Clearing the air on tax provisions on income from online games, the Central Board of Direct Taxes (CBDT) under the Finance Ministry has said any deposit credited in one's bank account in the form of “bonus or incentives” is subject to a tax deduction if funds are “withdrawn” as it's considered "net winnings".
"The new section mandates a person, who is responsible for paying to any person any income by way of winnings from any online game during the financial year to deduct income-tax on the net winnings in the person's user account," the CBDT circular says, adding that these are in effect from April 1, 2023.
However, if such funds are utilised for playing only and not withdrawn, the tax deducted at source (TDS) will not apply. Tax will not also be deducted on withdrawal if net winning does not exceed ₹100 in a month. It'll also apply if the balance is not sufficient to discharge the tax deduction liability calculated.
On calculating "net winnings" if there are "multiple wallets" under one user, the guidelines say "each wallet which qualifies as a user account shall be considered as a user account for the purposes of computing net winnings".
The CBDT says whenever there are multiple user accounts of the same user, each user account will be considered for the purposes of calculating net winnings. "The deposit, withdrawal, or balance in the user account shall mean the aggregate of deposits, withdrawals, or balances in all user accounts."
If a user borrows money and deposits it in the account, it will be considered a non-taxable deposit, the guidelines say. "For non-taxable deposit, it is necessary that the amount deposited by the user is not taxable i.e. it is from already taxed income or it is not chargeable to tax."
On the tax provisions on bonuses, referral bonuses, incentives, etc., they are to be considered as "taxable deposits" under Rule 133, says the CBDT. "Any deposit in the form of bonus, referral bonus, incentives, etc would form part of net winnings and tax under section 194BA of the Act is liable to be deducted at the time of withdrawal as well as at the end of the financial year."
For deposits like coins, coupons, vouchers, counters, etc., the equivalence in money of such deposit will be considered as a "taxable deposit" and would accordingly form part of the balance in the user account.
“However, some incentives/bonus credited in user account only for the purposes of playing, which can not be withdrawn or used for any other purposes, will be ignored for calculation of net winnings,” the authority elaborates.
Further, the department has clarified that the transfer from one user account to another user account, maintained with the same online gaming intermediary, of the same user will not be considered a withdrawal or deposit. However, when the amount is withdrawn from the user account to any other account, it will be considered a withdrawal.
Also, if money in the user account is used to buy an item in kind and given to the user then it is net winnings in cash only and the deductor is required to deduct tax at source under section 194BA of the Act accordingly, suggest the guidelines.