NISM-Series-X-B: Investment Adviser (Level 2) · Income from Other Sources

Deductions and Disallowed Expenses in Income from Other Sources

Updated 11 October 2026 · Fact-checked

Under Income from Other Sources you can deduct only expenses laid out wholly and exclusively to earn that income. Examples are collection charges, interest on money borrowed to invest, and the family pension standard deduction. Personal expenses, capital expenses and payments disallowed by section 58 cannot be deducted.

Understand Deductions and Disallowed Expenses

Income from Other Sources is the residual head. Dividends, interest, winnings, family pension and similar receipts land here. The law then lets you subtract certain costs of earning that income. Section 57 says what is allowed. Section 58 says what is not.

The core test is simple: the expense must be laid out or expended wholly and exclusively for the purpose of earning that income. A cost that only partly serves that purpose, or serves a personal purpose, fails the test. Capital expenditure also fails.

Three allowed items matter most for the exam. First, commission or remuneration paid for realising the income, such as a fee paid to collect interest. Second, interest on borrowed capital used to earn the income. Third, a standard deduction on family pension. Depreciation and similar allowances are allowed for assets like plant or furniture let out on hire, where the rent is taxed here.

For dividend income (and income from units of a mutual fund), the position was tightened. Interest expense against dividend income is capped at 20% of the dividend income. No other deduction, such as commission or remuneration for realising it, is allowed against dividend income. These limits apply to dividend income and mutual fund unit income. They do not apply to interest on securities, which has its own deduction rules.

Section 58 lists the disallowed items. Personal expenses are not deductible. Interest payable outside India (or to a non-resident) is not deductible if tax was not paid or deducted at source as required. Winnings from lotteries, crosswords, races, card games, gambling and similar activities, taxed at special rates, get no deduction for any expenditure or allowance. Expenses of a capital nature are never allowed. Always remember the sequence: identify the income, apply the specific rule, then check for disallowance.

Key formulas to remember

General test for deduction: Allowed only if expense is wholly and exclusively for earning the income, and is not capital or personal; Applies to every claim under section 57 before checking the specific item.
Interest against dividend income: Maximum interest deduction = 20% × dividend income; Applies to interest on money borrowed to invest. No other expense is allowed against dividend income.
Family pension standard deduction: Deduction = lower of 1/3 of the pension and a fixed rupee cap; The cap is ₹15,000 under the old regime and ₹25,000 under the new regime. The ₹25,000 figure applies from FY 2024-25 onward. Check which regime and year the question specifies, and follow the figures given in the question.
Winnings: Deduction = nil; No expense or allowance is allowed against winnings from lotteries, crosswords, races, card games and gambling. Tax applies on the gross amount.
Net income from other sources: Net income = Gross receipt − allowed deductions; Disallowed items are added back, never subtracted.

How to solve Deductions and Disallowed Expenses questions

Use this order for any deduction question on this head.

1Identify the type of income: dividend, interest, family pension, winnings, rent from hired assets, or other.
2Check whether it is winnings. If yes, stop: no deduction.
3Check whether it is dividend. If yes, only interest is allowed, capped at 20% of the dividend.
4For family pension, apply the lower of one-third of the pension or the cap for the regime given.
5For other income, test each expense: wholly and exclusively, revenue in nature, not personal.
6Remove disallowed items such as personal expenses, capital expenses, and interest payable outside India or to a non-resident where tax was not paid or deducted as required.
7Subtract the allowed amounts from gross income and state the net figure.

Quickest way: Three-gate filter

When to use it: Use when a long caselet lists many expenses and you have little time.

Gate 1: Is the income winnings? Answer is gross, with no deduction.
Gate 2: Is it dividend? Allow only interest up to 20% of the dividend; discard everything else.
Gate 3: Anything else? Keep only revenue costs directly tied to earning it; discard personal and capital items.
For family pension, compute one-third and compare with the cap; pick the lower.

Common mistakes in Deductions and Disallowed Expenses

Deducting collection charges from dividend income.
Students recall that collection costs are allowed for interest and extend it to dividend.
Fix: Only interest, within 20% of dividend, is allowed against dividend income. Nothing else.
Allowing full interest against dividend.
The rule 'interest on borrowed funds is allowed' is remembered without its cap.
Fix: Compute 20% of dividend and take the lower of actual interest and that figure.
Deducting expenses against lottery or gambling winnings.
Students treat all income under this head alike.
Fix: Winnings get no deduction at all. Tax the gross amount.
Using the wrong cap for family pension.
The old and new regime caps are mixed up.
Fix: Read the regime in the question. Use ₹15,000 for old and ₹25,000 for new, and compare with one-third of the pension.
Allowing capital or personal expenses.
The words 'wholly and exclusively' are skipped.
Fix: Ask two questions: is it revenue in nature, and is it purely for earning this income? Both must be yes.

Worked examples

Example 1

Rakesh receives dividend of ₹80,000 from listed companies. He paid ₹25,000 as interest on a loan taken to buy the shares and ₹3,000 as fees to a demat service for collecting the dividend. Find his income from other sources from this dividend.

Show the solution

Income type is dividend, so only interest is allowed.
Cap on interest = 20% × ₹80,000 = ₹16,000.
Actual interest is ₹25,000, so allowed interest = lower of ₹25,000 and ₹16,000 = ₹16,000.
The ₹3,000 fee is not allowed against dividend.
Net income = ₹80,000 − ₹16,000 = ₹64,000.

Answer: ₹64,000

Example 2

Meena, a widow, receives a family pension of ₹54,000 in a year. Under the new regime, with a standard deduction cap of ₹25,000 (the cap applicable from FY 2024-25 onward), find the taxable family pension.

Show the solution

One-third of ₹54,000 = ₹18,000.
Cap = ₹25,000.
Deduction = lower of ₹18,000 and ₹25,000 = ₹18,000.
Taxable family pension = ₹54,000 − ₹18,000 = ₹36,000.

Answer: ₹36,000

Exam tips

If the question mentions lottery, crossword, race or gambling winnings, pick the option with no deduction.
For dividend questions, the trap options usually allow full interest or also allow commission. Choose the 20% capped answer.
Always take the lower of one-third and the cap for family pension. Note which regime is stated.
Wrong answers are penalised, so skip only if you cannot eliminate two options.

Practice questions from Income from Other Sources

Deductions and Disallowed Expenses in other exams

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

Deductions and Disallowed Expenses: frequently asked questions

What does section 57 allow?

It allows expenses laid out wholly and exclusively to earn income under this head. Typical items are collection commission, interest on borrowed money used to invest, and the family pension standard deduction. Dividend income gets a narrower rule.

What does section 58 disallow?

It disallows personal expenses, interest payable outside India (or to a non-resident) where tax was not paid or deducted at source as required, and any expense against winnings from lotteries, races, card games and similar activities. Capital expenses are also not allowed.

How much interest can I deduct against dividend income?

You can deduct interest on borrowed funds up to 20% of the dividend income. Any excess interest is not allowed under this head.

Can I claim expenses on lottery winnings?

No. Winnings are taxed on the gross amount, with no deduction for any expenditure or allowance.