Taxation · Income from Other Sources

Other Receipts under Income from Other Sources: Compensation, Forfeited Advance, Family Pension and Unexplained Money

Updated 5 October 2026 · Fact-checked

Other receipts under Income from Other Sources are residuary items such as family pension, forfeited advance on a capital asset, and unexplained money. Compensation from an employer on termination is salary, not this head. To solve, identify the receipt, confirm no other head applies, apply the deduction or special rate, and disallow personal and capital expenses.

Understand Other Receipts: Compensation, Advance Forfeited and Sale of Shares

Income from Other Sources is the residuary head. An income comes here only if it is taxable and does not fall under Salary, House Property, Business or Capital Gains. So your first job in every question is to rule out the other heads.

Several specific receipts are named for taxation here. Family pension is pension paid to the family of a deceased employee. It is not the employee's own salary, so it is taxed here. Advance money forfeited is money a person received in negotiations to transfer a capital asset, which he keeps because the deal fell through. It is taxed here in the year of forfeiture, provided it is not already taxed under another head such as capital gains. Because it is taxed under this head, it is not deducted from the cost of acquisition of the asset.

Compensation on termination of employment (or on changing its terms) received from the employer is taxed as Salary (profits in lieu of salary), not under this head. Only compensation that does not fall under Salary or any other head would be residuary income here.

Unexplained money is cash, investment, jewellery or similar assets, or expenditure, that the assessee cannot explain to the Assessing Officer's satisfaction. It is treated as income and charged at a special flat rate under the Income-tax Act, 2025 as amended by the Finance Act, 2026, not at slab rates. Tax is on the full amount. No expense is allowed against it and no loss can be set off against it. It is kept out of the slab-rate total of Income from Other Sources. For the exact rate, surcharge and cess, use the ICAI study material for tax year 2026-27 or the rate given in the question.

Deductions under this head are narrow. You may deduct expenses incurred wholly and exclusively to earn the income, such as commission for realising interest on securities. You may not deduct personal expenses, capital expenditure or income tax. Dividend income gets no deduction for any expense, including interest. Family pension has its own standard deduction: the lower of 33⅓% of the pension and the amount prescribed in the ICAI study material for tax year 2026-27. Use the figure given in the question.

The sale of shares at a profit is normally a capital gain, not income from other sources. Shares received for nil or low consideration are covered in the gifts topic.

Key rules to remember

Family pension deduction: Deduction = lower of (33⅓% × family pension) and the amount prescribed in the ICAI study material for tax year 2026-27; Taxable = family pension − deduction; Use the prescribed amount given in the question. If the question gives none, use the figure in the ICAI study material for tax year 2026-27. Do not confuse this with commuted pension.
Forfeited advance: Advance forfeited on failed transfer of a capital asset (and not already taxed under another head) = taxable under Other Sources in the year of forfeiture; Because the advance is taxed here, it is not deducted from the cost of acquisition when the asset is later sold. Do not tax it twice.
Termination compensation: Compensation from the employer on termination or change of terms = taxed as Salary (profits in lieu of salary); Check the head first. Only compensation that falls under no other head would be residuary income here.
Unexplained money: Tax = special flat rate × full unexplained amount; take the rate, surcharge and cess from the ICAI study material for tax year 2026-27 (Income-tax Act, 2025 as amended by the Finance Act, 2026); This income is charged at a special rate, not at slab rates, and is kept out of the slab-rate total of Income from Other Sources. No deduction of any expense and no set-off of any loss against this income. Tax is on the full amount.
Dividend income: Taxable dividend = gross dividend (no deduction for interest or any other expense); No expense of any kind, including interest, is allowed against dividend income.
Other deductions: Allowed: expenses wholly and exclusively for earning the income (e.g. commission for realising interest on securities). Not allowed: personal, capital, income tax; Apply this test to each expense in the question separately.

How to solve Other Receipts: Compensation, Advance Forfeited and Sale of Shares questions

Use this order for any question on other receipts. It stops you from putting an item under the wrong head or claiming a wrong deduction.

1List every receipt in the question and ask whether it already fits Salary, House Property, Business or Capital Gains. If yes, leave it out of this head.
2For each remaining receipt, name the exact item: family pension, forfeited advance, unexplained money, dividend, interest and so on.
3Decide the year of taxability. Forfeited advance is taxed in the year it is forfeited, not the year it was received.
4Apply the specific rule. Family pension: lower of 33⅓% or the limit. Unexplained money: special rate, no deduction. Dividend: no deduction.
5For other receipts, list the expenses given and test each: wholly and exclusively for earning this income? Reject personal, capital and income-tax items.
6Check for double taxation. Do not reduce asset cost by an advance already taxed here, and do not tax termination compensation here when it is already salary.
7Add the slab-rate taxable amounts to get Income from Other Sources. Keep unexplained money out of this total and tax it separately at its special rate.
8Write the final figure clearly, with a one-line reason for each item you excluded.

Quickest way: Tag, test, total in three passes

When to use it: Use this in the exam hall for both MCQs and written answers on this topic.

MCQs: spot the key phrase. Pension of a deceased employee's family means other sources with a standard deduction. Advance forfeited means taxable here. Unexplained cash means special rate with no deduction. Eliminate options that give any expense deduction against dividend or unexplained money.
Do the family pension sum fast: take one-third, compare with the limit, deduct the lower.
Written answer: use three columns, Receipt, Reason for head, Taxable amount. Examiners give step marks for the reason.
Show the deduction working even if the amount is nil, for example 'Interest on loan: not allowed against dividend'.
End with a total line and a separate line for income taxed at a special rate.

Common mistakes in Other Receipts: Compensation, Advance Forfeited and Sale of Shares

Allowing interest on a loan taken to buy shares against dividend income.
Students feel that interest on money borrowed to buy shares is a natural cost of earning the dividend.
Fix: Allow no expense of any kind, including interest, against dividend income. Show it as 'not allowed' in your working.
Taxing forfeited advance in the year it was received.
Students link taxability to receipt, as with ordinary advances.
Fix: Tax it in the year it is forfeited because the negotiations failed. Until then it is only an advance.
Also reducing the cost of the asset by the forfeited advance that was already taxed.
Students assume an advance received on a capital asset always reduces its cost, and forget that this does not apply once it is taxed under Other Sources.
Fix: If the advance is taxed under Other Sources, it is not deducted from the cost of acquisition when computing the later capital gain. Use the full cost.
Applying the full prescribed family pension deduction (for example ₹25,000) even when one-third of the pension is lower.
Students remember the fixed amount and forget the 'lower of' test.
Fix: Always compute 33⅓% first. If the prescribed amount is ₹25,000, a pension of ₹36,000 gets a deduction of ₹12,000 only (one-third of the pension), not ₹25,000.
Setting off a loss or allowing expenses against unexplained money.
Students treat it like any other income.
Fix: Tax the full amount at the special rate. No expense, loss or allowance reduces it.
Taxing termination compensation under Other Sources when the employer paid it.
The topic name suggests Other Sources, so students stop checking other heads.
Fix: Compensation from the employer on termination or change of terms is salary (profits in lieu of salary). Check Salary first.

Worked examples

Example 1

Mrs. Rekha, widow of a government employee, received family pension of ₹1,20,000 during tax year 2026-27. She also received dividend of ₹30,000 and paid ₹6,000 interest on a loan taken to buy those shares. Compute her income from other sources. The question states that the prescribed family pension deduction amount is ₹25,000.

Show the solution

Family pension is not salary of Mrs. Rekha, so it is taxed under Other Sources.
One-third of the pension: ₹1,20,000 × 33⅓% = ₹40,000.
The prescribed amount given in the question is ₹25,000. The lower of ₹40,000 and ₹25,000 is ₹25,000.
Taxable family pension: ₹1,20,000 − ₹25,000 = ₹95,000.
Dividend is ₹30,000. No expense, including interest, is allowed against dividend, so the ₹6,000 interest is not deducted.
Income from other sources: ₹95,000 + ₹30,000 = ₹1,25,000.

Answer: Income from Other Sources = ₹1,25,000 (family pension ₹95,000 + dividend ₹30,000; the interest of ₹6,000 is disallowed).

Example 2

In tax year 2026-27, Mr. Anand received ₹2,00,000 as advance from a buyer for his plot (a capital asset). The deal failed and he forfeited the advance. Later he sold the plot to another buyer for ₹30,00,000. Its cost was ₹12,00,000. Show the tax treatment of the forfeited advance and the later capital gain, ignoring indexation, exemptions and tax rate on gain.

Show the solution

The advance was received while negotiating a transfer of a capital asset and was forfeited when the deal failed. It is taxable under Other Sources in tax year 2026-27, the year of forfeiture: ₹2,00,000.
Because the advance is taxed under Other Sources, it is not deducted from the cost of the plot.
Cost of acquisition remains ₹12,00,000.
Capital gain on the later sale: ₹30,00,000 − ₹12,00,000 = ₹18,00,000.

Answer: Forfeited advance of ₹2,00,000 is taxed under Other Sources in 2026-27. Later capital gain is ₹18,00,000, with no cost reduction for the advance.

Exam tips

In a mixed question, label each receipt with its head before computing. Many step marks go to the correct head.
Remember the no-deduction items: dividend (no expense at all, including interest), unexplained money, winnings from lotteries and similar specific incomes. No expense is allowed against them. Unexplained money is taxed at a special rate (use the rate given in the question or the ICAI study material for tax year 2026-27) and kept out of the slab-rate total of Income from Other Sources.
For family pension, always show the 'lower of' comparison, even if the limit clearly applies, and state the prescribed amount you use, taken from the question.
Read the year in the question. Taxability of forfeited advance depends on the year of forfeiture, not receipt.
Do not quote old Act terms such as 'assessment year' or old section numbers. Use 'tax year' and the Income-tax Act, 2025.

Practice questions from Income from Other Sources

Other Receipts: Compensation, Advance Forfeited and Sale of Shares: frequently asked questions

How is family pension taxed?

Family pension is taxed under Income from Other Sources, not Salary. You deduct the lower of one-third of the pension and the prescribed amount given in the question (or in the ICAI study material for tax year 2026-27). The balance is taxable.

Is forfeited advance always taxable?

It is taxable under Other Sources in the year of forfeiture when the advance was received in negotiations for transfer of a capital asset, the transfer did not happen, and the amount is not already taxed under another head. When it is taxed here, it is not deducted from the cost of the asset in the later capital gain. If the asset was stock-in-trade, it is a business receipt instead.

Which expenses are not deductible under Income from Other Sources?

Personal expenses, capital expenditure and income tax are not deductible. No expense at all is allowed against dividend income or unexplained money. Only expenses wholly and exclusively for earning the income are allowed against other items.

How is unexplained money taxed?

It is added to income and charged at a special flat rate under the Income-tax Act, 2025 as amended by the Finance Act, 2026, not at slab rates. Tax is on the full amount. Use the exact rate, surcharge and cess given in the ICAI study material for tax year 2026-27 or in the question. It is kept out of the slab-rate total of Income from Other Sources, and you cannot claim any deduction or set off any loss against it.

Is profit on sale of shares income from other sources?

Normally no. Profit on sale of shares held as investment is a capital gain. Shares received for no or low consideration are dealt with under the gifts topic.