Section 57 of the Income Tax Act: A Comprehensive Overview

A person's income is categorised under many heads of income under the Income Tax Act of 1961. Deductions are allowed against income subject to tax under the heading "Income from other sources" under Section 57 of the Income Tax Act. Section 57 specifically mentions the deductions that may be used to calculate the income taxable under the heading "Income from other sources" in clauses (i), (ia), (ii), (iia), (iii), and (iv). Other sources of income are usually subject to taxation at the rates specified by the applicable income tax bracket. You should definitely claim your deductions as they reduce your income tax liability. Continue reading to learn more about the Income Tax Act's Section 57 deductions.

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Table of content

What is Section 57 of the Income Tax Act?

Deductions that can be Claimed Under Section 57

Deductions Not Allowed Under Section 58

Amendments to Section 57(i) under the Finance Act, 2020

Conclusion

Most Asked Questions

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What is Section 57 of the Income Tax Act?

There are five heads for classifying income under the Income Tax Act. These include salaries, income from real estate, business and professional profits and gains, capital gains, and income from other sources. The fifth and remaining head of "Income from other sources" includes income that does not fall under any of the other four categories. For example, the tax head "Income from other sources" applies to dividends, lottery winnings, interest income, family pensions, and other forms of income received by a taxpayer. Although it would seem sensible that taxpayers with business revenue would be able to deduct business-related expenses, many taxpayers are unsure about deducting business-related expenses when it comes to income from other sources. To alleviate this confusion, Section 57 of the Income Tax Act offers particular deductions against the various income streams that fall under the purview of "Income from other sources."

Deductions that can be Claimed Under Section 57

A taxpayer can claim the following deductions on the income earned from other sources under Section 57 of the Income Tax Act:

• Dividends or interest received on tradable financial assets (securities) [Section 57(i)]: The taxpayer may deduct any reasonable amount paid as commission or compensation to a banker or other third party for collection costs incurred to realise such dividends or interest. 

  
  

• Deduction for employee contributions to welfare schemes [Section 57(ia)]: Under the heading "profits and gains of business or profession," an employee's contributions to provident funds (PF), superannuation funds (SF), employee state insurance (ESI), and other welfare programmes in the employer's accounts are considered income if they are not subject to taxation. If the employer contributes any money to these accounts and it is credited before or on the deadline, the taxpayer can deduct that amount.

  
  

• Deduction in the form of expense incurred on rental income [Section 57(ii)]: Any expense incurred on ongoing maintenance of the aforementioned assets, as well as insurance paid in relation to them, is allowed when rental income is obtained by renting out plant, furniture, machinery, or buildings. These items include furniture, machinery, and plants that are subject to depreciation. But in the case of a building, depreciation will only be permitted if the taxpayer is the true owner of the asset.

  
  

• Standard deduction from family pension [Section 57(iia)] : A deduction of one-third of the family pension's income, or Rs. 15,000, whichever is less, is permitted. For instance, the exemption offered is Rs 15,000 or Rs 20,000 (one-third of Rs 60,000), whichever is smaller, if a family member receives a pension of Rs 60,000. The taxable family pension as a result will be equal to Rs 60,000 - Rs 15,000 = Rs 45,000.

  
  

• Deduction from other income [Section 57(iii)] : Any additional expense paid in order to generate money that falls under the category of "income from other sources" and is not a capital or personal expense. However, if the taxpayer is a foreign firm, this deduction is not allowed.

  
  

• Deduction for interest on compensation or improved compensation [Section 57(iv)]: Subject to certain restrictions, 50% of interest on compensation or enhanced compensation received may be deducted from income.

Deductions Not Allowed Under Section 58

Certain expenses are specifically prohibited against income from other sources under Section 58 of the Income Tax Act. The following costs are not deductible: 

• Any costs incurred by the taxpayer personally

  
  

• Any interest due outside of India but not subject to tax withholding or payment at source 

  
  

• Any amount paid outside of India that is classified as "salaries," unless tax has already been paid or withheld at the source 

  
  

• An assessee is not entitled to any cost deduction if their revenue comes from gambling or betting of any form, lotteries, crossword puzzles, racing (including horse races), card games, and other activities.

Amendments to Section 57(i) under the Finance Act, 2020

Effective April 1, 2021, Section 57(i) was changed by the Finance Act of 2020. A taxpayer is eligible to deduct interest costs to get dividend income. Subject to a limit of 20% of dividends or income in relation to mutual fund units, interest on money borrowed for share investments may be deducted. On the other hand, a shareholder may not deduct any other expenses paid to receive dividend income. Dividend income was previously exempt from taxation in the hands of shareholders under Section 10(34). Under Section 115-O, the corporation was required to pay tax on these dividends. Stated differently, a taxpayer is only allowed to deduct interest paid on borrowed funds used for investments from their dividend income. Additionally, there will be a cap on the interest expense deduction of 20% of the gross dividend amount. Dividend income is taxed in the hands of the taxpayer at the applicable income tax slab rates, regardless of the amount received.

Conclusion

The Income Tax Act's Section 57 allows deductions for costs incurred in generating income other than salaries. Taxpayers can deduct interest paid on loans used for investments as well as costs incurred to generate revenue. But, it's crucial to make sure that the costs deducted from income are entirely and only incurred for that purpose, and that the borrowed funds are invested in revenue-producing assets. To claim these deductions, taxpayers must also keep accurate records of the costs incurred and the interest paid on loans. To properly claim the deductions and prevent any penalties for making inaccurate claims, it is imperative that you comprehend the terms of Section 57.

FAQ

Q1. What types of deductions can be claimed under Section 57?

Two categories of deductions are available under Section 57 for costs incurred in obtaining income other than wages. Expenses incurred in the course of earning revenue are the first category of deductions, while interest paid on money borrowed for investments is the second.

Q2. Which income types are eligible for deductions under Section 57?

Dividends, royalties, interest, and income from other sources can all be deducted under Section 57, as can income from a business or profession and from residential property.

Q3. What expense types are eligible for deductions under Section 57?

Rent paid for office or home property, salaries and wages paid to employees, costs incurred for the purchase of raw materials, advertising and marketing costs, interest paid on housing loans or money borrowed for investment, municipal taxes, costs for upkeep and repair, insurance premiums, bank fees, brokerage fees and fees paid to professionals like solicitors and accountants are among the expenses that qualify for deductions under Section 57.

Q4. What types of interest are considered income from other sources?

Interest categorised as income from other sources includes interest from bonds, debentures, fixed deposits, savings bank accounts, and foreign currency deposit accounts. 

Q5. Is there any limit to the number of deductions claimed under Section 57?

The number of deductions allowed under Section 57 is not restricted in any way. However, to be eligible for a deduction, the costs must be entirely and only expended in the process of earning income, and the borrowed funds must be invested in assets that produce revenue.

Q6. How can you claim deductions under Section 57?

The taxpayer is required to keep accurate records of the costs spent and the interest paid on borrowed funds in order to be eligible for deductions under Section 57. The claims included in the income tax return must be substantiated by these records.

Q7. How is a pension different from a family pension?

Since pensions are benefits that employees receive upon retirement, they fall within the salary category. Since family pensions are benefits that firms give to their employees' families after they pass away, they are categorised as income from other sources. 

Q8. What is the standard deduction for a family pension?

Under the new tax structure, a family pension may take a standard deduction of Rs 15,000 or one-third of the pension amount, whichever is less. According to Budget 2022, if pension and interest income are an elderly person's sole sources of yearly income, they may not be required to file income taxes.

Q9. Which ITR has to be filed to claim a deduction under section 57?

Only the family pension deduction is allowed under section 57 on the ITR-1; all other deductions under section 57 must be claimed on the the ITR-2.