Tax on Online Gaming in India

The online gaming industry in India is rapidly expanding, with players engaging in games across PCs, consoles, and mobile devices. Beyond entertainment, online gaming also offers opportunities to win real money. However, many players may not be fully aware of the tax obligations associated with their winnings.

As per the Income Tax Act, winnings from online games are treated as taxable income and are subject to a 30% tax under Section 115BB. This tax applies not only to direct winnings but also to bonuses, referral rewards, and any other incentives provided by gaming platforms.

Additionally, under Section 194BA, tax deduction at source (TDS) is applicable before the payout of net winnings. The responsibility of deducting TDS lies with the game operator or any entity making the payment. Online gamers must report their winnings under the 'Income from Other Sources' category when filing their Income Tax Returns (ITR) as per Section 115BBJ and ensure timely tax payments.

These tax regulations apply to all types of online games, whether they are skill-based or chance-based. Even if winnings are received in the form of digital coins, vouchers, merchandise, or any other non-cash rewards, they are taxed based on their market value. To stay compliant and avoid legal complications, players should be aware of these taxation rules and fulfill their tax obligations accordingly.

Tax on Online Gaming Winnings

The Central Board of Direct Taxes (CBDT) issued a circular and notification on May 22, 2023, providing clarity on the applicability of TDS on online gaming winnings. As per the updated tax regulations, online gaming platforms are required to deduct TDS at a rate of 30% on any winnings withdrawn by users.

Previously, the tax deduction was applicable only if winnings exceeded ₹10,000 in a financial year. However, with the introduction of Sections 115BBJ and 194BA under the Finance Bill 2023, taxation rules have changed.

Key Provisions for Taxation on Gaming Winnings:

Section 115BBJ: Income tax is levied at 30% on net winnings earned in the previous fiscal year.

Section 194BA: TDS applies to net winnings in the user's gaming account at the end of the financial year.

Calculation of Net Winnings:

Net winnings are calculated using the following formula:

Net Winnings = A - (B + C)
Where:

A = Total amount withdrawn by the user.

B = Total deposits made by the user before withdrawal.

C = Opening balance in the user’s account at the start of the financial year.

These rules ensure that all earnings from online gaming, whether skill-based or chance-based, are subject to taxation. Gamers should be mindful of these regulations to stay compliant with tax laws.

Example of Online Gaming Tax Calculation

Let’s understand the taxation on online gaming winnings with updated values:

Scenario:

You pay an entry fee of ₹1,000 to participate in an online game.

You win ₹60,000 from the game.

Tax Calculation:

Net Winnings = Total Winnings - Entry Fee
₹60,000 - ₹1,000 = ₹59,000

TDS at 30% on Net Winnings:
30% of ₹59,000 = ₹17,700

The gaming platform will deduct ₹17,700 as TDS and deposit it with the government. The remaining amount of ₹42,300 will be credited to your account as your final winnings.

Online gamers should be aware of these tax implications and ensure compliance while filing their tax returns.