TDS on online game winnings: Tax deduction methods as per CBDT guidelines.

The CBDT has recently provided guidelines, through a circular and notification dated May 22, 2023, regarding the tax deduction procedures for online gaming companies. These guidelines were introduced in response to the government’s elimination of the threshold for TDS deduction on online game winnings in the 2023 Budget.

As per the recent announcement, online game companies must deduct TDS from each rupee earned from winning online games. This rule has been effective since April 1, 2023, and applies to the financial year 2023-24. In the previous financial year (FY 2022-23), TDS on online game winnings was applicable only if the winnings exceeded Rs 10,000 in a financial year.

Under the newly introduced Section 194BA of the Income Tax Act, 1961, TDS will now be deducted on winnings from online games. The applicable TDS rate for such winnings is 30%, as specified in Section 194BA.

The CBDT has provided additional clarification stating that Goods and Services Tax (GST) will not be considered when calculating winnings from online games for the purpose of TDS under Section 194BA.

Here is a comprehensive overview of the essential details regarding TDS on winnings from online games.

As per the CBDT guidelines, online gaming companies are required to calculate the “net winnings” in order to determine the amount of TDS to be deducted. The calculation of net winnings for the purposes of Section 194BA is as follows:

The equation determines the calculation for net winnings: Net winnings = A – (B + C), where:

A = the total amount is withdrawn from the user account,

B = the aggregate amount of non-taxable deposits made by the account owner in the user account during the financial year until the withdrawal is made, and

C = the opening balance of the user account at the start of the financial year.

In simpler terms, net winnings are calculated by subtracting the total fresh deposits and the opening balance from the total withdrawal made from the user account.

What if individuals have multiple wallets?

On certain occasions, individuals may possess multiple wallets. Rule 133, issued by the CBDT, provides clarification that a user account encompasses every account associated with a user, where taxable deposits, non-taxable deposits, or winnings are credited, and the user debits withdrawals. Each wallet meeting the criteria of a user account will be treated as such for the purpose of calculating net winnings.

Therefore, if an individual possesses multiple user accounts, each user account will be taken into account when calculating net winnings. The deposits, withdrawals, and balances will be considered collectively across all user accounts.

Let’s consider an example where an individual holds two user accounts (account 1 and account 2) with an online gaming company. Here are the details for each account:

Account 1:

– Withdrawal: Rs 5,000

– Opening balance: Rs 500

– Deposit: Rs 2,000

Account 2:

– Opening balance: Rs 1,000

– No withdrawals or deposits made

Please note that these figures are for illustrative purposes only. Based on this information, the net winnings and TDS calculations for each account can be determined according to the guidelines provided by CBDT.

To calculate the net winnings for the purpose of TDS deduction, the formula would be as follows:

Net winnings = Rs 5,000 – (Rs 2,000 + Rs 500 + Rs 1,000) = Rs 1,500

This calculation considers the total withdrawal from all user accounts (Rs 5,000) and subtracts the total fresh deposits made in all accounts (Rs 2,000) as well as the total opening balance of all accounts (Rs 500 + Rs 1,000). The resulting value of Rs 1,500 represents the net winnings.

Based on the given example, the individual’s net winnings amount to Rs 1,500. The online gaming company will then deduct TDS at 30% of the net winnings. In this case, the TDS deduction will amount to Rs 450.

Please note that in situations where a gaming company operates multiple gaming platforms that cannot be feasibly integrated, the net winnings for each platform will be calculated individually, and TDS will be levied accordingly for each platform. This approach ensures that the net winnings and TDS calculations are performed separately for each gaming platform.

Relaxation on TDS from online gaming winnings

The CBDT has provided clarification that TDS will not be applicable if the net winnings in a month do not exceed Rs 100. However, it is important to note that if the withdrawal amount exceeds Rs 100 in the same month or subsequent month, the TDS deduction will be made at that time. In cases where no withdrawal occurs, the deduction will be made at the end of the financial year.

For Example, In April, your net winnings were Rs 90, and since the withdrawal amount is below Rs 100, TDS is not deducted. In the next month, your net winnings were Rs 200, and if you withdraw this amount, TDS will be deducted as it exceeds the Rs 100 threshold.

Since the total winnings in the financial year exceed Rs 100, the company will deduct TDS in May. The TDS deduction will be 30% of the total winnings, which amounts to Rs 290 (Rs 90 + Rs 200). This TDS will be deducted when a withdrawal is made in May.

Vasudevan explains that the CBDT while providing the relaxation, has instructed gaming companies to take on the responsibility of ensuring that an individual’s user account contains sufficient balance to fulfil the TDS obligations. If a gaming company offers relaxation and the individual’s user account does not have enough balance, the gaming company will be responsible for depositing the TDS on behalf of the individual.

Can you submit Form 15G/H to avoid TDS?

Vasudevan clarifies that as per Section 194BA, individuals cannot submit Form 15G/H to exempt themselves from TDS on online game winnings.

What constitutes withdrawal from the user’s account?

According to Vasudevan, when money added by an individual to their user account is utilised for playing games within the platform, it is not classified as a withdrawal. However, if the funds are transferred to a bank account (in case of net winnings), utilised for purchasing in-game merchandise, or used for any purpose other than playing games, it will be considered a withdrawal from the user’s account. In such cases, TDS will be applicable on the amount that has been withdrawn.

What about bonuses, referral bonuses, and other incentives?

Bonuses, referral bonuses, and other incentives offered by online gaming companies are considered taxable deposits as they increase the user account balance, even though they are not deposited by the user.

These bonuses, referral bonuses, and other incentives are considered as part of the net winnings and are subject to TDS under Section 194BA. It is important to note that TDS must be paid on these amounts either during the withdrawal or at the end of the financial year if no withdrawal is made.

When incentives are provided in the form of coins, coupons, vouchers, or other non-monetary forms, the monetary equivalent of these incentives will be considered for calculating the net winnings. The monetary value of these non-monetary incentives will be included in the overall calculation of net winnings for the purpose of TDS deductions.

Incentives or bonuses credited to a user account solely for playing purposes, which cannot be withdrawn or used for other purposes, will not be considered for calculating net winnings. The company must maintain a record of such incentives. If these incentives become eligible for withdrawal in the future, they will be included in the calculation of net winnings.

What if the borrowed money is deposited in the user’s account?

Money deposited by the user in their account is categorised as a non-taxable deposit if the deposit represents already taxed income or is not subject to income tax. Therefore, if the deposited money is borrowed, it will be considered a non-taxable amount for the purpose of calculating net winnings and TDS deductions.

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