HOW ARE LOTTERY WINNINGS TAXED IN INDIA?
In India, lottery winnings are taxed at a flat 31.2% rate as per Section 56(2)(ib), Section 115BB, and Section 194B of the Income Tax Act 1961. However, the total tax amount on a win could go all the way up to 59.9%.
The tax deduction is irrespective of whether the money is won in domestic or international lotteries. Also, there is no way to receive relief on it based on your income slab or otherwise. You must pay the tax in full.
Let’s take a closer look to understand how lottery taxes work.
Law for Taxation of Lottery Winnings
Section 56(2)(ib) of the Income Tax Act 1961 – Definition of Income From Other Sources
Section 56(2)(ib) of the Income Tax Act 1961 recognizes winnings from lotteries, crossword puzzles, card games, horse races, and other similar gambling or betting games as ‘income from other sources’ and deems them taxable. There is no tax exemption or deduction applicable on such incomes.
Section 194B of the Income Tax Act 1961 – TDS on Lottery Winnings
| TDS on Lottery Winnings | |
|---|---|
| Rate | 30% |
| Income head | Income from other sources |
| Threshold limit | ₹10K |
| Refund of deducted tax | Non-refundable |
| Deductions as per Chapter VI-A (Section 80C, 80D, and 80E) | Not allowed |
Section 194B of the Income Tax Act 1961 talks about the mandatory deduction of TDS (Tax Deducted at Source) from lottery winnings exceeding ₹10K at a flat rate of 30%. However, the person responsible for the deduction is the one who is liable to pay the winners – in this case, the lottery organizers.
TDS was introduced in the Indian taxation system to levy tax on the source of income. When it comes to lotteries, the payer of winnings is the deductor. This person is liable to make payments only after deducting the tax at the source and depositing the amount into the Central Government’s exchequer.
The same corresponds to Section 276B of the IT act 1961, which mentions the penalty for defaulters. Accordingly, if an individual or organization fails to credit the deducted TDS to the Central Government within the stipulated time, they may be liable to prosecution for a period of 3 months to 7 years along with a monetary fine.
For winnings paid in cash or via DD and cheques, TDS should be deducted before the winner is paid out. For winnings paid in kind, the payer needs to calculate the value of the payment and pay the tax from his pocket.
For winnings that are made in part cash and part kind, the payer has to calculate the total tax according to the total value of the cash and the market value of the prize paid out in kind.
In general cases of TDS, the deductee can claim a credit of the amount based on Form 26AS or a TDS certificate from the deductor. However, in the case of lottery winnings, such claims are not entertained as per Section 58(4) of the Income Tax Act. Also, no deductions as per Section 80C, 80D, and 80E are allowed (check the table below).
| Sections for Tax Relief | |
|---|---|
| Section | Nature of Deposit for Income Tax Relief |
| 80C | Payment of life insurance premium, tuition fees of children, deposit in public provident fund, repayment of housing loan, etc. |
| 80D | Medical insurance premium, HUF, contribution to CGHS |
| 80E | Payment of interest on education loan for self or dependant |
Please note that TDS is deducted at basic rates. No surcharge or educational cess is applicable in addition to TDS on lottery winnings. Also, if the payer cannot manage to deduct TDS, the payee must make arrangements for the same.
Now, let’s understand this with an example.
Let’s assume Raman won ₹10 lakh in an international lottery. Since this amount exceeds ₹10K, the payer would be liable to deduct 30% TDS (₹3 lakh) and credit it to the Government of India before paying him. Therefore, Ramam would receive ₹7 lakh as the final amount.
Had this been a TDS on general income, Ramam would have been able to claim it back. However, the nature of his income being lottery winnings, the deduction cannot be reclaimed.
As a side note, please note that international lottery sites usually put the responsibility of tax on you as the player. If you happen to win big, always make sure to raise the question about tax with them in order to know how to proceed.
Furthermore, TDS is not the only tax Raman would be paying on his winning. Read on to know what happens next.
Section 115BB of the Income Tax Act 1961 – General Tax on Lottery Winnings
On 1st April 1987, Section 115BB was inserted in Chapter XII of the Income-tax Act after Section 115B.
It states that where the gross income of an individual includes winnings lotteries, crosswords, puzzle, card games, horse race, or similar betting and gambling games, the income tax payable would be a total of the following:
- The calculated tax amount on the winnings at the rate of 30% (31.2% after adding cess).
- The amount of tax chargeable had the individual’s total income been reduced by the income from the winnings.
The tax on winnings, thus applicable, would not be liable for exemption even if the individual’s total income isn’t taxable. Also, such tax deposit would not be refundable except the amount, which is claimable and repayable as per Section 87A.
Additionally, there would be a 4% Education and Health cess on this 30% tax as well as a surcharge of up to 37% (depending on the amount won), which would eventually increase it to 31.2% (or higher). The lottery winner must pay this amount at the time of filing his income tax return.
Before we explain by continuing with the previous example, check the current tax slabs for individuals in India in the table below.
| Income Tax Slabs (Excluding 4% Education Cess) | |
|---|---|
| Income Range | Income Tax |
| Up to ₹2,50,000 lakhs | – |
| ₹2,50,001 to ₹5,00,000 | 5% |
| ₹5,00,001 to ₹10,00,000 | 20% |
| Above ₹10,00,000 | 30% |
Also, the surcharge rates are as follows:
| Surcharge Rates | |
|---|---|
| ₹50 lakhs – ₹1 crore | 10% |
| ₹1 crore – ₹2 crores | 15% |
| ₹2 crores – ₹5 crores | 25% |
| ₹5 crores – ₹10 crores | 37% |
| Above ₹10 crores | 37% |
Income tax on lottery winnings is calculated in the following 4 steps:
- Step 1: Basic Tax = 30% of Winnings after TDS deduction
- Step 2: Surcharge = Applicable % of the Basic Tax (check the table above)
- Step 3: Cess = 4% of Basic Tax + Surcharge
- Step 4: Total Income Tax = Basic Tax + Surcharge + Cess
In the previous example, we discussed how Ramam won ₹10 lakh in the lottery but received ₹7 lakh after TDS deduction.
Now, let’s also assume his gross salary for that fiscal year is ₹6 lakhs. Therefore, his total income for the fiscal year is 7 + 6 = ₹13 lakhs.
His taxes would now be processed in two parts.
In the first part, he will be taxed ₹2.184 lakhs (31.2% of ₹7 lakh). In the second part, he would be taxed ₹1.248 lakhs (20.8% of ₹6 lakh).
Since his income does not exceed ₹50 lakhs, the surcharge won’t be applicable in either case.
Therefore, his total income after taxes for that fiscal year would be ₹13 lakhs – (₹2.184 lakhs + ₹1.248 lakhs) = ₹9.568 lakhs.
Of course, Raman can claim his usual tax relief on the ₹1.248 lakhs tax as permitted under 80C, 80D, 80E. However, he would not be able to claim any on the ₹2.184 lakhs. He must pay this amount in full.
Full Tax Example on a ₹10 Crore Lottery Win
Let’s further understand lottery taxes with a full example of how a ₹10 Crore win would be taxed based on what we have learned so far.
- Step 1: TDS = 30% of ₹10 Cr = ₹3 Cr (₹7 Cr left)
- Step 2: Basic Tax = 30% of ₹7 Cr = ₹2.1 Cr
- Step 3: Surcharge = 37% of ₹2.1 Cr = ₹0.777 Cr
- Step 4: Cess = 4% of ₹2.1 + 0.777 = 4% of ₹2.877 Cr = ₹0.115 Cr
- Step 5: Total Tax = ₹3 Cr + ₹2.1 Cr + ₹0.777 Cr + ₹0.115 Cr = ₹5.99 Cr
The effective tax paid on a ₹10 crore win would be ₹5.99 Cr, which is 59.9%.
Double Taxation Avoidance Agreement (DTAA)
Players of international lotteries in India should also be aware of the Double Taxation Avoidance Agreement (DTAA) to avoid paying double taxes (TDS) on their lottery winnings.
India enters this tax treaty with multiple other countries so taxpayers are relieved from paying tax twice – once in the source country and again in the residence country. Currently, India has signed the DTAA with 85 countries worldwide.
We have listed all of them and their corresponding TDS rates in the list below
- Armenia – 10%
- Australia – 15%
- Austria – 10%
- Bangladesh – 10%
- Belarus – 10%
- Belgium – 15%
- Botswana – 10%
- Brazil – 15%
- Bulgaria – 15%
- Canada – 15%
- China – 15%
- Cyprus – 10%
- Czech Republic – 10%
- Denmark – 15%
- Egypt – 10%
- Estonia – 10%
- Ethiopia – 10%
- Finland – 10%
- France – 10%
- Georgia – 10%
- Germany – 10%
- Greece – as per agreement
- Hashemite kingdom of Jordan – 10%
- Hungary – 10%
- Iceland – 10%
- Indonesia – 10%
- Ireland – 10%
- Israel – 10%
- Italy – 15%
- Japan – 10%
- Kazakhstan – 10%
- Kenya – 15%
- South Korea – 15%
- Kuwait – 10%
- Kyrgyz Republic – 10%
- Libya – as per agreement
- Lithuania – 10%
- Luxembourg – 10%
- Malaysia – 10%
- Malta – 10%
- Mauritius – 7.50 to 10%
- Mongolia – 15%
- Montenegro – 10%
- Morocco – 10%
- Mozambique – 10%
- Myanmar – 10%
- Namibia – 10%
- Nepal – 15%
- Netherlands – 10%
- New Zealand – 10%
- Norway – 15%
- Oman – 10%
- Philippines – 15%
- Poland – 15%
- Portuguese Republic – 10%
- Qatar – 10%
- Romania – 15%
- Russia – 10%
- Saudi Arabia – 10%
- Serbia – 10%
- Singapore – 15%
- Slovenia – 10%
- South Africa – 10%
- Spain – 15%
- Sri Lanka – 10%
- Sudan – 10%
- Sweden – 10%
- Swiss Confederation – 10%
- Syrian Arab Republic – 7.50%
- Tajikistan – 10%
- Tanzania – 12.50%
- Thailand – 25%
- Trinidad and Tobago – 10%
- Turkey – 15%
- Turkmenistan – 10%
- UAE – 12.50%
- UAR (Egypt) – 10%
- Uganda – 10%
- UK – 15%
- Ukraine – 10%
- United Mexican States – 10%
- USA – 15%
- Uzbekistan – 15%
- Vietnam – 10%
- Zambia – 10%
Please note that double taxes can only be avoided if the DTAA has been signed. Without it, you would have to pay TDS twice without relief.
FAQ
What Is an Education Cess?
An Education Cess is an additional tax levied on an individual’s Basic Tax by the Government to generate revenue for funding primary, secondary, and higher education within the country. This money is utilized in improving existing infrastructure and creating new as well as raising the overall quality of education. Education Cess goes into funding midday meals in schools, Government institutes, loans for low-income students, salaries for faculties and staff, and special schemes.
What Is a Surcharge?
A Surcharge is a tax levied on the payable Basic Tax. It is not included in the income tax slab rates, rather charged separately. The purpose of a surcharge is to levy additional tax on individuals who fall in the higher income brackets. In a way, it relieves the poor class of the society from the burden of tax and shifts the same to the higher class.
Do the Indian Taxation Rules for Lotteries Vary by State?
In India, the taxation rules for lotteries might vary from one State to the next. The Delhi Entertainments and Betting Tax Act 1996 and the Andhra Pradesh (Telangana) Horse Racing and Betting Tax Regulation 1358F Act are classic examples of this deviation. What’s more, States can even levy tax on lotteries run by other States!
