Real money gaming banned, but gains liable to income tax: Be prepared to declare in your tax returns

Tax on winnings from online gaming

The thrill of logging on to an online gaming portal, paying a small entry fee, and potentially ending up with thousands in winnings can be addictive. The potential risk of financial ruin has resulted in the government last month banning real money games online, citing financial pitfalls and risks of addiction - especially among youth - leading to a shutdown of many gaming apps including rummy and poker games.

But there is a catch. Even if the government bans platforms, the taxman does not care, and the income earned is liable to tax. If you won money through online gaming in the last financial year, you would still be expected to pay tax on it.

Vivek Jalan, Partner at Tax Connect Advisory Services LLP shared how the law has interpreted this. “The Income tax law is not concerned with the legality or illegality of a business. Section 2(24) of the Income Tax Act, 1961 gives an inclusive definition of the word income. Any kind of income earned by the assessee attracts income tax at the point of its accrual or receipt. The Act considers the income earned legally as well as tainted income alike. There is nothing like an illegal income so far as the tax collector is concerned. Hence, even income from online gaming, even after it has become illegal, will continue to remain taxable,” Vivek Jalan said.

In other words, if you thought a ban would save your gaming gains from the tax net, think again, as the Income tax Department will still come knocking. In FY 24-25 though, the ‘net income’ from online games were treated as taxable income and are subject to a 30% tax under Section 115BB.

So, how does this work in practice? Since FY 2024-25, winnings from online games are calculated as ‘net winnings;. For example, you put Rs 1,000 into your gaming wallet, play a match, and win Rs 30,000. For tax purposes, your net winning is Rs 29,000 (that’s your Rs 30,000 prize minus the Rs 1,000 you spent to enter). The gaming company is required to deduct 30% tax upfront as Tax Deducted at Source (TDS) before you even see the money in your account.

However, the taxation doesn’t end there. At the time of filing the Income tax Return (ITR), you still need to declare those winnings. Even if the app has been banned subsequently, the earnings remain reportable. If you are a salaried individual, ITR-2 is your go-to form. If you are also running a business alongside, then ITR-3 comes into play. Either way, gaming money falls under ‘Income from Other Sources’ in your return form.

Any TDS deducted will show up in your Form 26AS and should be reported in the Schedule TDS section of your ITR, which you can adjust while filing ITR for FY25.

So, if last year brought you a jackpot through an online game, the winning is still very much on the taxman’s radar.