Online games Such as Poker, Rummy, Ludo, Dream11 and battleground games are getting popular day by day especially since lockdown with celebrities endorsing such online fantasy games. Winning and use of real cash is common in such games among youngsters and even minors with revenue from gaming industry increasing exponentially year on year.

INTRODUCTION OF SECTION 115BBJ

Section 115BB has been amended to exclude income from online gaming & new section 115BBJ has been introduced for taxation of winning from online gaming from A.Y. 24-25.

CHARGEABILITY OF TAX

• Net Winnings will be taxable at the rate of 30% plus surcharge and cess where else income other than winnings like joining/ referral bonus will be taxed at slab rates.
• Deduction under chapter VI-A, rebate u/s 87A, basic exemption limit and slab rate benefits not available for winnings as it is compulsorily taxable at special rate of 30%.
• Advance Tax provisions attracted if estimated tax liability to exceed Rs. 10,000.

TDS ON WINNINGS FROM ONLINE GAMES

• TDS @ 30% u/s 194BA w.e.f. 1st April 2023 without threshold limit.
• TDS to be deducted on net winnings on date of withdrawal from e-wallet and on balance net winnings remaining in e-wallet at year end.

HOW TO CALCULATE NET WINNINGS?

Net winnings =(A+D)-(B+C), where,

A= Aggregate amount withdrawn during the year

B= Aggregate amount of deposit made in the account by assessee during the year

C= Opening balance of account at the beginning of the year

D= Closing balance of account at the end of the year

CONSEQUENCES OF NON-REPORTING

Non- Reporting can lead to penalty of up to 200% of tax amount (file updated return if not reported for previous years)

To Download Official Notification, click here.

FAQ’s related to direct taxation on online gaming:

Q1: If user borrows some money and deposits in his account, will it be considered as taxable deposits or non-taxable supply?

• The amount deposited by the user must not be taxable, either from already taxed income or not chargeable to tax. In the case of borrowing money, it must be considered a non-taxable deposit.  

Q2: How will bonus, referral bonus, incentives etc. be treated?

• Bonuses, referral bonuses, and incentives are taxable deposits given by online game intermediaries to the user. However, some incentives/bonus which cannot be withdrawn or used for other purposes are ignored for calculation of net winnings.

Q3: At what point we consider that amount has been withdrawn?

• Transfer from one user account to another user account, maintained with the same online gaming intermediary, of the same user shall not be considered as withdrawal or deposit, as the case may be.
• However, when the amount is withdrawn from the user account to any other account, it shall be considered as withdrawal.

Q4: Numerous gamers play with small amounts and withdraw small amounts. Is there any relaxation to ease compliance u/s 194BA?

It is clarified that tax may not be deducted on withdrawal on satisfaction of all conditions mentioned:

a) net winnings comprised in the amount withdrawn does not exceed Rs 100 in a month;

b) tax not deducted on account of this concession is deducted at a time when the net winnings comprised in withdrawal exceeds Rs 100 in the same month or subsequent month or if there is no such withdrawal, at the end of the financial year; and

c) the deductor undertakes responsibility of paying the difference if the balance in the user account at the time of tax deduction u/s194BA of the Act is not sufficient to discharge the tax deduction liability calculated in accordance with Rule 133.

Q5: When the net winnings is in kind how will tax deduction under section 194BA operate?

• It is clarified that where money in user account is used to buy an item in kind and given to user then it is net winnings in cash only and the deductor is required to deduct tax at source under 194BA of the act accordingly.
• However there could be a situation where the winning of the game is a prize in kind. In that situation provision of sub section (2) of section 194BA of the act will operate.
• According to this where the net winnings are wholly in kind or partly in cash and partly in kind but part in cash is not sufficient to meet the lability of deduction of tax in respect of whole of the net winnings.
• In these situations the person responsible for paying shall before releasing the winnings ensure that tax has been paid in respect of net winnings.
• In the above situation, the deductor will release the net winnings in kind after the deductee provides proof of payment of such tax (eg. Challan details etc.)
• This year form 26Q also has included provisions for reporting such transactions under section 194BA of the act.      
• In the alternative, as an option to remove difficulty if any, the deductor may deduct tax under section 194BA of the act and pay to the government. In the form 26Q the deductor will need to show this as tax deducted by him on net winnings under section 194BA of the act.

Q6: How will valuation of winnings in kind required to be carried out?   

• The valuation would be based on fair market value of the winnings in kind except in following cases:
• The online game intermediary has purchased the winnings before providing it to the user. In that case the purchase price shall be the value of winnings.
• The online game intermediary manufactures such items given as winnings. In that case, the price that it charges to its customers for such items shall be the value of such winnings.

It is further clarified that GST will not be included for the purpose of valuation of winnings for TDS under section 194BA of the act.

Q7: The guidelines by CBDT have been issued after 01.04.2023 while the law has come into effect from 01.04.2023. Will there be any relaxation on penal consequences in the intervening period i.e. between 01.04.2023 and the date on which the rules/ guidelines are issued?

• Taxpayers are expected to deduct tax at source under section 194BA even before issuance of rule 133 or this guidance.
• It is expected that they have carried out their responsibility. However, if there is a shortfall in deduction of tax due to time lag in issuance of rule 133 or this circular, for the month of April, 2023 that shortfall may be deposited with the tax deduction for the month of May 2023 by 7^th June 2023. In that case there won’t be any penal consequences.

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