Section 56: Understanding Taxation on Miscellaneous Income

The Income Tax Act classifies income sources under 5 main heads. These consist of income from house property, income from salaries, profits and gains from business or profession, income from other sources, and capital gains.

Section 56 of the Income Tax Act includes the taxation on earnings that fall under the head of Income from Other Sources. This includes interest earned from security, immovable properties, and income from rental properties, equipment, or gifts. Section 56(2)(x) of the Income Tax Act elaborates on the taxation on gift exchange.

Taxable Income Under Section 56

Here is a look into the income taxable u/s 56:

Dividends

Based on the residential status of the company paying it, dividends are taxed u/s 56(2)(i) as ‘Income from Other Sources or IFOS.’

One-time Profits

Any lotteries, crosswords, and racing earnings, including horse races, card games, gambling, or betting winnings, are considered one-time profits. Any such income is taxable at a 30% flat rate and a 4% cess.

Securities

All interest earned from investment in securities is taxable under Section 56(2)(id).

Advance Payments for Capital Asset Transfer

Advance payments or payments received during negotiations for the transfer of a capital asset (in case the money is forfeited and there is no asset transfer).

Income from Rent

Net income from renting out plants, furniture, or machinery that belongs to a taxpayer is taxable under Section 56(2)(ii). Additionally, net income from renting machinery or furniture with the property where the machinery is established is taxable under Section 56(2)(iii).

Keyman Insurance Policy

Any income from the returns from the Keyman insurance policy, which includes a bonus, is liable for income tax under Section 56 (2)(iv).

Shares Crossing FMV

When a private company issues shares greater than the Fair Market Value (FMV) price, the amount received in excess of FMV is taxable under Section 56(2)(viib).

Taxation on Gifts Under Section 56

As per Section 56(2)(x), all cash or cash equivalent gifts, movable, or immovable property gifted are taxable.

Key points to note:

Gifts in the form of cash and cash equivalents, property, or in-kind in a FY are taxable
Gifts under ₹50,000 are exempt from taxation for a financial year
You must pay tax on all gifts that have a combined value of over ₹50,000 within a fiscal year
Any cash an employee receives from their employer is classified as salary and taxed under 56(2)(x) of the Income Tax Act

There are few exemptions to Section 56(2) of the Income Tax Act, as follows:

Gifts from relatives
Gifts received as a wedding present
Gifts from trusts, educational institutions, hospitals, or medical institutions
Gifts from any trust or institution u/s 12A, 12AA or 12AB
Gifts received as a part of a will after the death of the donor

However, you cannot consider gifts received from the local authority under this section. Additionally, the term ‘relative’ extends to siblings, spouse, spouse’s sibling, any blood relative, parent sibling, blood relative of spouse, or offspring of the blood relative or spouse.

Taxation of Property Transactions under Section 56(2)(x)

All immovable property received without consideration (without being paid anything for it), which includes land, buildings or both, are taxable.

Key points to note:

Stamp duty value of such property must be more than ₹50,000
If the acquired property is for consideration with a stamp duty value over ₹50,000 or 10% of consideration, then you must pay income tax on stamp duty as well
Movable personal property includes gold or other jewellery, bullion, stocks, securities, paintings, sculptures, archaeological collections, etc.
For movable personal property with a global FMV of more than ₹50,000, you must pay tax according to Section 56(2) of the Income Tax Act
If you consider less than the overall fair market value of the property, then the entire excess FMV will be taxable over ₹50,000

What is the amendment of Section 56?

Amendments to Article 56(2)(x) under the Finance Act 2022 provide tax relief to taxpayers for the financial year. This amendment was introduced in response to the Covid-19 pandemic.

If I give a cash gift to my spouse, is it subject to taxation under Section 56(2) of the Income Tax Act?

As per Section 56(2)(x) of the Income Tax Act, all cash gifts from spouses are exempt from taxation.

If I give my family member any gift worth ₹40,000, will I have to pay tax?

No. All gifts under ₹50,000 are exempt from taxation, so you will not be liable to pay tax on gifts worth ₹40,000.

Who falls under the category of ‘relatives’ under Section 56?

‘Relatives’ under Section 56 includes siblings, spouse, siblings of the spouse, siblings of parents, any descendant or ascendant, or spouse of these relatives.

What is Section 56 income from interest?

Section 56 of the Income Tax Act, 1961, covers income from other sources, including interest from securities, fixed deposits, savings accounts, and other investments. This interest is added to your total income and taxed at applicable rates.

What is the exemption limit under Section 56?

Under Section 56, gifts exceeding ₹50,000 in a financial year are taxable. However, gifts from specified relatives or on special occasions like marriage are exempt.

What is Form 56 in income tax?

Form 56 is used by taxpayers claiming deductions under Section 10AA. It’s essential for businesses and ship operators within Special Economic Zones (SEZs).

What does Section 56(2) of the Income Tax Act cover?

Section 56(2) of the Income Tax Act taxes ‘Income from Other Sources,’ including gifts and lottery winnings. Gifts over ₹50,000 from non-relatives are taxable.