Income from Other Sources (IFOS) – Legal and Procedural Guide for AY 2025–26

With Interpretation of Section 56, Supporting Provisions, and Accurate Filing Practices

Statutory Basis and Interpretation

Section 56(1) – The Residual Head

As per Section 56(1) of the Income-tax Act, 1961:

“Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head ‘Income from other sources’, if it is not chargeable to income-tax under any of the heads specified in clause (A) to (E) of section 14.”

Thus, Income from Other Sources is a residuary head of income that applies when income is not taxable under the following heads:

• Salaries (Section 15)

• Income from House Property (Section 22)

• Profits and Gains of Business or Profession (Section 28)

• Capital Gains (Section 45)

This ensures that no taxable receipt escapes assessment merely because it does not fall within a specific head.

Section 2(13) – Relevance of Business Definition

The term "business" under Section 2(13) includes:

“Any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.”

If an activity lacks systematic structure, continuity, or intent to carry on commercial operations, then income arising from such activity cannot be brought under the head “Profits and Gains of Business or Profession.” It would fall under “Income from Other Sources.”

Judicial Principles

• In CIT v. Govinda Choudhury & Sons (1993) 203 ITR 881 (SC), the Supreme Court held that when income is not taxable under any specific head, it must be taxed under IFOS.

• In S.G. Mercantile Corp. v. CIT (1972) 83 ITR 700, it was clarified that casual or isolated transactions lacking a business framework are not business income.

Classification of Income under Section 56(2)

Various types of income specifically taxable under the head IFOS are outlined in Section 56(2), including:

1. Dividend income

2. Interest on securities, bonds, savings, fixed deposits, recurring deposits

3. Family pension (not covered under salary)

4. Winnings from lotteries, races, games, betting

5. Letting of plant, machinery or furniture not forming part of business assets

6. Forfeiture of advance received against capital asset transfer (post 01.04.2014 amendment)

7. Gift of money or property where aggregate value exceeds fifty thousand rupees, subject to exceptions

8. Interest received on enhanced compensation (in the year of receipt)

Each type of income must be carefully examined for its nature and correct legal head.

Deductions Allowed under Section 57

Deductions from IFOS are limited to those specifically allowed under Section 57:

1. In case of family pension, deduction under Section 57(iia) is allowed to the extent of fifteen thousand rupees or one-third of the pension, whichever is lower.

2. In case of dividend income, deduction for interest expense incurred to earn such income is allowed, subject to a maximum of twenty per cent of such dividend income.

3. In case of letting of plant and machinery, deductions for insurance, repairs and depreciation are allowed if the conditions are met.

4. No deduction is allowed in respect of casual incomes such as winnings from lotteries, games, etc., as per Section 58(4).

Claims under Section 57 must be directly attributable to the income offered and not general expenses.

Selection of ITR Form and Reporting Procedure

Appropriate Form Selection

• ITR-1 may be used only if total income includes income from other sources up to five thousand rupees, and only if the source is interest or dividend.

• ITR-2 is suitable for individuals with income from other sources above five thousand rupees or other types of IFOS (e.g., gifts, winnings).

• ITR-3 is required if the assessee also has income from business or profession.

• ITR-4 (presumptive taxation) can be used only if IFOS does not exceed five thousand rupees.

Schedule OS – Reporting Details

In ITR-2 and ITR-3, income from other sources must be reported in Schedule OS, as follows:

• Interest income: Reported under the relevant clause (savings, deposits, etc.)

• Dividend income: Disclosed separately from interest

• Family pension: Reported with deduction under Section 57(iia)

• Other income: Honorarium, gifts, referral commission, etc.

• Deduction under Section 57 must be separately shown

• Net income under IFOS must be accurately calculated and matched with TDS credits

TDS Reporting and Reconciliation

Most IFOS incomes are subject to tax deduction at source (TDS). Some key TDS provisions include:

• Section 194A: TDS on interest other than securities

• Section 194: TDS on dividend

• Section 194B: TDS on lottery or game winnings

• Section 194H: TDS on commission

• Section 194J: TDS on professional fees and honorarium

The total income offered under IFOS must match the gross amount reported in Form 26AS, AIS and TIS. TDS must be claimed under the correct schedule in the ITR form.

Mismatch between reported income and TDS can result in demand notices or processing issues under Section 143(1).

Practical Scenarios and Tax Head Determination

Situation	Head of Income	Reasoning
Interest on fixed deposit or savings	IFOS	Passive receipt; not business-linked
Gift received from non-relative exceeding fifty thousand	IFOS	Taxable under Section 56(2)(x)
Honorarium for one-time university lecture	IFOS	Not professional income; no continuity
Winnings from online gaming	IFOS	Taxable at flat rate; Section 56(2)(ib)
Referral commission earned occasionally	IFOS	No regular activity or set-up
Professional receiving recurring commission	Business Income	Continuity, commercial intent evident

Each case must be judged based on frequency, structure, and underlying activity.

Procedural Compliance and Filing Checklist

• Collect Form 26AS, AIS and TIS for the financial year 2024–25

• Reconcile all interest, dividend, and other receipts

• Confirm if income is covered under business or capital gains; if not, classify under IFOS

• Use appropriate ITR form based on complexity and income size

• Disclose income accurately in Schedule OS

• Link TDS in the relevant schedule and match with reported income

• Claim deductions under Section 57 only if specifically eligible

• Submit return within the due date to avoid fees under Section 234F

Key Compliance Risks and Avoidance

1. Reporting business or commission income under IFOS when it qualifies as professional income may lead to misclassification penalties or audit selection.

2. Claiming excessive deductions under Section 57 without proof may result in disallowance.

3. Using ITR-1 despite having gifts or other IFOS above five thousand rupees renders the return defective under Section 139(9).

4. Not reconciling Form 26AS or AIS with income declared in the return may result in underreporting notices or incorrect TDS credit.

Conclusion

Income from Other Sources under the Income-tax Act is not merely a catch-all category. It is governed by specific statutory provisions under Section 56 and Section 57 and subject to judicial interpretation. Careful classification, correct deduction claims, and appropriate ITR form usage are essential for legally compliant and risk-free return filing.

Any income which is not specifically chargeable under salary, house property, business, or capital gains and does not fall under exclusions must be examined under Section 56 for IFOS treatment.