Casual Income in Income Tax: Meaning, Tax Rate & Declaration

Last year, Shikhar won a lottery and was awarded ₹1,00,000. Elated yet puzzled him on this aspect- does he have to pay tax on this money?

• Casual income means unexpected earnings like lottery wins, game prizes, or gambling gains.
• It is not regular income (like salary or business profits).
• The tax rules are different for such income.

Tax Rates on Casual Income (Example for Shikhar)
 

• Shikhar must pay ₹31,200 (30% + 4% cess) on his ₹1,00,000 lottery win.
• He must declare it in his tax return under "Income from Other Sources."

This paper describes the taxation of casual earnings and how they should be reported.

What is Casual Income?

Shikhar, a software engineer, has just won ₹50,000 in a crossword puzzle competition. He was excited, but the question popped into his mind: Is the money taxable?

Casual income means a once-in-a-lifetime, unexpected, unpredictable and irregular earnings, it is not earned through a regular profession or trade. These are neither your traditional income nor do they include:

• Lottery or gambling wins
• Prizes from games, quizzes, or contests
• Unexpected cash awards or gifts (from non-relatives)

Key Features of Casual Income:
 

• Not regular: Doesn’t come every month like a salary.
• Not planned: You can’t predict when you’ll earn it.
• Taxed differently: Higher flat tax rate compared to salary.

Example: Shikhar’s Crossword Prize
 

• Shikhar must pay ₹15,600 as tax on his prize.
• He must report it on his tax return under "Income from Other Sources."

Casual income has no tax-free threshold as against salary, so your total income can be small, but you are taxed on the income. Remember to look at tax guidelines whenever planning to spend such windfall gains!

Read More - Characteristics of the Good Tax System

Taxability of Casual Income
 

Last month, Shikhar won ₹2,00,000 in a poker match. He is now wondering what amount of tax he is going to pay on these winnings.

How Casual Income is Taxed:
 

• Treated as "Income from Other Sources"
• A special flat tax rate applies (higher than normal income tax)
• No basic exemption - taxable even if your total income is below ₹2,50,000

Tax Rules for Common Casual Income Types:
 

Important Points for Shikhar:

1. His ₹2,00,000 poker win attracts ₹62,400 tax
2. The casino will deduct 30% TDS (₹60,000) when paying him
3. He must show the remaining ₹2,400 tax on his return
4. Must file ITR even if no other income

Casual income, unlike salary, is taxed on the spot. Shikhar is to maintain his winning slip and TDS certificate for filing.

Tips to Minimise Tax on Casual Income

Shikhar won ₹5,00,000 in a lottery and wants to reduce his ₹1,56,000 tax bill. Here's what he can do:

• Spread the income by taking prizes in instalments over the years to stay in lower tax brackets
• Donate to charity under Section 80G to claim deductions (up to 50-100% of the donation)
• Invest in tax-free bonds where interest earned is completely tax-free
• Gift to family members in lower tax brackets (but avoid frequent large gifts)
• Claim expenses if any costs were incurred to earn the prize (like contest entry fees)
• Check exemptions, as some awards for literary/scientific work may be tax-free

Also Read - How to Calculate Taxable Income

Shikhar may make donations of ₹50,000 to good causes (approved charities) and reduce the amount of his lottery winnings, subject to tax, to ₹4,50,000 and thus save ₹15,600 in tax. These strategies have to be implemented only with the help of a CA.

Conclusion

The case of Shikhar depicts how casual benefits, such as winnings in lottery games or in games, carry unseen tax burdens. His excitement about winning ₹5,00,000 in a lottery did not take effect immediately when he thought that almost every third chunk (₹1,56,000) he would get as tax. He minimised his taxes by legally taking care of this through apt planning, such as making donations to charity and smart investments.

The major lessons are straightforward: any windfall should be taxed at substantially high rates, 30%, and it must be reported in your tax return, and few legitimate yet restricted means of reducing the tax burden can be done. It does not matter whether it is the lottery money, game shows' prize money, or dream cash awards; these incomes do not enjoy the ₹2,50,000 tax concessions that regular incomes have.

As Shikhar has found out, it is prudent to make advance provisions on taxation and also seem an expert on taxation to take care of this type of income. It would avert the last-minute shocks or fines that you may encounter during the tax filing season.

FAQs on Casual Income Tax

What exactly is casual income?

Shikhar won ₹50,000 in a radio contest - this one-time, unexpected prize is casual income. It includes lottery wins, game show prizes, or gambling earnings that aren't part of your regular salary or business income.

How much tax will I pay on lottery winnings?

When Shikhar won ₹10,00,000 in a lottery, ₹3,12,000 (30% tax + 4% cess) went straight to taxes. This flat rate applies regardless of your other income.

Do small prizes need to be declared?

Yes! Even if Shikhar wins just ₹15,000 in a crossword puzzle, he must report it. There's no minimum threshold - all casual income is taxable.

Who deducts TDS from my prize money?

The prize giver deducts 30% of TDS before paying you. When Shikhar won ₹2,00,000 in a game show, ₹60,000 was deducted immediately, and he received ₹1,40,000.

Can gifts from friends be taxed?

If Shikhar's friend gifts him ₹60,000, ₹10,000 (amount above ₹50,000) becomes taxable under "Income from Other Sources." Gifts from relatives are always tax-free.

How do I show casual income on my tax return?

Shikhar reports his ₹1 lakh poker winnings under "Income from Other Sources" in ITR form. He includes TDS details from Form 26AS.

Are there any exemptions?

Very few. Shikhar's ₹1,00,000 scholarship and ₹3,00,000 inheritance are tax-free, but most windfalls like lottery or game prizes are fully taxable.

What if I forget to declare casual income?

When Shikhar didn't report ₹25,000 prize money, he got a tax notice. Penalties can be 50-200% of the tax due plus interest.

Can losses reduce my casual income tax?

No. Unlike business losses, Shikhar's ₹20,000 loss in betting can't offset his ₹50,000 lottery winnings. Each casual income is taxed separately.

Any way to legally reduce this tax?

Shikhar donated ₹30,000 to the PM Relief Fund, reducing his taxable lottery amount from ₹5,00,000 to ₹4,70,000, saving ₹9,360 in tax. Professional advice helps find such options.

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