks to surcharge and cess) is applicable to all the above forms of windfalls — which means you don’t have to bother too much about the ‘tax-slabs’ if you are of the type who survives only on these windfalls.

And if your winnings are on account of lottery, cross word puzzles, horse races, card games or other games of any sort — you probably don’t have to bother to make that trip to the bank to pay those taxes either — the wise taxman has it all fixed-up — the amount that you should receive from such winnings is only after the applicable taxes have been deducted at source by the payer.

In today’s world of media hype, with competition among various channels to launch innovative schemes of prizes, it is common that such prizes are awarded in kind. The provision dealing with TDS (tax deducted at source) clearly stipulates that in such cases, the person responsible for paying shall, before releasing the winnings, ensure that tax has been paid in respect of the winnings.

The certificate for TDS is prescribed in form no 16A which requires giving all the details of payments with the dates of remittance of taxes, cheque number, etc. This certificate, evidencing the TDS has to be filed by the recipient of income in original along with the return of income.

While filing the return on income the earnings from lotteries and windfalls should be categorised as ‘income from other sources’. This is the residuary head of income. It must be noted that the gross winnings are subject to tax and no claim can be made in respect of any expenses incurred in relation to such winnings.

The gain may be a windfall and there is some ad hoc-ism in applying the flat rate of 30%. Further, losses incurred under any other head of income cannot be set off against lottery and other windfalls. After all one has to pay a reasonable price for a fortuitous or a windfall gain.