Won a lucky draw? Give the taxman his due

Much like discounts and attractive loan offers, a lucky draw is often used by sellers to lure customers during the festive season. If the prizes are irresistible, like a car, a holiday trip or a gold coin, can one not fall for it?

You may be excited about the possibility of a win, but if you end up being the lucky winner, keep in mind that the taxman will come knocking on your doors to claim his share of the winnings.

Yes, a tax is to be paid on the prize won in a lucky draw. The rate of tax is 30 per cent along with applicable cess. Even if you fall in the 10 or 20 per cent bracket for the rest of your income, you will have to pay tax at the highest slab for a prize.

And, if the value of the prize exceeds ₹10,000, the full 30 per cent tax will be deducted at source itself.

If the prize in cash is above ₹10,000, then the TDS amount will be deducted from the prize amount by the organiser and the balance is given to the winner. For instance, if a person wins ₹1,00,000 in a lucky draw, the organiser will deduct ₹30,900, which is 30.9 (including cess) per cent on ₹1 lakh and hand over the balance ₹69,100 to the winner. Tax on an amount below ₹10,000 should be paid by the winner when filing his IT return.

When the prize offered is in kind, the organiser of the lucky draw has to make sure that the tax is paid before giving out the prize to the winner. In such cases, as per the terms and conditions laid down by the organiser, either the organiser or the winner will bear the tax liability. Say, a person wins a car worth ₹5 lakh in a lucky draw and, as per the terms, the tax is to be borne by the winner. In that case, the person has to pay ₹1,54,500 (₹5,00,000*30.9 per cent) to the organiser, who will in turn pay to the government. In contrast, if the terms of the agreement say that the tax will be borne by the organiser himself, the winner escapes the tax burden.

However, keep in mind that the tax borne by the organiser is also considered as part of the prize of the winner. The total value of prize in such cases is calculated as follows: In the above example, the value of the car, ₹5 lakh will be deemed net of tax, which is 30.9 per cent. Therefore, the total prize value is ₹7,23,589 (₹5,00,000*100/(100-30.9)). In this case, the tax that will be paid by the organiser is ₹2,23,589 ( 7,23,589 – 5,00,000).

Even when the prize is in cash, some tax experts opine, that the organiser can choose to take up the tax liability.

When the prize is a combination of cash and kind, the rules will be applicable as explained above.

The method of valuing prizes such as a holiday trip is not clear. Parizad Sirwalla - Partner and Head, Global Mobility Services at KPMG in India says, “There are no specific provisions or guidelines provided for such prizes in the Income Tax law. However, one may argue that the price at which such prize is offered to third parties (that is, market value) may be considered as the value for tax purposes. And, the TDS would need to be calculated on such amount.”

When TDS is deducted on the prize and paid to the government, the winner, that is, the assessee, should obtain the TDS certificate from the organiser for records purposes. This amount should reflect in the assessee’s 26AS statement as well.

The income earned from lucky draws and lotteries is to be shown under the head ‘Income from Other Sources’. Since this lucky draw income is not subjected to standard income tax calculation, it cannot be clubbed with any other income.

Deductions under Section 80C to 80U cannot be utilised against this income. Income tax calculation on routine income will not be impacted in anyway and so too the tax slab determination.

Also, the TDS paid on this cannot be set off against assessee’s tax liability on routine income when calculating self-assessment tax.

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