Section 194B: TDS on Winnings from Lottery, Puzzles, Games, and Horse Races

“The only thing that hurts more than income tax is not having to pay an income tax” – Thomas Dewar

Winning a lottery is super exciting. Monetary reward for solving a puzzle that tickles your brain is icing on the cake. If there’s something more alluring to a Jockey than a great horse, it’s the prize money. Nothing quite beats the moment of winning KBC and shaking hands with the legendary Amitabh Bachchan. 

But what’s the first thing you would do with the jackpot after winning it?

Before you even think about that fancy car or an exotic holiday, remember you have got to pay the government a share of what you have won!

Yes. It is indeed distressing to part with money. But you don’t have a choice.

The reason: Section 194B of the Income Tax Act

What Does the Provision State?

According to 194B of Income Tax, winnings from lottery, puzzles, games & race horses are subject to a tax deduction at source (TDS) of 30%.

The person who pays the prize money is responsible for deducting the tax if the amount payable exceeds Rs.10,000. (Hence no tax is deducted if the amount is below Rs.10,000)

Tax should be deducted by the payer at the time of making the payment, and only the net amount is given to the winner.

Sources That Come Under the Ambit of Section 194B:

Any winnings from the following sources are taxed at a flat 30% rate irrespective of your income level:

• Lottery
• Crossword Puzzles
• Card Games
• Online Games
• Quiz Competitions
• Lucky Draws
• Television Shows
• Betting & Gambling
• Entertainment Programs
• Horse Racing (Section 194BB)

Note: 

1. After adding a surcharge & cess of 4% to the flat 30% rate, the effective tax rate is 31.20%.
2. Only specific awards that are approved by the government, like National Award, Bharat Ratna etc., are exempted from tax.

Is the TDS Applicable if the Prize is given in Kind and not in Cash?

Yes. Provisions of Section 194B are applicable even if the winnings are not in the form of cash.

Illustration:

If you win a gift hamper worth Rs.1 lakh in a music competition, Rs.30,000 (Rs.1 Lakh*30%) must be paid to the government by you.

If the music show organizers do not collect the amount from you to pay the government, it shall be recovered from them as follows:

Value of Gift Hamper: Rs.1 Lakh (net)

Hence, the Gross Value of Gift: Rs.1 Lakh/(100%-30%) 

Rs.1 Lakh/70% = Rs.1,42,857

Amount of TDS applicable: 1,42,857*30% = Rs.42,857 (excluding surcharge & cess)

Note:

If the reward is given partly in cash and the rest in kind, the 30% tax shall be deducted from the cash amount after aggregating the cash prize and the market value of the prize in kind.

If the cash portion is insufficient to meet the tax liability, it is the responsibility of the payer to ensure that the tax is paid to the government in full before he releases the gift to the winner.

Salient Features of Section 194B:

• Flat Taxation:

  Every person (who wins any prize), irrespective of their age, income and gender, is taxed at 30%. There are no special exemptions.

• Prize Money is Separate:

  Other regular income of the winner is taxed as per his tax slab. Winnings are treated separately.

• No Refunds Given:

  The amount deducted under 194B is a charge that does not depend on the winner’s salary or business income. Hence, he is not eligible to claim any amount as a refund from the government.

• Entire Winnings is Taxed:

  Any expenditure incurred in relation to earnings under this section (E.g. cost of lottery tickets, travel, stay etc.) is not allowed to be deducted from the prize amount and the entire amount is taxable. Further, no deduction or allowance can be claimed even if you invest the said amount in specified instruments under Chapter VI-A.

• Filing of Returns:

  The winner has to include the prize amount in his tax returns under the head – Income from Other Sources. A TDS certificate has to be submitted as proof of payment of tax.

• Prize in Installments:

  If the prize money is paid in installments, tax should be deducted every time before such an installment is paid.

• Residential Status of Winner is Irrelevant:

  Whether the winner is a resident Indian or an NRI, it’s the responsibility of the payer to deduct tax before paying the winning amount.

• Agent in Receipt of Prize Money:

  If the lottery agent receives the money on tickets remaining unsold or he happens to receive any unclaimed amounts, the same shall be treated as his business income (hence not covered u/s 194B)

• Horse Racing & Other Races:

  Winning from horse races (covered u/s 194BB) is taxed at a flat 30%. However, other races, such as camel, buffalo racin,g etc., are not covered by this section.

• Penalty for Non-compliance:

  If the person responsible for deducting tax at the source fails to do so, he is charged a penalty that is equal to the amount of tax not deducted. If the tax deducted is not deposited with the government, it can lead to imprisonment ranging from a minimum of three months to 7 years.

Wrapping it Up!

Recently, the media was abuzz with how a lottery winner from Illinois, Chicago, would get to keep only $434 Million after winning a whopping $1.28 Billion lottery jackpot. 

That means he pays the government a shocking $846 Million in taxes! 

Suddenly you wonder who has actually won the jackpot?! But then you realize this is indeed a good problem you would love to have.

Anytime you get lucky and happen to win a prize, remember 194B. Do not forget to share your joy with the government by duly fulfilling your tax obligations. 

You do not want the Taxman behind your back, especially when you are out there enjoying the bonanza!

If paying tax pinches you, recall the quote in the beginning, and you shall definitely start to feel better!!