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Published on:

January 15, 2025

Udeetta Sarma

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Section 194B of Income Tax Act - Taxes on Lottery Winnings

Winning a lottery is euphoric, but knowing the tax implications vis-a-vis the Indian Income Tax Act is essential. Part II of the Act deals with Section 194B of the Income Tax Act which specifically relates to taxation of winning from lotteries, a game show and any other sources. This specialist description explains the intricacies of Section 194B, its scope, TDS, legal compliances, and so on.

What is Section 194B of the Income Tax Act?

Section 194B specifies the TDS to be deducted on wins from lotteries, crossword puzzles, game shows, etc. This helps collect the majority of the tax liability at the source itself, thereby easing compliance for the winner as well as ensuring tax collection for the government.

This part applies when total winnings are more than ₹10,000 in a financial year. The tax is deducted before the prize goes out to the winner, so compliance is not a consideration.

Scope of Applicability

The deduction under Section 194B applies to different types of winnings such as:

Lotteries — State-run lotteries, online lotteries, or any organized lottery system.

Crossword puzzles — Any prize money won in competitive and casual crossword-solving tournaments.

Game shows — Television or digital competitions like quiz shows, talent contests or lotteries.

Betting and gambling — Any game involving bets and stakes.

Online gaming – Winnings from online platforms that offer contests, card games, or other interactive gaming.

194B TDS Rate

Tax deduction liability for any game of chance, i.e. payouts like a jackpot, lies with the person responsible for making the payment, under section 194B, at a TDS rate of 30% on the aggregate winnings. This flat rate will apply no matter the winner’s income tax slab or financial history.

The effective tax rate can range between 31.2% or above depending on taxpayers' income slabs due to various surcharges and cess (health and education cess etc.)

For example:

If you win ₹1,00,000 in a lottery, the TDS at 30% will be ₹30,000. With less (4%) included, the total tax due is ₹31,200. The amount of balance transferred to you is ₹68,800.

You might also be interested in ‍Section 133(6) of the Income Tax Act.

TDS on Prizes in Kind

Section 194B also extends to prizes in kind, including cars, bikes, and other luxury items. In this case, the tax is required to be paid before the prize is awarded. In case the cash portion of winnings is less than TDS due, the winner is required to deposit the cash required for paying taxes.

For instance, if the prize is a car worth ₹15,00,000, the tax to be charged would be ₹4,50,000 (30%). This is an amount that must be paid by the winner before claiming their vehicle.

Is the Lottery Legal in India?

In India, lotteries are governed by an act known as the Lotteries (Regulation) Act, of 1998 and therefore they are permissible only depending on specific state laws. Some states, like Maharashtra, Kerala and West Bengal allow and regulate lotteries, while others, like Gujarat and Karnataka, have banned them outright.

This point is crucial, so make sure any state lottery you join follows the law of your state.

Tax Implications for Winners

Winnings from lotteries and similar activities are taxed as Income from Other Sources under the Income Tax Act. This income is subject to a flat 30% tax and deductions (like 80C or 80D) can not be claimed on it.

Here are some important things to note:

Flat Tax Rate:

This gives the prize a 30% flat tax, the prize money is taxed at a fixed rate irrespective of total income or exemption limits applicable to other forms of income.

No Deductions:

You cannot deduct any expenses incurred in purchasing lottery tickets and entering contests.

Other Tax Liabilities:

The tax liability becomes pricier even more with provisions for surcharge and cess.

Responsibilities of the Payer

The entity or individual distributing the winnings must:

Before making the payment deduct TDS at the applicable rate.
Deposit the amount of TDS to the government in the specified time.
Generate Form 16A: This is the certificate that will be the proof of TDS deduction for this winner.
Quarterly TDS Return Filing: Detailed Explanation of TDS Deducted in Form 26Q.

Noncompliance with these requirements may lead to a levy penalty as per the Income Tax Act.

To keep learning more about income tax laws in our country you can also refer to Section 10 of the Income Tax (IT) Act: Exemptions and Allowances.

Penalties for Non-Compliance

There are penalties for non-compliance, both for payers and winners:

In the case of Payer:

Where TDS has not been deducted or deposited, the layer may be liable for payment of a penalty equivalent to that of interest. In severe cases, such acts can result in prison sentences of up to seven years and extra fines.

For Winners:

The winner may benefit by not declaring the winnings in the Income Tax Return (ITR) but this could lead to penalties for concealment of income as high as 200% of taxes evaded.

Examples of Tax Computation

Let’s consider some scenarios to better understand the application of Section 194B:

Scenario 1: Winning a Lottery

Details	Amount (₹)
Winnings	5,00,000
TDS (30%)	1,50,000
Effective Tax (with cess)	1,56,000
The amount received by the winner	3,44,000

Scenario 2: Winning a Prize in Kind

Details	Amount (₹)
Prize Value (Luxury Car)	20,00,000
TDS (30%)	6,00,000
Cash Required to Pay Taxes	6,00,000
Prize Handed Over After Tax	Yes

The car is handed over only after the tax amount is paid.

Planning Your Finances as a Winner

If you do win a large sum, it falls to you to manage your money wisely:

Set Aside Your Taxes:

Make sure to always check the TDS amount before you spend or invest with your winnings.

Declare Income in ITR:

So, make sure that you declare the income properly and do not leave any scope for disputes in future.

Seek Professional Advice:

If you're raking in a hefty amount then by all means pay for a little advice from a tax advisor or financial professional to see where you stand in terms of what you owe and how to plan ahead.

Conclusion

The Indian Income Tax Act, Section 194B: Withholding Taxation on Lottery Income Information on the legal and tax implications of this provision is critical whether you are a participant or organizer.

Winning in a lottery can change your life, but in order to be on the right side of the law, knowing the tax liabilities associated with it is important. Good luck get your ducks in a row, and liaison your win responsibly.

Swipe — Your Readily Compliant Solution to Taxes

Although managing taxes from lottery winnings can be daunting, Swipe aims to make it automatic. So if you won as an individual or as a business that will be responsible for TDS deduction, Swipe has an easy-to-use tax calculator to assist with tax calculations, TDS filings and compliances. Automated processes and reports that suit your requirements ensure you and your clients stay stress-free. Thousands of users trust Swipe to manage their tax obligations with ease. Join today and never miss a metrics compliance deadline again.

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FAQ

1. What is Section 194B of the Income Tax Act?

According to section 194B, 30% of TDS is applicable on winnings from lotteries, game shows and other such sources as long as the winnings are greater than ₹10,000 in a financial year.

2 . What is the TDS rate as per Section 194B?

The TDS rate is 30% whether or not the winner's income tax slab. Cess and surcharge are also applicable leading to a higher effective tax rate.

3 . Is the lottery legal in India?

Lotteries in India are governed by state laws. Some states, such as Kerala and Maharashtra, permit and regulate lotteries, while others, such as Gujarat, have banned them.

4. When it comes to prizes provided in kind, how TDS will be levied?

In case of prizes in kind (like cars), if the cash component itself is not enough to pay the TDS — the winner will have to do it in cash before claiming the prize.