Section 194B of Income Tax Act: TDS on Lottery, Games

Winnings from games of chance, such as lotteries, puzzles, and card games, often involve substantial sums of money. To prevent tax evasion and ensure a steady flow of revenue to the government, the Finance Ministry introduced a specific provision in the form of section 194B in the Income Tax Act of 1961.

In this article, we are going to delve into the provisions of section 194B of the Income Tax Act and explore its scope and implications for both winners and those responsible for prize disbursement.

Know More About How to File TDS Return?

What is Section 194B of the Income Tax Act?

Section 194B is a provision of the Income Tax Act of 1961 that mandates tax deduction at source (TDS) on winnings from games of chance and skill. According to this section, the TDS must be deducted if the winnings exceed ₹10,000 in value in a financial year, irrespective of whether the winnings were paid out in cash or kind.

By ensuring that tax is deducted at the source, instead of relying on the winner to declare and pay tax on their winnings later, section 194B takes a proactive approach to reduce tax evasion and simplifies the process of tax collection.

What Kind of Activities Fall Under the Purview of Section 194B of the Income Tax Act?

Section 194B of the Income Tax Act lists out the activities that are subject to tax deduction at source. Here is a quick overview of what they are.

Crossword puzzles
Lotteries
Card games
Betting
Surveys
Raffles
Sports fantasy games
Casino games
Gambling
TV programmes, including singing and dancing competitions, game shows, and quiz shows, among others
Online games of all kinds (under section 194BA, introduced in the Finance Act 2023)

Who is Responsible for Deducting TDS Under Section 194B of the Income Tax Act?

Under section 194B of the Income Tax Act, the person or entity responsible for paying the winnings must deduct tax at the prescribed rate before making the payment to the winner. The tax must be deducted irrespective of whether the prize amount is paid as a lump sum or in installments.

Furthermore, the deductor is not only responsible for deducting the tax but also for depositing it with the government within the prescribed time limit. Additionally, they are also required to issue a TDS certificate on Form 16A to the winner. This TDS certificate serves as proof of tax deduction and can be used by the winner while filing their income tax return.

Even in cases where the winnings are issued in kind, like vehicles, appliances, or travel packages, the responsibility of deducting TDS still lies with the prize distributor. The distributor can either bear the burden of paying TDS or collect it from the winner before handing over the winnings.

What is the Rate of TDS Deduction Under Section 194B of the Income Tax Act?

The rate of TDS under section 194B of the Income Tax Act is fixed at 30% of the value of the winnings. Including surcharge and cess, the 194B TDS rate comes up to 31.2%. In the case of non-resident Indians, a cess of 4% is added to the basic TDS rate of 30%.

Note: This rate applies uniformly to all winners, irrespective of the basic exemption limit, deductions, income bracket, and residential status.

What are the Consequences of Non-Compliance With the Provisions of Section 194B of the Income Tax Act?

If the person or entity responsible for deducting and paying TDS under section 194B of the Income Tax Act of 1961 fails to do so, they will be subject to a penalty. The amount of the penalty will be equal to the amount of TDS that was supposed to be deducted and paid to the government of India (section 271C).

In addition to this, interest on late deductions and deposits of TDS may also be levied. Here is a quick overview.

Interest of 1% per month will be levied if TDS under section 194B has not been deducted. [section 201(1A)(i)]
Interest of 1.5% per month will be levied if TDS under section 194B is deducted but not deposited. [section 201(1A)(ii)]

Note: In both cases, interest will be levied on the amount of TDS from the date on which the deduction or deposit was supposed to be made to the actual date of deduction or deposit.

Furthermore, if the responsible person or entity fails to pay TDS under section 194B, they may also be punished with imprisonment for a minimum of 3 months and a maximum of up to 7 years, along with the penalty.

Key Points to Note About Section 194B of the Income Tax Act of 1961

Let us now look at some of the key things you should keep in mind when dealing with TDS under section 194B of the Income Tax Act.

The income from section 194B, after deduction of TDS, is added to the head ‘Income from Other Sources’.
The income from section 194B is not eligible for any deductions under any section of the Income Tax Act.
If the winnings are in kind, then the TDS is deducted from the fair market value of the prize offered to the winner.
The TDS on income from section 194B must be deducted irrespective of the basic exemption limit or taxable income of the winner.
The TDS under section 194B will not be eligible for an income tax refund under any circumstances, even if the winner’s income is below the basic exemption limit.

Conclusion

Section 194B of the Income Tax Act of 1961 plays a crucial role in ensuring the timely collection of taxes on winnings from games and contests based on luck or skill. Understanding the section and its various provisions, especially the penal provisions, is crucial for both potential winners and the organisers of games and contests.

If you have won cash or prizes from games, contests, or lottery and wish to estimate the amount of tax that will be deducted at source, consider using a TDS calculator. It is a user-friendly tool that can help you instantly determine the amount of TDS payable on a wide range of payments.