30 Mar 2013

FAQ on taxes and gambling winnings

Despite the earlier post giving various provisions on taxes on gambling winnings, we have been receiving hundreds of queries seeking clarifications on the amount of tax to be paid on gambling winnings and different circumstances under which an exception can be sought from paying tax at source on gambling winnings. We have thus collated a few practical scenarios in a FAQ format clarifying different tax related aspects concerning gambling, lottery and betting winnings. The position of law has been clarified by Hersh Sayta of Ernst & Young and other eminent Chartered Accountants, lawyers and poker players having practical experience in the subject.

1. What is the rate of Income Tax payable on winnings from any card games, lotteries or other gaming activities?

As per Section 115BB of the Income Tax Act the current rate of Income Tax (as on financial year 2013-14) on poker winnings or winnings from any such card games etc. is 30%. However there is education and higher education cess payable on the taxable amount and hence the total effective amount of tax payable is 30.90%.

Section 2(24)(ix) of the IT Act defines card games and lotteries as follows:

Any winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever.

[Explanation.For the purposes of this sub-clause,

(i) “lottery” includes winnings from prizes awarded to any person by draw of lots or by chance or in any other manner whatsoever, under any scheme or arrangement by whatever name called;

(ii) “card game and other game of any sort” includes any game show, an entertainment programme on television or electronic mode, in which people compete to win prizes or any other similar game.

Section 115BB reads as follows:

Tax on winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or gambling or betting of any form or nature whatsoever.

Where the total income of an assessee includes any income by way of winnings from any lottery or crossword puzzle or race including horse race (not being income from the activity of owning and maintaining race horses) or card game and other game of any sort or from gambling or betting of any form or nature whatsoever, the income-tax payable shall be the aggregate of

(i) the amount of income-tax calculated on income by way of winnings from such lottery or crossword puzzle or race including horse race or card game and other game of any sort or from gambling or betting of any form or nature whatsoever, at the rate of 21[thirty] per cent; and

(ii) the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the amount of income referred to in clause (i).

2. Are organisers compelled to deduct Tax at Source (TDS) on poker winnings?

As per Section 194B of the Income Tax Act, on any winnings above Rs. 10,000/- (as per laws prevailing in financial year 2012-13) it is the responsibility of persons organising or managing the event to deduct 30.90% tax before releasing the winnings.

Section 194B reads as follows:

Winnings from lottery or crossword puzzle.

The person responsible for paying to any person any income by way of winnings from any lottery or crossword puzzle or card game and other game of any sort in an amount exceeding ten thousand rupees shall, at the time of payment thereof, deduct income-tax thereon at the rates in force :

Provided that in a case where the winnings are wholly in kind or partly in cash and partly in kind but the part in cash is not sufficient to meet the liability of deduction of tax in respect of whole of the winnings, the person responsible for paying shall, before releasing the winnings, ensure that tax has been paid in respect of the winnings.

3. Are organisers required to give a TDS certificate when tax is deducted on winnings?

Yes, as per Section 203 of the IT Act and Rules framed thereunder TDS certificate has to be supplied by the deductor to the deductee within one month from the end of the month during which the credit has been given or the sums have been paid. [See this link for more information].

4. If prizes are awarded instead of cash, does TDS still have to be deducted?

Yes, TDS has to be deducted to the extent of 30.90% of the value of the gift/prize or the organiser has to ensure that the winner pays the tax amount upfront.

5. What is the liability for not deducting TDS?

Organisers or those responsible for the event can potentially face various liabilities for not deducting TDS and they would have to pay the amount payable, interest and other penalties from their own pockets if the amount is not deducted. Further, prosecution can be initiated for non-deduction of TDS and there is a maximum punishment of seven years imprisonment and fine. [See: Sections 201(1A), 221, 276B of the Income Tax Act].

6. Are set-offs permitted before deducting of TDS?

No, set-offs or any deduction/adjustment of costs etc. would not be permitted before deduction of TDS.

7. Is there any liability to deduct additional surcharge over and above the 30.90% TDS in case of gambling winnings?

As per the Finance Bill 2013, an additional surcharge is proposed to be levied on income from gambling under Section 115BB as TDS deductions under Section 194B on amounts exceeding specified limits. The manner and rates at which this surcharge is to be levied has not yet been notified.

Update: As per the Finance Bill, 2013 the following surcharge will be levied on the TDS deducted as per Section 194B:

The amount of tax so deducted shall be increased by a surcharge in the case of

(i) every non-resident (other than a company) at the rate of ten per cent. where the income or the aggregate of income paid or likely to be paid and subject to deduction exceeds one crore rupees ;

(ii) every company other than a domestic company at the rate of two per cent. where the income or the aggregate of income paid or likely to be paid and subject to deduction exceeds one crore rupees but does not exceed ten crore rupees ;

(iii) every company other than a domestic company at the rate of five per cent. where the income or the aggregate of income paid or likely to be paid and subject to deduction exceeds ten crore rupees.

For Income Tax on gambling winnings in terms of Section 115BB the following surcharge shall be levied:

Total income Rate of surcharge for domestic companies Rate of surcharge for foreign companies
Up to Rs. 1 crore NIL NIL
Over Rs. 1 crore 5% on tax to be paid 2% on tax to be paid

The provisions relating to surcharge shall be applicable w.e.f. 1st April 2013.