Introduction to Section 194G of Income Tax Act, 1961
Section 194G of the Income Tax Act, 1961 deals with the provisions for deduction of tax at source (TDS) on commission, remuneration, or prize by whatever name is called, paid on lottery tickets. Further, it specifies the liability of the person responsible for paying such income and the rate at which tax is to be deducted.
Lotteries are considered a means of easy money, and people often purchase them with the hope of winning a large amount of money. However, the TDS will be deducted from income earned on the sale of lottery tickets under the Income Tax Act, of 1961.
Purpose of Section 194G
Section 194G aims to ensure that:
- Tax is collected at the source itself,
- To facilitate easy and timely collection of taxes, and
- To curb tax evasion.
Applicability of provision of Section 194G
Section 194G of the Income Tax Act, 1961 lays down the provisions for deduction of TDS at the rate of 5% when there is receipt of:
- Commission;
- Remuneration; or,
- Prize
On the sale of lottery tickets.
Further, this section applies to any person who is responsible for paying such income to any person who has been:
- Stocking;
- Distributing;
- Purchasing; or,
- Selling lottery tickets.
TDS Rates Applicable under Section 194G
The provision of section 194G requires the deductor to deduct TDS at the rate of 5%. Moreover, it should be noted that no surcharge or education cess shall be levied at the said rate of 5%.
However, in case the PAN is not furnished, the deductor is liable to deduct TDS @ 20% (maximum marginal rate).
Want to know the tax rate applicable to lottery winnings? Read more about it in Section 115BB of the Income Tax Act, 1961.
Threshold Limit under Section 194G
The deductor would be liable to deduct TDS under section 194G only if the income amount exceeds INR 15,000. In other words, the exemption limit specified under section 194G is INR 15,000 and TDS would be deductible only above that amount.
Time of deducting TDS under Section 194G of the Income Tax Act, 1961
TDS is required to be deducted in case of payment made to the person when-
- Such sum is credited of such sum to the account of the payee; or
- Payment is made to the payee in cash or by way of issue of cheque/ draft/ any other mode.
Whichever event takes place earlier.
Deemed application of provisions of TDS under Section 194G
When the amount is credited to the Suspense Account or any other account in the books of the person who is liable to make payment to the deductee, it will be deemed to have been credited to the account of the payee and the provisions for deduction of TDS on payment made on sale of lottery tickets will apply.
Provision of Lower / NIL TDS deduction
The payee can, by filing an application in Form No. 13, request the assessing officer for a lower TDS deduction or NIL / no TDS deduction. Thus, if the payee receives the appropriate certificate from the Assessing Officer, the deductor would deduct TDS at a lower rate or NIL rate. However, section 206AA(4) states that no certificate for lower / NIL deduction shall be granted unless the application contains the Permanent Account Number (PAN) of the applicant.
Example of Section 194G
Let us understand the provisions of Section 194G with an example.
Suppose Mr. X is a lottery ticket seller and receives a commission of Rs. 20,000 from the lottery company in a financial year. In this case, the lottery company is liable to deduct TDS at the rate of 5% on the commission paid to Mr. X, as it exceeds the threshold limit of Rs. 15,000. Therefore, the lottery company would deduct Rs. 1,000 (5% of Rs. 20,000) as TDS and pay the balance commission of Rs. 19,000 to Mr. X.
Conclusion
Therefore, Section 194G of the Income Tax Act, of 1961 deals with the provisions for the deduction of TDS on commission, remuneration, or prize on sale of lottery tickets. Hence, the section specifies the liability of the person responsible for paying such income and the rate at which tax is to be deducted.
