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Playing online fantasy games and making money? Know the income tax implications

Income tax is to be paid on the entire amount won and no deduction of any expenditure or allowance shall be allowed

April 22, 2021 / 06:43 PM IST

With the immense popularity of the IPL in India, along with low-cost data plans and high penetration of mobile phones, the growth of the Indian fantasy sports betting industry has sky-rocketed in the last five years. Fantasy sports operators organize online games based on real-life sporting events such as cricket, football, basketball, hockey and kabaddi.

According to the Federation of Indian Fantasy Sports (FIFS), the revenue of fantasy sports operators increased 3x year-on-year in FY20, to Rs 2,400 Crores. The number of fantasy sports operators has increased from 10 in 2016 to 150 in 2020. The number of fantasy sports users has increased 50x from 2 million in 2016 to over 100 million in 2020.

Legality of fantasy sports and online betting

Betting and gambling are regulated by The Public Gambling Act, 1867 (PGA), which prohibits all forms of gambling activities and betting on games of chance. The PGA has no provision for online gambling, so no specific law bars online gambling in India. Online gambling in India can be in the form of crossword, quizzes, card games or fantasy sports.

In regulating platforms offering such games, Indian laws differentiate between betting on games of chance and staking on games of skill. There is a strict prohibition on participation and offer of games of chance, while jurisprudence has taken a more favourable position with games of skill. Certain versions of fantasy sports games can be argued to be predominantly skill-based games.

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Games of skill

The High Court of Punjab and Haryana held Dream 11’s format of fantasy sport to be a game of skill in the Varun Gumber Case. Thereafter, the Bombay High Court also recognised that the same format of fantasy sport was a game of skill.

Various courts have reasoned that a user’s exercise of skill-based superior knowledge, judgment and attention plays a critical role in analysing the element of skill involved in fantasy games. It is also reasoned that the result thereof is not dependent on winning or losing of a particular team in the real world game.

Fantasy games are organised in the form of a contest. In each contest, a user builds a virtual team (constituted by players of a real-time match) and competes against virtual team/s of other users. Based on the performance of players in the real event, the virtual team created by the user is allotted points. The users with the highest points are declared winners and are paid the winnings or prize money.

Also read: Making gains via gaming apps during the lockdown? Don’t forget the tax implications

Tax implications and reporting in your return

Fantasy sports and online betting winnings are taxable under section 115BB of the Income Tax Act (“ITA”) under the head ‘Income from Other Sources’. It is a standalone special provision that encompasses winnings from lottery, crossword puzzle, horse race, card games, betting, gambling or any other games. Further, Section 58(4) of the ITA provides that no deduction or expenditure is allowed to be claimed against such income.

Income tax on prize money/ winnings

Winnings are taxed at a flat rate of 30 percent, excluding cess and surcharge, without the benefit of the basic exemption limit. The platform paying out the winnings will need to deduct tax at source under section 194B of the ITA if the winnings exceed INR 10,000 per contest. The TDS deducted by the platform at the time of payment will be displayed in Form-26AS of the user.  The user can take credit of the TDS while filing his/her income tax return.

No Deduction or Expenditure Allowed

The crucial aspect is that income tax is to be paid on the entire winnings and no deduction in respect of any expenditure or allowance shall be allowed in computing the income by way of any winnings from fantasy sport games. Although the term ‘winnings’ defined by the CBDT vide its circular no. 240 of 1978 meant gross winnings net of the amount invested in the form of bet, the meaning has been modified with the introduction of Section 58(4) of the ITA in 1995. It is now established that no such expenditure of bet paid/entry fees shall be allowed as a deduction.

The examples below illustrate this position:

Example 1: X bet Rs 1,000 in a fantasy sport contest on an online platform and won Rs 5,000 as prize money. The entire Rs 5,000 would be taxable at 31.2 percent and Rs 1,000 paid by X as entry fees to participate in the contest shall not be allowed as a deduction.

Example 2: X played five fantasy sport contests in a single live match, wherein he bet Rs 1,000 in each contest. He lost four contests and won one, winning Rs 5,000 as prize money. X has in all spent Rs 5,000 to participate in the five contests while he won Rs 5,000 from his one contest prize money, so even though X has only broken even and has not earned any money, as per income tax law, he will have to pay tax of 31.2 percent on Rs 5,000, as that is his winning amount and no deduction of expenditure (in the form of entry fees) to earn such income can be claimed as per Section 58(4).

Thus, online fantasy sports betting is legal in India and participants should be mindful of the aforesaid tax implications while filing their income tax returns.
Harsh Bhuta is Partner, Bhuta Shah & Co LLP
first published: Apr 22, 2021 09:59 am

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