TDS on lottery winnings-Section 194B


1082. Prizes awarded to agents under “lucky dip draws” scheme - Whether they are “lotteries” within the meaning of the section from which tax is required to be deducted at source

1. This Ministry has had an occasion to consider the question of the deduction of tax at source under section 194B from prizes awarded to lottery agents in what are popularly known as “lucky dip draws”.

2. Under the scheme of “lucky dip draws”, the agents are generally grouped into various categories according to the number of tickets purchased by them.  The prizes are awarded category-wise, through draws of the lucky tickets. These prizes are “lotteries” within the meaning of section 194B as they are dependent wholly on the chance draw of a lucky ticket.

3. The State Governments and Union territories running lotteries are, therefore, requested to deduct tax at source at the rates prescribed by the Annual Finance Act in respect of “lotteries or crossword puzzles” from “lucky dip” prizes won by lottery agents.

4. This clarification may please be brought to the notice of all concerned under the control of the State Governments and Union territories.

Circular: No. 264 [F. No. 275/58/79-IT(B)], dated 11-2-1980.

Judicial Analysis

Explained in - In Commercial Corpn. of India Ltd. v. ITO [1993] 201 ITR 348 (Bom.), the above circular was commented upon with the following observations :

“It must be seen in the first place that this circular has not been issued by the Central Board of Direct Taxes and the circular has been issued by the Ministry of Finance. Needless to say it covers what is known as “lucky dip draws” which is meant purely for agents and not for the purchases of the lottery tickets. In any case, it is the contention of the Ministry of Finance that the prizes awarded in lucky dip draws are lotteries within the meaning of section 194B on the sole ground that they are dependent wholly on a chance draw of a lucky ticket.” (p. 367)

“...We conclude that the principle of contemporanea  expositio cannot be made available to the Income-tax Department because, firstly, there is no exposition whatsoever by the Central Board of Direct Taxes and, secondly, we are not construing an ancient statute and, lastly, for the reason that we are not concerned with the construction of any provisions of the statutes which are ambiguous or which pose difficulties.” (p. 369)

Under Section 194B of the Income Tax Act, 30 per cent tax is deducted on any prize money in excess of Rs 10,000 and other winnings from games, lotteries etc. This is deducted at source (TDS). A Three per cent education cess is payable on the tax amount.

While filing your income tax returnyou must include prize money under income from other sources’ and, you must submit the TDS certificate as proof that you have paid all the tax dueagainst the prize money.

Taxation on prizes in kind
A multitude of game/talent shows opt for a combination of cashand kind. The tax liability on cash prizes can be arrived at by a simple calculation, but this is not the case with prizes in kind. Although the applicable tax rateis the same, that is, 30 per cent, it poses a challenge on two fronts — who bears the tax liability and what is the valuation of the prize?

“If the prizes awarded are in kind, the prize distributor will, before releasing the prize, ensure that tax has been paid in respect of the winnings. It will eitherrecover it from the winner or bear the tax liability itself and deposit TDS.

But if prizes are partly in cash and partly in kind, tax is deducted on the total value of the cashand kind from the cash. And, if the cashis insufficient to meet the TDS liability, either the winner or the prize distributor pays the deficit. This will depend entirely on the  terms and conditions of prize scheme.

Say, you win a car with a market value of Rs 7 lakh and the conditions require you to bear the tax liability. You will have to cough up Rs 2.1 lakh tax, and Rs 6,300 education cess. Then there are registration charges, road tax, octroi and insurance, which must be borne by the winner. The only alternative: Forego your award.

Guidelines for valuing prizes, including holidays, insurance products and even contracts awarded by channels to winners, are unclear. The valuation will be largely circumstantial. For instance, to value a holiday, you may have to consider how much it costs an unrelated third party.