A) Introduction and Applicability of Section 194BA:
- Budget 2023 introduced a new provision to tax income earned from winnings from online gaming.
- 194BA section is applicability from 01-04-2023
B) Rate and Threshold for Deduction of TDS:
- TDS shall be deducted at the rate of 30% on the net winnings from any online gaming without any threshold exemption.
C) When TDS needs to be deducted:
- TDS shall be deducted on the net winnings at the end of the financial year if there is any unwithdrawn winning amount pending in the user account.
- However, in case there is withdrawal from user account during the financial year TDS shall be deducted at the time when there is withdrawal of net winnings from the user account as well as on the remaining amount of net winnings in the user account at the end of financial year if any.
D) Amount on which TDS need to be deducted:
- On the Net winning amount earned during the Financial Year.
- Where the net winnings are wholly in kind or partly in cash and partly in kind but the part in cash is not sufficient to meet the liability of deduction of tax in respect of whole of the net winnings, the person responsible for paying shall, before releasing the winnings, ensure that TDS has been paid in respect of the net winnings.
E) For removal of difficulty and smooth implementation brief guidelines are issued by CBDT Circular no 5 dated 22 May 2023.
- Bonus, referral bonus, incentives etc are given by the online game intermediary to the user, they will be considered as taxable deposit under Rule 133.
- For calculation of net winnings, online gaming industry will consider each user account separately when a user has multiple accounts. The deposit, withdrawal, or balance in the user account refers to the total amount across all user accounts associated with the individual.
- Transfers between user accounts under the same online intermediary, belonging to the same user, will not be treated as withdrawals or deposits.
- However, if a withdrawal or deposit occurs between one user’s account and another user’s account, such transfers will be considered as withdrawals.
- The valuation of winnings in kind will be based on the fair market value, except when the online gaming intermediary has purchased the winnings before providing them to the user, in that case the purchase price shall be the value for winnings.
- Where online game intermediary manufactures such items given as winnings, the price that it charges to its customers for such items shall be the value for such winnings.
F) Calculation of Net Winning for Section 194BA as prescribed under Rule 133
For calculation of Net winning following definition needs to be understood first:
- Taxable deposit means any amount deposited in the user account which is not a non-taxable deposit. Any incentive or bonus received in user account which are withdrawable will be classified as taxable deposits.
- Non-taxable deposit means the amount deposited by the user in his user account and which is not taxable. Any incentives or bonus which is not withdrawable, will not form part of Non-taxable deposit.
- Withdrawal means any amount withdrawn by the user from any user account. Any 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.
As per Rule 133 of the Income Tax Rules, 1962 Net winnings from online games shall be calculated using the following formulas:
Rule 1 – Net winnings from online games during the previous year
Net winnings = (A+D)-(B+C) where,
A= Aggregate amount withdrawn from the user account during the financial year
B = Aggregate amount of non-taxable deposit made in the user account by the assessee during the financial year
C = Opening balance of the user account at the beginning of the financial year (Excluding Incentive/Bonus Which is Non-Withdrawable)
D = Closing balance of the user account at the end of the financial year (Excluding Incentive/Bonus Which is Non-Withdrawable)
Rule 2 – Net winnings comprised in the first withdrawal during the financial year.
Net winnings =A-(B+C) where
A = Amount withdrawn from the user account;
B = Aggregate amount of non-taxable deposit made in the user account by the owner of such account during the financial year, till the time of such withdrawal; and
C = Opening balance of the user account at the beginning of the financial year
Rule 3 – Net winnings comprised in each subsequent withdrawal during the financial year.
Net winnings =A-(B+C+E) where
A = Aggregate amount withdrawn from the user account during the financial year till the time of subsequent withdrawal including the amount of such subsequent withdrawal;
B = Aggregate amount of non-taxable deposit made in the user account by the owner of such account during the financial year, till the time of such subsequent withdrawal;
C = Opening balance of the user account at the beginning of the financial year; and
E= Net winnings comprised in the earlier withdrawal or withdrawals computed under Rule (2).
Rule 4 – Net winnings comprised in the user account at the end of the financial year.
Net winnings =(A+D)-(B+C+E) where
A = Aggregate amount withdrawn from the user account during the financial year;
B = Aggregate amount of non-taxable deposit made in the user account by the owner of such account during the financial year;
C = Opening balance of the user account at the beginning of the financial year;
D= Closing balance of the user account at the end of the financial year; and
E= Net winnings comprised in the earlier withdrawal or withdrawals computed under Rule (2) and Rule (3)
If the amount of Net winning is NEGATIVE in any of the above Rules, then that amount will be ignored and considered as zero and no TDS will be required to be deducted.
