Games people play: Skill or chance? Tax rates will differ, say experts

Many people had taken to online games during the lockdown. The possibility of earning a windfall, while playing from home, had attracted a lot of players to them. Now, with the deadline for filing income-tax return (ITR) approaching (July 31, 2022), gamers need to know the rules that govern taxation of income from online games.

Maneet Pal Singh, partner, I.P. Pasricha & Co says, “Any income, irrespective of its quantum, earned from online gaming must be reported while filing income-tax returns.”

Games of chance

First, the taxpayer needs to determine whether the game she/he played was one of chance/luck, or it involved skill. Section 115BB determines how winnings from lotteries, racing (including horse racing), cards, gambling or betting of any form, including online gaming, are to be taxed. 

Jayashree Parihar, counsel, PSL Advocates & Solicitors, says, “Such income is computed under the head ‘income from other sources’.”

According to Aditya Chopra, managing partner, Victoriam Legalis-Advocates and Solicitors, “Under Section 115BB, any income arising from a game of any sort, which does not involve any skill, is taxed at the rate of 30 per cent.”

Ankit Jain, partner, Ved Jain & Associates says that the government has imposed the highest tax rate in order to discourage such activities.

Games of skill

Any game that involves talent and knowledge, and is not based entirely on chance, is considered a game of skill. Chopra says, “If a game involves application of a person’s skills, then winnings from such a game are taxed at the normal rate applicable to the recipient of such income.”

No deductions for games of chance

Section 58 (4) restricts the assessee from deducting any expenses from the income derived from a game of chance. Gopal Bohra, partner, NA Shah Associates, says, “The taxpayer cannot claim any benefit of tax slab on such income, or deduction under Section 80C or 80D, while computing his/her tax liability on such income.”

Adds Singh: “If the winnings have been derived from a game of skill, then expenses incurred on earning that income can be deducted while computing taxable income.”

TDS rules under Section 194B

Tax is deducted at source by the entity paying out the price money before distributing the winnings. “TDS will be deducted at the flat rate of 30 per cent, excluding cess. TDS is applicable only if the winnings exceed ~10,000,” says Parihar.

In the case of games that involve knowledge or skill, TDS is not required to be deducted. Deepak Jain, chief executive, TaxManager.in says, “Winnings from games of skill need not be taxed. However, most platforms deduct 30 per cent of the winnings and pay out the rest. The winners can claim a refund of the excess tax.”

The TDS deducted will be reflected in the taxpayer’s Form 26AS. Credit for this amount should be taken while filing ITR. Suresh Surana, founder, RSM India, says, “If any winnings are subject to TDS, the taxpayer should check Form 26AS and the Annual Information Statement to ensure that the correct amount of tax has been deducted.”

Players need to be careful about a few things. Bohra says, “Sometimes, the winning amount is not credited to the winner’s bank account, but is used for some other purpose on the online portal. Individuals should, therefore, keep track of all such winnings, especially those that are less than ~10,000, on which no TDS is deducted.”

Caution should also be exercised while claiming TDS. Jain from Ved Jain & Associates says, “If a claim is made incorrectly, the taxpayer may have to shell out additional tax, interest, and penalty.”

At the end of each quarter, obtain Form 16A from the gaming platform. Verify that your PAN has been correctly reported, so that you are able to get the benefit of the tax already deducted at the time of filing your tax return.
 

The kind tax

• If the prize that a person is to receive is in kind (in the form of goods), such as a car, then the prize distributor must ensure before releasing the prize that tax has been paid on it
• Tax is paid at the market value of the prize 
• The prize distributor can either recover the tax from the winner or bear it himself
• For instance, suppose that Suman has won an Alto car in a contest which has a  market value is Rs 4 lakh
• Tax @ 31.2 per cent, which is Rs  1,24,800, must be paid before the winner can receive the car 

Source: Cleartax.in