Direct Tax Laws & International Taxation · Income from Other Sources

Permissible Deductions and Disallowed Amounts under Income from Other Sources

Updated 5 October 2026 · Fact-checked

Income from other sources allows only expenses laid out wholly and exclusively to earn that income. Capital and personal expenses are barred. Dividend gets only interest, capped at 20% of the dividend. Family pension gets the lower of one-third or a fixed limit. Lottery and similar winnings get no deduction at all.

Understand Permissible Deductions and Disallowed Amounts

Income from other sources is the residual head. Anything taxable that does not fit salary, house property, business or capital gains lands here. Because it is a residual head, the law is strict about what you can deduct. There is no long list of business-style allowances.

The general rule is the same as for business: an expense is deductible if it is incurred wholly and exclusively for earning the income being taxed. It must not be capital in nature. It must not be personal. Think of collection charges on interest, or repairs and insurance on machinery you let out on hire.

Then come the special rules, which is where exam marks sit. For dividend income, the only deduction is interest on money borrowed to invest, and it is capped at 20% of the dividend. No commission, demat or advisory charges are allowed against it. For family pension, a fixed deduction applies instead of actual expenses. For winnings from lotteries, crosswords, races, card games, gambling or betting, no expense of any kind is allowed.

Family pension is the pension received by the legal heir of a deceased employee. It is taxed under this head, not salary, because the employer-employee relationship has ended. That is why the salary standard deduction is not available on it. The standard deduction applies to the employee's own pension taxed as salary, not to family pension. The deduction you get on family pension is a separate, specific one.

Some amounts are also barred outright: personal expenses, interest or salary payable outside India on which tax was not deducted or paid as required, and any capital expenditure. Keep a mental split between deductions (allowed), special-limit deductions (dividend, family pension) and nil-deduction receipts (winnings).

Key rules to remember

General deduction rule: Allowed = expenditure wholly and exclusively for earning the income, if not capital and not personal; Applies to interest on securities, rent from machinery let on hire, and similar receipts. Include the actual expense only if the question gives it and it relates to that income.
Dividend income deduction: Deduction = lower of (interest actually paid on borrowed money for investment) and (20% × dividend income); Under the Income-tax Act, 2025 (tax year 2026-27), only interest is allowed. No other expense, such as commission or demat charges. The 20% is on gross dividend before any deduction.
Family pension deduction: Deduction = lower of (1/3 × family pension) and (fixed limit); Under the Income-tax Act, 2025 for tax year 2026-27, the fixed limit is ₹25,000 if you are taxed under the default (new) regime and ₹15,000 if you opt out of it. Both regimes continue for this tax year. Use whichever the question states or implies, and state your assumption.
Gambling-type winnings: Deduction = Nil; Covers lottery, crossword puzzles, races including horse races, card games, other games, gambling and betting. Even ticket cost or entry fee is not allowed.
Machinery, plant or furniture let on hire: Allowed: current repairs, insurance, depreciation, plus other expense wholly and exclusively incurred; Applies when the letting is not part of a business and the rent is taxed under this head.
Barred amounts: No deduction: personal expenses; interest or salary payable outside India without required tax deduction or payment; capital expenditure; State the rule and the reason in the answer.

How to solve Permissible Deductions and Disallowed Amounts questions

Use this order for any question on deductions under income from other sources. It stops you from applying a business-style deduction where none exists.

1List every receipt that falls under this head and tag each one: dividend, interest on securities, family pension, winnings, machinery rent, or other.
2For each receipt, decide which rule applies: nil deduction (winnings), capped interest only (dividend), fixed deduction (family pension), or general wholly-and-exclusively test (the rest).
3For dividend, compute 20% of the gross dividend and compare with the interest paid. Take the lower. Ignore every other expense.
4For family pension, compute one-third of the pension, compare with the fixed limit for the regime, and deduct the lower.
5For other receipts, scan the expenses. Allow only those linked to that income and not capital or personal. Reject the rest with a one-line reason.
6Compute the net figure for each receipt and add them to get income from other sources.
7Flag any special-rate income, such as lottery winnings, so it is taxed at its own rate and not at slab rates.
8Write the answer in provision-fact-conclusion form, showing the limit applied and the amount disallowed.

Quickest way: Three-bucket sort

When to use it: Use this in a numerical question that lists many receipts and expenses and you have limited time.

Bucket 1, winnings: take the gross amount, deduction nil.
Bucket 2, dividend: deduction is the lower of interest paid and 20% of dividend. Strike out everything else.
Bucket 3, family pension: deduct the lower of one-third and the fixed limit.
All other receipts: deduct only the expense that clearly relates to that receipt and is revenue in nature.
Add the four net results and move on.

Common mistakes in Permissible Deductions and Disallowed Amounts

Allowing commission, demat charges or advisory fees against dividend income.
You treat dividend like business income, where all related expenses count.
Fix: Remember dividend allows interest only, and only up to 20% of the dividend. Everything else is disallowed.
Applying the 20% cap to interest on securities or other receipts.
The cap is memorised without the receipt it belongs to.
Fix: Link the 20% cap strictly to dividend income. Other receipts use the wholly-and-exclusively test.
Giving the salary standard deduction on family pension.
Pension feels like salary, so the salary deduction seems natural.
Fix: Family pension is taxed under other sources. The standard deduction applies to the employee's own pension taxed as salary, not to family pension. Use only the specific family pension deduction: lower of one-third or the fixed limit.
Computing the family pension deduction as one-third without comparing with the limit.
You remember the fraction and forget the cap.
Fix: Always write both figures and pick the lower. For ₹1,50,000 pension, one-third is ₹50,000 but the deduction is capped at the fixed limit.
Deducting the ticket cost or related expenses from lottery or gambling winnings.
Net-of-cost thinking feels fair, and it is how capital gains work.
Fix: No deduction is allowed against winnings from lottery, crosswords, races, card games, gambling or betting. Tax the gross amount.
Allowing capital expenditure or personal expenses because they relate to the receipt.
You check only the link with income and ignore the nature of the expense.
Fix: Test both: the expense must be wholly and exclusively for earning the income, and must be revenue in nature and not personal.

Worked examples

Example 1

Mr Rao, a resident individual, receives dividend of ₹1,20,000 from an Indian company and interest of ₹10,000 on his savings bank account. He paid ₹40,000 as interest on a loan taken to buy the shares, and ₹5,000 as demat and advisory charges. Compute his income from other sources for the tax year 2026-27 under the Income-tax Act, 2025.

Show the solution

Under the Income-tax Act, 2025, dividend is taxed at its gross amount of ₹1,20,000. The only deduction is interest on borrowed money, capped at 20% of the dividend.
20% × ₹1,20,000 = ₹24,000.
Interest actually paid is ₹40,000. The lower figure is ₹24,000, so the deduction is ₹24,000. The excess interest of ₹16,000 is disallowed.
Demat and advisory charges of ₹5,000 are not allowed against dividend income. The full ₹5,000 is disallowed.
Total expenses disallowed = ₹16,000 + ₹5,000 = ₹21,000.
Net dividend income = ₹1,20,000 − ₹24,000 = ₹96,000.
Savings bank interest of ₹10,000 has no related expense in the facts, so it is taken as it is.
Income from other sources = ₹96,000 + ₹10,000 = ₹1,06,000.

Answer: Income from other sources = ₹1,06,000. The deduction against dividend is ₹24,000, and ₹21,000 of the expenses (₹16,000 excess interest and ₹5,000 charges) is disallowed.

Example 2

Mrs Sharma, a widow taxed under the default (new) regime, receives family pension of ₹1,50,000 after her husband's death. She also wins ₹50,000 from a lottery after buying tickets worth ₹5,000, and earns ₹30,000 interest on a bank fixed deposit. Compute her income from other sources for the tax year 2026-27 under the Income-tax Act, 2025.

Show the solution

Family pension is taxed under income from other sources, not salary. The salary standard deduction does not apply, because it is available only on the employee's own pension taxed as salary.
One-third of ₹1,50,000 = ₹50,000. The fixed limit under the default (new) regime is ₹25,000. The lower figure is ₹25,000.
Net family pension = ₹1,50,000 − ₹25,000 = ₹1,25,000.
Lottery winnings allow no deduction. The ₹5,000 ticket cost is disallowed, so the taxable amount is ₹50,000. These winnings are taxed at a flat special rate of 30%, not at slab rates. Surcharge and health and education cess apply on top of this tax, as applicable.
Bank FD interest of ₹30,000 has no related expense in the facts, so it stands at ₹30,000.
Gross total under this head = ₹1,25,000 + ₹50,000 + ₹30,000 = ₹2,05,000.
Split for tax rates: ₹50,000 lottery winnings at the flat 30% special rate (₹15,000 before surcharge and cess); the balance ₹1,55,000 (₹1,25,000 + ₹30,000) at normal rates.

Answer: The gross total under income from other sources is ₹2,05,000. Of this, ₹50,000 lottery winnings are taxed at the flat 30% special rate (₹15,000 before surcharge and cess), and the balance ₹1,55,000 is taxed at normal rates. Family pension deduction is ₹25,000, and the ₹5,000 lottery ticket cost is disallowed.

Exam tips

In an MCQ on dividend, check first whether the option allows any expense other than interest. That option is wrong.
Always show both figures when a limit applies: 20% of dividend or one-third of family pension. Examiners give marks for the comparison.
Read the case for the regime. The family pension limit differs between regimes, so state your assumption in one line.
List disallowed items separately with a reason. Written answers earn marks for the provision, the facts and the conclusion.
Do not let winnings from lottery, gambling or betting slip into a deduction list. A single ticket cost or entry fee appears as a trap.

Practice questions from Income from Other Sources

Permissible Deductions and Disallowed Amounts in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CS ExecutiveDeductions and Disallowed Amounts under Other Sources

Permissible Deductions and Disallowed Amounts: frequently asked questions

What deductions are allowed from income from other sources?

You can claim expenses incurred wholly and exclusively to earn that income, provided they are not capital or personal. Special rules apply: dividend allows only interest up to 20% of the dividend, family pension gets a fixed deduction, and winnings from lotteries and gambling get none.

Is the standard deduction available on family pension?

No. The salary standard deduction applies to the employee's own pension taxed as salary, not to family pension. Family pension has its own deduction: the lower of one-third of the pension and the fixed limit, which is ₹25,000 under the default regime and ₹15,000 where the old regime is opted.

What is the difference between the deduction for dividend and for family pension?

Dividend allows only actual interest on borrowed funds, capped at 20% of the dividend. Family pension allows a formula-based deduction, regardless of actual expenses, equal to the lower of one-third of the pension and the fixed limit. One depends on actual cost, the other does not.

Which amounts are not deductible from income from other sources?

Personal expenses, capital expenditure, and interest or salary payable outside India on which tax was not deducted or paid as required are not deductible. Winnings from lotteries, crosswords, races, card games, gambling and betting allow no deduction of any expense.