Winning a car, an apartment or a kilo of gold in a contest sounds like pure profit, but the taxman wants his share before you can drive off. Here is how TDS on prizes given in kind actually works, who pays it, and what it means for your tax return.
Under Section 56(2)(ib) of the Income Tax Act, any winnings from lotteries, crossword puzzles, card games, races, game shows or any other form of betting or gambling are taxed under the head Income from Other Sources at a flat rate of 30% under Section 115BB, plus applicable cess, taking the effective rate to 31.2%. This rate applies regardless of whether the prize is cash, a car, jewellery, a flat or a foreign holiday package. There is no basic exemption limit, no slab benefit and no deduction allowed against this income, not even Section 80C investments.
Section 194B requires the prize distributor to deduct TDS at 30% before releasing the prize. With a cash prize this is simple: the organiser deducts 30% and pays you the balance 70%. But when the prize is a car worth Rs 10 lakh, there is no cash to deduct from. The organiser cannot hand over 70% of a car.
The law gives the organiser two options in this situation, both of which fall under what is commonly called grossing up.
The organiser can choose to bear the TDS liability on your behalf. If they do this, the tax paid by the organiser is itself treated as a perquisite or additional income in your hands, and TDS must be computed on the grossed-up value, not just the face value of the prize.
More commonly, especially for big-ticket prizes like cars and flats in promotional contests, the organiser asks the winner to first pay the applicable TDS amount in cash before the prize is released. So if you win a car valued at Rs 10 lakh, you may be asked to deposit around Rs 3 lakh (30% of Rs 10 lakh) to the organiser, who then deposits this with the government as TDS against your PAN, and hands over the car to you.
Whichever option is used, you will receive a TDS certificate (Form 16A) from the organiser reflecting the amount deducted under Section 194B. This will also appear in your Form 26AS and Annual Information Statement (AIS). When filing your ITR, you must report the full value of the prize, plus any tax borne by the organiser if Option 1 was used, under Income from Other Sources, and claim credit for the TDS already deducted.
Tax liability under Section 194B arises the moment the prize is awarded and TDS is deducted, regardless of what you do with the asset afterwards. If you sell the car later, that sale is a separate transaction and may attract capital gains tax (or, for a personal-use vehicle, may simply be exempt as a personal effect under Section 2(14), though this is a separate analysis from the prize income itself).
Because Section 115BB income is taxed at a special flat rate, you cannot set off any other loss, including business loss or capital loss, against this winning. It stands entirely on its own in the computation, taxed at 30% flat with no deductions of any kind.