Online poker, rummy and other online games offering real money are seeing real-time growth in the last few years. The online gaming industry witnessed massive growth in the last 10 years with people having personal computers and smartphones that offer the ability and the liberty to live in a virtual world full of possibilities.
Earlier provisions on tax on online gaming
The tax laws related to winnings from online games in India were the same as those for other forms of gambling or betting. According to the Income Tax Act of 1961, any income earned through gambling or betting, including winnings from online games, is subject to a flat tax rate of 30% (plus applicable surcharges and cess) if the winnings exceed INR 10,000 in a financial year. This tax is deducted at the source by the gaming operator, and the remaining amount is paid to the winner.
Therefore, no tax was deducted if the earnings from online games or gambling didn’t exceed INR 10,000. The earlier provision provided a window for the income to escape taxation, as the limit of INR 10,000 was used by the online platforms for splitting the winning into chunks of amounts below INR 10,000 and avoiding taxes.
Recent tax amendments on online gaming
The government is enforcing new TDS from 1st April on winning proceeds withdrawn from online gaming. As per the change made to Finance Bill 2023, online gaming is subject to TDS.
The budget 2023 has introduced new provisions for curbing this escapement and bringing these online winnings under the purview of Income Tax. In the budget 2023, two sections have been introduced with respect to the taxability of winnings from online gaming, Section 115BBJ – Tax on winnings from Online games and Section 194BA – TDS on winnings from Online games. Section 115BBJ calls for the taxability of the net amount which is received from the online winnings at 30%. The threshold of INR 10,000 won’t be applicable while deducting TDS on income derived from online gaming. TDS would be deducted on every single rupee earned after the deduction of any charges paid as entry fees. Likewise, no Chapter VI – A deduction like 80C, 80D etc., cannot be used to reduce such taxable income and no expenses could be claimed against such income.
Example 1
Earlier, if an individual wins INR 8,000, which does not exceed the threshold of INR 10,000, then there would be no deduction of TDS and the individual would receive entire INR 8,000 on withdrawal. However, under the new provisions, effective from April 1, the threshold of INR 10,000 has been done away with and the TDS deducted would be on net winnings from online games excluding any entry fees. So now, if the same individual wins INR 8,000 then TDS at 30% on the entire INR 8,000 would be applicable and the individual would receive INR 5,600 (INR 8,000 minus TDS of INR 2,400) on withdrawal.
Example 2
Now, if an individual wins INR 5,000 and paid an entry fee of INR 1,000, the TDS would be deducted from INR 4,000 (INR 5,000 minus INR 1,000) which will be considered as net winnings and the amount payable to the winner will be INR 4,000 minus 30% = INR 2,800.
Responsibilities of payer
The payer needs to deduct the TDS and deposit such TDS to the government’s credit and has to file a quarterly return in Form 26Q and issue Form 16A to the winner from whom income such TDS has been deducted.
Responsibilities of players
The players need to provide their PAN details to the online gaming intermediaries for the purpose of TDS deduction. Further, they need to file their tax return within the prescribed due dates by disclosing online winnings for which TDS has been deducted under section 194BA. If the PAN details are not disclosed by the winner, the winner won’t be able to claim the TDS credit while filing the income tax return.