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

Income from Other Sources: Scope and Chargeability

Updated 11 October 2026 · Fact-checked

Income from Other Sources is the residuary head of income under the Income-tax Act. Income is taxed here only if it is taxable, not exempt, and does not fall under salary, house property, business or profession, or capital gains. Section 56 sets the basis of charge. Test the other four heads first.

Understand Income from Other Sources: Scope and Chargeability

Indian income tax splits total income into five heads: Salaries, Income from House Property, Profits and Gains of Business or Profession, Capital Gains, and Income from Other Sources. Each head has its own rules for what is taxed and what is deducted.

Income from Other Sources is the residuary head. It catches income that is taxable but does not fit any of the first four heads. Think of it as the last bucket. You reach it only after you have ruled out the other four.

The basis of charge is section 56. Section 56(1) says income of every kind that is chargeable to tax and is not excluded from total income is taxed under this head, if it is not chargeable under the other four heads. Section 56(2) then lists specific items that are taxed here. Examples are dividend income, winnings from lotteries, crossword puzzles, races, games and similar sources, and interest on securities where it is not business income. Gifts above the prescribed limit under section 56(2)(x) also fall here.

The list in section 56(2) is not exhaustive. Even an item not named there is taxed under this head if it is income, is taxable and fits no other head. Interest on bank deposits, savings accounts and loans is a common example. The income must first be taxable. Exempt income, such as agricultural income, is outside this head.

One point trips many students. The same receipt can be taxed under different heads depending on facts. Interest earned by a person whose business is lending money is business income. The same interest earned by a salaried investor is Income from Other Sources. The nature of the activity decides the head, not the name of the receipt.

Key formulas to remember

Residuary rule: Income from Other Sources = Taxable income − income under Salaries, House Property, Business/Profession and Capital Gains; Use this head only when no other head applies and the income is not exempt.
Basis of charge: Section 56(1): income of every kind, if taxable and not under the other four heads; Section 56(2) lists specific incomes, but the list is not exhaustive.
Order of classification: Salaries → House Property → Business/Profession → Capital Gains → Other Sources; Test the heads in this order. Other Sources is always the last.
Typical items under section 56(2): Dividends, winnings from lotteries/games/races, interest on securities (non-business), gifts under 56(2)(x); Bank interest also falls here when it is not business income.

How to solve Income from Other Sources: Scope and Chargeability questions

Use this method for any question that asks which head an income falls under or whether it is chargeable under Other Sources.

1Read the receipt and note who earns it and in what capacity: employee, owner of property, businessperson, investor.
2Check whether the income is exempt from tax. If it is fully exempt, it is not taxed under any head.
3Test Salaries: is there an employer-employee link?
4Test House Property, then Business or Profession, then Capital Gains, in that order.
5If none applies, classify it under Income from Other Sources under section 56.
6Check whether the item is named in section 56(2), such as dividend, winnings or gifts, to confirm.
7Pick the option that matches the head and watch for words like 'only' or 'always' in the choices.

Quickest way: Eliminate four heads, then default to Other Sources

When to use it: Use when a 1-mark question asks under which head an income is taxed.

Ask: is it salary, rent from a property, business profit or gain from selling an asset?
If yes to any, choose that head.
If no to all four, choose Income from Other Sources.
Beware: for a person in the business of lending, interest is business income.

Common mistakes in Income from Other Sources: Scope and Chargeability

Treating section 56(2) as a closed list.
Students memorise the named items and assume nothing else qualifies.
Fix: Remember section 56(1) is a general residuary charge. Any taxable income not under other heads falls here.
Taxing bank interest as business income for every investor.
Students link interest with finance activity.
Fix: Interest is Other Sources unless it arises from a business, such as lending. Check the person's activity.
Applying this head before testing the other four.
Dividend, interest and gifts look familiar as Other Sources items.
Fix: Always go in the order of heads. Other Sources is the last resort.
Including exempt income under this head.
Students forget the chargeability condition.
Fix: Section 56 applies only to income that is taxable and not excluded from total income.
Assuming the label of the receipt decides the head.
Students go by the name, such as 'interest' or 'rent'.
Fix: Look at the source and the capacity of the earner. The same receipt can fall under different heads.

Worked examples

Example 1

Rohan is a salaried employee. He earns interest on a savings bank account and receives a dividend from an Indian company. Under which head are these taxed?

Show the solution

Rohan is not in the business of lending or investing as a trade, so the interest is not business income.
Neither receipt is salary, house property income or a capital gain.
Both are taxable and not exempt.
By the residuary rule, they fall under Income from Other Sources under section 56.

Answer: Both the interest and the dividend are taxed under Income from Other Sources.

Example 2

A money lender earns ₹80,000 as interest on loans given in the course of his regular lending business. Under which head is it taxed, and why?

Show the solution

Check the nature of the activity: lending is his regular business.
The interest is therefore earned from business, which is tested before Other Sources.
As the income fits Profits and Gains of Business or Profession, the residuary head is not used.

Answer: The ₹80,000 is taxed under Profits and Gains of Business or Profession, not Income from Other Sources.

Exam tips

Expect questions asking which head applies. Apply the order of heads and choose Other Sources only after ruling out the rest.
Watch for options saying section 56(2) lists all items. That is a trap, as the head is residuary.
Notice the earner's capacity in the question. It decides between business and Other Sources.
Questions using 'only' or 'always' about interest or dividend are often wrong.
Exempt income is not taxed under any head, so do not choose Other Sources for it.

Practice questions from Income from Other Sources

Income from Other Sources: Scope and Chargeability in other exams

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

Income from Other Sources: Scope and Chargeability: frequently asked questions

What is income from other sources?

It is the residuary head of income. It covers taxable income that does not fall under Salaries, House Property, Business or Profession, or Capital Gains. Section 56 gives the basis of charge.

Is the list in section 56(2) exhaustive?

No. Section 56(2) names specific items such as dividends, winnings and gifts. Other taxable income not under any other head is still taxed under section 56(1).

Is interest always taxed under Income from Other Sources?

No. Interest earned by a person in the business of lending is business income. For most investors, interest on deposits and loans is taxed under Other Sources.

Why is the order of heads important?

Other Sources is the residuary head. You must rule out the other four heads first, in order, before treating income as Other Sources.