Tax on Winning Game Shows and Lotteries

Many game shows and reality shows offer rewards like houses, cars, or large amounts of money. If you’ve ever thought about how lucky a person is to get such a huge chunk of money, keep in mind that the winner does not get to keep the whole amount because of lottery tax. Any money or reward won through a game show, reality programme, or lottery, is subject to lottery tax in India, called tax deduction at source (TDS).

How is Deductible Tax Calculated?

The taxable “Income from Other Sources” is defined under the Income Tax Act of 1961 in Section 56(2) (ib). After Kaun Banega Crorepati (KBC), a popular game show was introduced in 2000, the definition of games related to taxation was changed by the Finance Act of 2001 to cover television and electronic (online) gaming formats. Winnings from the sources listed below are subject to a TDS of 30% under Section 194B of Income Tax Act:

• Lucky draws and lotteries
• Crosswords
• Racing
• Competitive TV or electronic game shows
• Card playing, betting, or gambling.

How is TDS Deducted?

On top of this 30% tax, a 2% education cess and a 1% secondary and higher education cess are additionally levied. The overall tax rate on earnings now becomes 31.2%. If the total amount won exceeds Rs. 10 lakhs, a further 10% surcharge is also applicable. To sum it up, the actual winning amount or value is subject to a 30% TDS rate under Section 194B. The relevant tax that is withheld at source once surcharge and cess are taken into account is 31.2%.

How is Online Gaming Taxed Under the Income Tax Act?

Online gaming has witnessed a remarkable surge in popularity, encompassing activities such as online rummy, poker, and other real-money games. This growth is closely intertwined with the widespread adoption of smartphones and laptops, which have facilitated access to a virtual landscape ripe with opportunities.

However, the financial gains derived from online gaming prompt an important question: How is the income generated from such activities taxed under the Income Tax Act?

Under the Income Tax Act, there’s a rule called Section 194B that deals with taxing online gaming earnings. This rule is about Tax Deducted at Source (TDS), which is a part of your winnings that’s kept aside before you receive the money. This applies to various types of games like competitions and lotteries. But here’s the catch: this rule only comes into play when your winnings are more than Rs. 10,000. So, if you win a big amount, a part of it will be set aside as tax. This helps make the taxation process practical and fair for bigger winnings.

How are Winnings from Game Shows and Lotteries Taxed?

The calculation of your taxes on lottery winnings and game show winnings is different from the calculation of your other income. These profits fall under the category of “Income from other sources.” When filing the income tax return, it’s crucial to include the amount won in the lottery separately. The following example will make things clear:

Let’s take the example of Rakul, who earns an annual income of Rs. 10 lakhs. Additionally, he has won Rs. 40,000 from online gaming. As Rakul’s total income surpasses the minimal exemption threshold of Rs. 2.5 lakhs, he is required to pay a 31.2% income tax on his lottery winnings, inclusive of cess, amounting to Rs. 40,000. Moreover, Rakul is subject to regular income tax based on the applicable income tax slab for his overall earnings. As his prize exceeds Rs. 10,000, the organisation granting the prize is obligated to deduct Tax Deducted at Source (TDS). This deduction will be at the rate of 31.2%, as outlined in Section 194B of the Income Tax Act.

It’s worth noting that the recipient of the prize needs to add the TDS amount to their yearly income tax return. Additionally, if the prize is given as cash or some tangible item, the overall tax should be computed on both the cash value and the retail worth of the item given as the prize. After deducting the tax, the winner will receive the cash equivalent of the reward. In cases where the cash prize isn’t sufficient to cover the entire tax amount, either the entity awarding the prize or the winner is responsible for compensating for the outstanding tax balance.

Key Takeaways on Taxation of Game Show Winnings

The following points must be remembered in relation to TDS on prize money:

• Everyone must pay a tax of 31.2% with cess, regardless of their regular income, winnings, age, or physical condition, if the winning amount is above Rs. 10,000.
• The TDS of 31.2% is calculated flat tax on the winning sum, it will not be added to your regular income tax, and you will not be able to benefit from using this amount on your income tax rate slab.
• Your standard income will be taxed in accordance with your income tax rate bracket, and the tax on lottery winnings in India will be treated separately from your other income tax.
• Even if you invest the prize money in one of the savings instruments listed under Sections 80C to 80U, you are not eligible for any tax deductions or exemptions when it comes to game show rewards.
• Before claiming the prize, you must pay the government a TDS of 31.2% if your winnings come in the form of a car, jewellery, flat, or any other movable or immovable item. For instance, before you can take home a car you won on a game show valued at Rs. 10 lakhs, you must pay tax before driving it off. You might have to give up the reward if you are unable to pay the required sum.
• The only exception to taxation on game show winnings is that you do not have to pay tax on the amount that you donate, partially or fully, to the government or to the agency conducting the lottery/game show.