Deductions.

93(1)

The income chargeable under the head “Income from other sources” shall be computed after making the following deductions:—

• (a) for dividends [excluding those referred to in section 2(40)(f) or interest on securities, any reasonable sum paid as commission or remuneration to a banker or any other person for the purpose of realising such dividend or interest on behalf of the assessee;
• (b) for income of the nature referred to in section 92(2)(c), so far as may be, an amount as per section 29(1)(e);
• (c) for income of the nature referred to in section 92(2)(f) and (g), so far as may be, an amount as per section 28(1)(a), (b), (d), section 33, and subject to the provisions of section 28(2);
• (d) for income in the nature of family pension (a regular monthly amount payable by the employer to a family member of an employee upon the death of such employee),–– (i) an amount equal to one-third of such income or twenty-five thousand rupees, whichever is less, where income-tax is computed under section 202(1); and (ii) an amount equal to one-third of such income or fifteen thousand rupees, whichever is less, in any other case;
• (e) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for making or earning such income;
• (f) for income of the nature referred to in section 92(2)(i), an amount equal to 50% of such income and no other deduction shall be allowed under this section.

93(2)

In respect of––

• (a) dividend income of the nature referred to in section 2(40)(f), no deduction shall be allowed;
• (b) any other dividend income [other than in clause (a)], or income from units of a Mutual Fund specified under Schedule VII (Table: Sl. No. 20 or 21) or income from units of a specified company as referred to in section 2(h) of the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002, only deduction allowed shall be interest expense which, for any tax year, shall be limited to 20% of such income (included in the total income for that year, without deduction under this section).

Explanation

Section Summary:

Section 93(1) and 93(2) of the new income tax law in India outlines the deductions allowed while computing income under the head "Income from other sources." This section specifies the types of expenses or allowances that can be deducted from such income, ensuring that taxpayers can reduce their taxable income by certain permissible amounts. The section also clarifies restrictions on deductions for specific types of income, such as dividends and mutual fund units.

Key Changes:

1. Dividend Deductions: The new law introduces specific rules for deducting expenses related to dividends and interest on securities. It allows reasonable commission or remuneration paid to bankers or others for realizing such income but excludes certain dividends under section 2(40)(f) from any deductions.
2. Family Pension Deduction: A new provision allows a deduction for family pension income, capped at one-third of the income or a fixed amount (₹25,000 or ₹15,000, depending on the tax computation method).
3. Mutual Fund and Specified Company Income: Deductions for interest expenses on income from mutual funds or specified companies are now limited to 20% of such income.
4. General Expenditure Deduction: The law retains the provision for deducting any non-capital expenditure incurred wholly and exclusively for earning such income.

Practical Implications:

• Taxpayers Receiving Dividends: Taxpayers earning dividends (except those under section 2(40)(f)) can deduct reasonable commission or remuneration paid to intermediaries for realizing such income. However, no other deductions are allowed for dividends under section 2(40)(f).
• Family Pension Recipients: Individuals receiving family pension can now claim a deduction of up to one-third of the pension or a fixed amount, reducing their taxable income.
• Mutual Fund Investors: For income from mutual funds or specified companies, only interest expenses up to 20% of the income are deductible. This limits the tax benefits for such income.
• General Income Earners: Taxpayers earning income from other sources can deduct any non-capital expenses incurred exclusively for earning that income, provided they meet the "wholly and exclusively" criteria.

Critical Concepts:

• Income from Other Sources: This refers to income that does not fall under the heads of salary, house property, business/profession, or capital gains. Examples include interest, dividends, and family pensions.
• Family Pension: A regular monthly payment made by an employer to the family members of a deceased employee.
• Wholly and Exclusively: Expenditure must be incurred entirely and solely for the purpose of earning the income to qualify for deduction.
• Section 2(40)(f) Dividends: These are specific types of dividends excluded from deductions under this section.

Compliance Steps:

1. Document Expenses: Maintain records of commissions, remuneration, or other expenses incurred for realizing income from dividends, interest, or other sources.
2. Calculate Deductions: For family pension, calculate the deduction as one-third of the income or the specified limit (₹25,000 or ₹15,000), whichever is lower.
3. Limit Mutual Fund Deductions: Ensure that interest expenses on mutual fund or specified company income do not exceed 20% of such income.
4. Report Accurately: Include all allowable deductions while filing income tax returns under the head "Income from other sources."

Examples:

1. Dividend Income: Mr. A earns ₹1,00,000 as dividends and pays ₹5,000 as commission to his banker for realizing the dividend. He can deduct the ₹5,000 commission from his dividend income, reducing his taxable income to ₹95,000.
2. Family Pension: Ms. B receives a family pension of ₹60,000 annually. She can claim a deduction of ₹20,000 (one-third of ₹60,000) or ₹15,000, whichever is lower. Her taxable income from the pension will be ₹45,000.
3. Mutual Fund Income: Mr. C earns ₹50,000 from mutual funds and incurs ₹12,000 in interest expenses. Since the deduction is capped at 20% of the income (₹10,000), only ₹10,000 can be deducted, leaving ₹40,000 as taxable income.

This section ensures clarity on permissible deductions while tightening restrictions on certain types of income, aligning with the broader goals of the new tax law.