TDS on Winnings from Online Gaming | Section 194BA

Applicability of Section 194BA

According to Section 194BA of the Income Tax Act, 1961, anyone receiving income from winnings from online gaming must have TDS withheld from their net winnings in order to pay taxes on those winnings. TDS under Section 194BA must be taken out of every single rupee earned after entry fees, if any, are subtracted; these funds are referred to as net winnings. Therefore, when deducting TDS, the threshold of Rs 10,000/- shall not be applicable.

Earlier Provisions Before Introduction of Section 194BA

All winnings from lotteries, crossword puzzles, betting, horse racing, and other similar activities were taxed under Section 194B of the Income Tax Act, which requires the payer of such winnings to deduct TDS at 30% if such winnings are greater than Rs. 10,000/-. There was no specific section for TDS on online gaming until 1st April 2023
A new provision to tax income earned from winnings from online gaming was proposed in Budget 2023. According to Section 194BA of the Income Tax Act, this provision was introduced to tax such winnings from online gaming and was set to take effect on July 1st, 2023. However, as the Finance Bill was being passed in the Lok Sabha, the government changed the date of application to April 1, 2023. Additionally, it modified that TDS must be withheld from net earnings regardless of whether they exceed the threshold limit of Rs. 10,000.

Rate of TDS Under Section 194BA

The net winnings from any online gaming must have TDS deducted at a rate of 30% in accordance with TDS Section 194BA. Also, the TDS is required to deduct both when the withdrawal is made and when the financial year comes to an end.

What Constitutes Net Winnings?

Net winnings are the total amount withdrawn by the user after excluding the amount deposited by the user at the beginning. Let’s understand this via the following calculation.

Calculation of Net Winnings

According to CBDT regulations, online gaming companies must compute "net winnings" in order to determine the amount of TDS that needs to be withheld. For the purposes of Section 194BA of the Income Tax Act, net winnings are calculated as follows:

The following equation determines how to calculate net winnings.

Net winnings = A – (B + C), where:

• A represents the overall sum withdrawn from the user account,
• B is equal to the total of the account owner's non-taxable deposits made in the user account throughout the financial year up until the withdrawal is made, and
• C is the user account's opening balance at the beginning of the financial year.

Simply, net winnings are determined, by deducting the total of all recent deposits and the opening balance from the total of all withdrawals from the user account.

According to the formula, it is possible that the net winnings are negative. According to CBDT, TDS will not be applicable in this situation.

Valuation of Net Winnings

• Unless the online gaming intermediary has already paid for the winnings before giving them to the user, the valuation of winnings in kind will be based on fair market value.
• In cases where the online gaming intermediary manufactures prizes, the fair market value will also be taken into account.
• However, in case of transfers between user accounts that are owned by the same user and are managed by the same online intermediary will not be regarded as deposits or withdrawals.

What if an Individual Has Multiple Wallets?

A user may have multiple wallets open at the same time. In Rule 133, the CBDT made it clear that a user account includes any account where a user's winnings, taxable deposits, or non-taxable deposits are credited and withdrawals are debited. For the purpose of calculating net winnings, each wallet that meets the requirements of a user account shall be treated as a user account.

Therefore, if a single user has multiple user accounts, the net winnings from each account would be taken into account. All user accounts will be taken into account for the deposit, withdrawal, or balance.

When a user has multiple accounts, the calculation of net winnings in the online gaming industry will take each account into account separately.

Example of a User Having Multiple Accounts

Consider a person who has two user accounts, let us call them Account 1 and Account 2, with an online gaming company. During the financial year, the person withdraws Rs 5,000 out of Account 1. Account 1 has a Rs. 500 opening balance. Now, over the course of the FY, the person deposits Rs 2,000 in account 1. Account 2's opening balance is Rs 1,000, and neither a withdrawal nor a deposit has ever been made by the user.

The following will be done to calculate net winnings for the TDS deduction in this case.

Net winnings = Rs 5,000 (total withdrawals) - {Rs 2,000 (total deposits during the FY) + 500 (opening balance of Account 1) + Rs 1,000 (opening balance of Account 1)} = Rs 1,500

An individual's net winnings from the aforementioned example equal Rs. 1500. The online gaming company will take 30% of Rs. 1,500 (or Rs. 450) as TDS, which comes to Rs. 450.

Please be aware that TDS will be applied appropriately if the gaming company has multiple gaming platforms and it is not possible to integrate all of them into one. In this case, the net winnings for each platform will be determined separately.

What Are Taxable Deposits?

Although bonuses, referral bonuses, and other rewards provided by online gaming companies are not deposits made by the users themselves, they are still considered taxable deposits because they increase the balance of the user's account.
According to TDS Section 194BA, TDS must be withheld from these bonuses, referral bonuses, and other incentives because they are regarded as a part of the net winnings. It is significant to remember that TDS must be paid on these sums either during the withdrawal or, in the absence of a withdrawal, at the end of the financial year.

What Are Non-taxable Deposits?

If the user deposits money into their account that either represents income that has already been taxed or is not subject to income tax, the deposit is categorized as a non-taxable deposit. In order to determine net winnings and TDS deductions, the deposited money will be regarded as a non-taxable amount if it is borrowed.

When to Deduct TDS Under Section 194BA?

TDS must be applied to net winnings at the end of the fiscal year in accordance with the rules if there is any pending unwithdrawn money in the user account. When a user withdraws net winnings from its user account, TDS must be deducted from the amount withdrawn. However, such TDS will be deducted from the total amount withdrawn during the financial year.

What if Gaming Winning Is in Kind?

Sometimes, rather than receiving cash as a prize from an online game, players receive some sort of prize, like a car, motorcycle, mobile phone, or gadget. Such victories will also be subject to TDS. Based on the fair market value of the gift, the TDS on such items will be computed.

If a person receives an online gaming winning in kind, or partially in cash and partially in kind, the person responsible for paying the winnings must make sure that there is enough cash on hand to cover the TDS amount and that the tax has been paid on the winnings to the government, before disbursing the winnings to the winner.

Exemptions on TDS from Online Gaming Winnings

TDS will not be applied if net winnings in a month do not exceed Rs 100, according to clarification from the CBDT. It is crucial to remember that the TDS deduction will be made at that point if the withdrawal amount in the same or the following month exceeds Rs 100.

For instance, Your net winnings in April were Rs 90, and since the withdrawal amount is less than Rs 100, TDS is not taken into account. Your net winnings for the following month were Rs 200; however, since this amount exceeds the Rs 100 cutoff, TDS will be applied if you withdraw this sum.

The company will deduct TDS in May because the cumulative winnings for the financial year are greater than Rs 100. TDS will be deducted at the rate of 30% of the total winnings, or Rs 290 (Rs 90 + Rs 200). In May, when a withdrawal is made, this TDS will be deducted.

Impact of TDS Under Section 194BA on Gamers

The introduction of Section 194BA has the following impact on gamers.

• The tax burden on online gamers has increased.
• Potentially higher taxes and more difficult financial management will have an impact on professional gamers and streamers.
• Organizations involved in e-sports may need to make financial model adjustments and take tax implications for revenue streams into account.
• Financial effects and a possible decline in gaming revenue.
• Understanding and following new tax regulations can be difficult.
• There is a chance that players will relocate to a region with more favourable tax laws.

Other Considerations Need to Know Regarding TDS Under Section 194BA

Due Date of Deposit of TDS

When TDS is withheld in a month other than March, it must be deposited into the government's account by the seventh day of the following month. If the TDS is taken out in March, it must be deposited into the government's account by the 30th of April.

Filing of TDS Return

The gaming companies that provide winnings or prizes to their users are required to deduct TDS and submit TDS reports in accordance with Section 194BA of the Income Tax Act. As a result, they must file quarterly returns on Form 26Q by the last day of the month following the quarter's end. The following are the due dates.

Issue of TDS Certificate

The gaming companies or other deductors will be required to issue a TDS certificate to the deductee in form 16A within 15 days from the due date of furnishing the TDS Return for 194BA.

The deductee may claim a TDS credit in their income tax return. Additionally, Form 26AS on the income tax department website contains information about the tax deducted in accordance with Section 194BA.

Eligibility of Deduction Under Chapter VI A

Any person receiving income as a result of winning at an online casino or other gaming platforms is not entitled to any deductions under Chapter VI A. Additionally, such income will not be taken into account when determining the basic tax exemption threshold.

Reporting of Income

Anyone who has received income from winnings from online gaming must include this income in their income tax return under the heading "Income from Other Sources."

Higher deduction of TDS for Non-Filers (Sec 206AB)

Winnings from online games are exempt from the provisions of Section 206AB of the Income Tax Act. Therefore, where the recipient of the winnings has not filed an ITR, the payer of the winnings amount shall not deduct TDS at a higher rate. The TDS shall be deducted at the rate of 30% in case of Non-filers of income tax returns.