By CA Surekha Ahuja
A Complete Guide to Cryptocurrency, Online Gaming Winnings, Lottery Income, Patent Royalty, Carbon Credits, Unexplained Income and Other Special Tax Regimes
AY 2025–26 | Sections 190 to 195 of the Income-Tax Act, 2025
Most taxpayers focus on the tax rate. However, for special income categories under the Income-Tax Act, 2025, the rate is only one part of the computation. Equally important is determining the taxable base and understanding whether any deduction, allowance, expense claim, or loss set-off is permitted.
A taxpayer may know that a particular income is taxable at 30%, but the more important questions often are:
- 30% of what amount?
- Is any deduction permitted?
- Can losses be adjusted?
- Does TDS discharge the entire tax obligation?
The Income-Tax Act, 2025 answers these questions differently for different categories of special income. In most cases, the law not only prescribes a fixed tax rate but also restricts or completely prohibits deductions and loss adjustments.
As return filing for AY 2025–26 gathers pace and AIS, TDS and TCS reporting become increasingly data-driven, understanding these provisions correctly is critical to avoiding computation errors, notices and future tax disputes.
What Makes These Incomes Special?
Unlike salary, business income, house property income or most investment income that are generally taxed under normal slab rates, certain categories of income are subject to special taxation provisions.
These provisions generally prescribe:
- A fixed tax rate;
- A specific taxable base;
- Restrictions on deductions; and
- Restrictions on loss set-off and carry forward.
Accordingly, taxpayers should always follow the following sequence:
The Four-Step Rule
Step 1 – Identify the applicable section
Step 2 – Determine the taxable base
Step 3 – Allow only deductions specifically permitted
Step 4 – Apply the prescribed tax rate
Most computational errors arise at Steps 2 and 3.
Quick Reference Table: Special Income Tax Rates, Taxable Base, Deductions and Loss Rules
| Section | Income Category | Tax Rate | Taxable Base | Deduction Allowed | Loss Set-Off |
|---|---|---|---|---|---|
| 194(4) | Virtual Digital Assets (Crypto, NFTs) | 30% | Sale consideration less cost of acquisition | Cost of acquisition only | Not permitted |
| 194(5) | Online Gaming Winnings | 30% | Net winnings as prescribed | None | Not permitted |
| 194(1) | Lottery, Gambling and Betting | 30% | Gross winnings | None | Not permitted |
| 194(2) | Patent Royalty | 10% | Eligible royalty income | None | Not applicable |
| 194(3) | Carbon Credit Transfers | 10% | Gross consideration | None | Not permitted |
| 194(6) | Life Insurance Business Profits | 12.5% | Profits of life insurance business | As provided | As applicable |
| 195 | Unexplained Income | 60% plus surcharge | Entire unexplained amount | None | Not permitted |
| 192 | Block Assessment Income | 60% plus surcharge | Undisclosed income assessed | None | Not permitted |
| 193 | GDR Income | 10% / 12.5% / Slab | As specified | As specified | As applicable |
| 191 | Taxable RPF Balance | Special computation | Schedule XI mechanism | Special rules | As applicable |
| 190 | Average Rate Relief | Rate mechanism | For rate purposes | Not applicable | Not applicable |
Virtual Digital Assets (Crypto, NFTs & Other VDAs) – Sec.194(4)
(Corresponding to earlier Section 115BBH)
| Particulars | Position |
| Tax Rate | 30% |
| Taxable Base | Sale consideration less cost of acquisition |
| Deduction Allowed | Cost of acquisition only |
| Loss Set-Off | Not permitted |
| Carry Forward | Not permitted |
The VDA taxation regime remains one of the strictest provisions under the Act.
Only the cost of acquisition is deductible. No deduction is available for exchange charges, gas fees, wallet fees, mining expenses, platform charges or other incidental expenditure.
Further, losses from VDA transactions cannot be adjusted against any other VDA gains or any other head of income and cannot be carried forward.
Online Gaming Winnings – Section 194(5)
(Corresponding to earlier Section 115BBJ)
| Particulars | Position |
| Tax Rate | 30% |
| Taxable Base | Net winnings as prescribed |
| Deduction Allowed | None |
| Loss Set-Off | Not permitted |
| Carry Forward | Not permitted |
The taxable amount is the net winnings computed under the prescribed rules.
No deduction is available for entry fees, participation costs, subscriptions or platform charges.
TDS deducted by the gaming platform does not remove the obligation to disclose the income in the return.
Lottery, Gambling and Betting Winnings – Section 194(1)
(Corresponding to earlier Section 115BB)
| Particulars | Position |
| Tax Rate | 30% |
| Taxable Base | Gross winnings |
| Deduction Allowed | None |
| Loss Set-Off | Not permitted |
| Carry Forward | Not permitted |
This provision taxes winnings on a gross basis.
No deduction is permitted for lottery tickets, betting stakes or participation expenses.
Patent Royalty – Section 194(2)
(Corresponding to earlier Section 115BBF)
| Particulars | Position |
| Tax Rate | 10% |
| Taxable Base | Eligible royalty income |
| Deduction Allowed | None |
| Option Requirement | Before return due date |
The concessional rate substitutes the benefit of claiming related expenditure.
To qualify, the patent should generally be registered in India, developed in India and belong to the true and first inventor.
Carbon Credit Transfers – Section 194(3)
(Corresponding to earlier Section 115BBG)
| Particulars | Position |
| Tax Rate | 10% |
| Taxable Base | Gross consideration |
| Deduction Allowed | None |
| Loss Set-Off | Not permitted |
The transfer of carbon credits is taxable on a gross basis and no expenditure is deductible.
Life Insurance Business Profits – Section 194(6)
| Particulars | Position |
| Tax Rate | 12.5% |
| Taxable Base | Profits of life insurance business |
| Applicability | Life insurance companies |
| Deduction Position | As provided under the section |
This provision applies to life insurance companies and not to policyholders.
Unexplained Income – Section 195
(Corresponding to earlier Section 115BBE)
| Particulars | Position |
| Tax Rate | 60% plus surcharge |
| Taxable Base | Entire unexplained amount |
| Deduction Allowed | None |
| Loss Set-Off | Not permitted |
| Carry Forward | Not permitted |
This provision generally covers:
- Unexplained cash credits;
- Unexplained investments;
- Unexplained money;
- Unexplained assets;
- Unexplained expenditure; and
- Certain hundi-related transactions.
The burden of explaining the nature and source lies on the taxpayer.
Other Important Special Provisions
Section 192 – Block Assessment of Undisclosed Income
- Tax Rate: 60% plus surcharge
- No deductions
- No loss set-off
- No carry-forward benefit
Section 191 – Taxable Recognised Provident Fund Balance
Taxation is governed by the special mechanism contained in Schedule XI.
Section 193 – GDR Income of Knowledge Sector Employees
- Dividend Income – 10%
- Long-Term Capital Gains – 12.5%
- Other Income – Slab Rates
Section 190 – Average Rate Relief
Provides a rate-computation mechanism where exempt income is considered for determining the applicable tax rate.
The Expense Question: Why Most Computation Errors Occur
The most common error is assuming that a genuine expense automatically becomes deductible.
That assumption is incorrect for special-income provisions.
Where the Act expressly prohibits deduction of expenditure or allowance, the restriction is absolute. Commercial necessity, actual payment or business purpose cannot override an express statutory prohibition.
This principle is particularly important for Virtual Digital Assets; Online Gaming Winnings; Lottery and Betting Income; and Unexplained Income.
Before Filing Your Return: Practical Compliance Checklist
Before filing the return, taxpayers should verify:
✓ Correct identification of the applicable provision.
✓ Correct determination of the taxable base.
✓ Whether any deduction is specifically permitted.
✓ Restrictions on loss set-off and carry forward.
✓ TDS and TCS credits reflected in AIS and Form 26AS.
✓ Proper disclosure of the income in the return.
Remember: TDS credit reduces tax payable. It does not eliminate the obligation to disclose the income.
Final Takeaway
For special incomes, the tax rate is often only the beginning of the analysis.
The more important questions are:
- What amount is taxable?
- What deductions are permitted?
- Can losses be adjusted?
- What compliance obligations remain despite TDS deduction?
The correct sequence remains:
Identify the income → Determine the taxable base → Allow only statutory deductions → Apply the prescribed rate → Report the income → Claim the TDS credit separately.
For AY 2025–26, following this sequence may be the most effective way to avoid notices, adjustments and future tax disputes.
