Section 56 of Income Tax Act: Understanding Income from Other Sources

Section 56 acts like a catch-all tax rule. It applies to all income sources that don’t fit into salary, house property, business profits, or capital gains. In effect, it ensures that nothing slips through the tax net, even if it’s income you didn’t “earn” by working – like gifts or lottery winnings.

When Does It Apply?

This section kicks in whenever you receive income that doesn’t fall into the four main categories. That includes various receipts like interest, dividends, property gifts, winnings, or crypto, that otherwise might not be taxed. Section 56 makes sure they are.

What Income Does Section 56 Cover?

Under Section 56, anything that doesn’t belong to salary, business, property, or capital gains typically gets taxed. This includes interest from banks or bonds, dividends, winnings from games or puzzles, monetary or property gifts, rental income from sub-letting, income from letting machinery, family pension, and even cryptocurrency gifts if applicable.

The Income Tax Department’s documentation confirms that dividends, winnings, interest on securities, rental income from plant or machinery, and sums received without consideration or inadequate consideration – all fall under this residual head of “Income from Other Sources.

How Are Gifts Taxed?

Gifts become taxable if certain conditions are met. Cash or property gifts from non-relatives aggregating over ₹50,000 in a year are fully taxable. For property gifts, if their value exceeds ₹50,000 or involves inadequate consideration beyond tolerance limits, Section 56 kicks in.

However, gifts from relatives (like parents, siblings, grandparents), gifts received on one’s marriage, and those inherited or received via a will are entirely exempt.

New Rules: Crypto Gifts & Angel Tax

Recent updates now explicitly include virtual digital assets (like crypto or NFTs) under the definition of property in Section 56(2)(x). These are taxable if the gift value exceeds ₹50,000 unless received from relatives or on exempt occasions.

Regarding startup investments, the angel tax under Section 56(2)(viib) -which taxed the excess premium paid for unlisted shares has now been abolished, effective FY 2025–26, offering relief to startups and investors.

How Is Income Taxed Under Section 56?

Income like interest, dividends, sub-rent, or taxable gifts get added to your total taxable income and are taxed at your applicable slab rate. But winnings from lotteries, puzzles, or similar are subject to a flat 30% tax, with no deduction allowed, plus applicable cess or surcharge.

Under Section 57, limited deductions apply only in certain cases: interest on dividend income (up to 20% of the dividend) and a standard deduction for family pension (the lower of ₹15,000 or one-third). No deductions are allowed against winnings.

Common Misunderstandings to Avoid

A frequent mistake is thinking only the amount above ₹50,000 is taxable, in fact, the entire gifted amount becomes taxable. Some assume wedding gifts are exempt for others, but the exemption applies only to the bride or groom. Many overlook that small property undervaluation under the 10% tolerance band isn’t taxable. New rules around crypto gifts are still not widely understood. Stay alert to avoid errors.

Consequences of Non-Compliance

Failing to report income under Section 56 can lead to interest on underpaid or delayed tax, penalties under Section 270A, late filing fees, or even prosecution in cases of deliberate evasion. Unreported large gifts or crypto inflows can trigger scrutiny.

Best Practices for Compliance

Keep a log of all gifts including details like donor, relationship, occasion, and valuation. For property transfers, maintain documentation like agreements and stamp duty valuations. Track and disclose crypto gifts, and ensure winnings are reported correctly with TDS shown. Reconcile your statements with AIS/26AS and file accurately. When in doubt, especially with complex property or crypto cases, consult a tax professional.