Section 57 of Income Tax Act: Deductions on Income from Other Sources Explained

Section 57 of Income Tax Act: What You Can Deduct from Income from Other Sources

Not every rupee that lands under "Income from Other Sources" is fully taxable. The Income Tax Act allows you to reduce this income by certain genuine expenses before tax is calculated on it, and the section that lists these allowances is Section 57 of the Income Tax Act, 1961. Whether you earn interest, dividends, rental income from machinery, or a family pension, this section decides how much of it you actually pay tax on. Here is a complete breakdown of every deduction available under Section 57, along with the recent change that pensioners in particular should know about.

What Does Section 57 of the Income Tax Act Cover?

Section 57 sits under Chapter IV-F of the Act, in the part that deals with "Income from Other Sources" under Section 56. Any income that does not fit under salary, house property, business, or capital gains gets taxed under this residual head, and Section 57 tells you which expenses can be subtracted from that income before arriving at your final taxable figure.

The section is broken into five clauses, each covering a distinct category of expense:

1. Commission or collection charges on dividend and interest income
2. Repairs, insurance, and depreciation on let-out plant, machinery, or furniture
3. Standard deduction on family pension
4. Any other expenditure incurred wholly to earn that income
5. Deduction on interest received on compensation or enhanced compensation

Let's go through each one.

Deduction for Collecting Dividend or Interest Income - Section 57(i)

If you hire a banker or any other agent to collect dividend or interest on securities on your behalf, the commission or remuneration paid for that service is deductible, provided the amount is reasonable and genuinely spent for that purpose. This is a narrow deduction and does not cover unrelated advisory or portfolio management fees.

The 2020 Change That Limits Deduction Against Dividend Income

Before April 1, 2020, dividend income was largely exempt in the hands of shareholders because companies paid Dividend Distribution Tax before releasing dividends. The Finance Act, 2020 abolished this system, which meant dividends became taxable directly in the hands of the recipient at their applicable slab rate.

To go with this shift, the government inserted a proviso in Section 57(i), effective from April 1, 2021 (FY 2020-21 onward). Under this proviso:

• Only interest expense on money borrowed to invest in shares or mutual fund units can be claimed as a deduction against dividend income.
• No other expense, such as demat charges, advisory fees, or brokerage, can be claimed.
• The interest deduction itself is capped at 20% of the gross dividend or mutual fund income received during the year.

Example: Suppose you receive a dividend of Rs 20,000 from an Indian company and had taken a loan to buy those shares, on which you paid Rs 6,000 in interest during the year. Since 20% of Rs 20,000 works out to Rs 4,000, you can claim only Rs 4,000 as a deduction, not the full Rs 6,000 you actually paid. The remaining Rs 2,000 in interest cannot be carried forward or claimed elsewhere against this income.

Deduction on Rental Income from Machinery, Plant, or Furniture - Section 57(ii)

When you let out machinery, plant, furniture, or a building along with these assets, any income earned is taxed under "Income from Other Sources" rather than "Income from House Property" (unless letting them out is your core business). Against this income, you can claim:

• Current repair expenses on the let-out assets
• Insurance premiums paid on them
• Depreciation on plant, machinery, and furniture

One point often missed: depreciation on a building used for this purpose is allowed only if you are the actual legal owner of that property, not merely a tenant subletting it.

Standard Deduction on Family Pension - Section 57(iia)

Family pension is the amount paid to legal heirs after the death of an employee or pensioner, and it is taxed as income from other sources rather than salary, since there's no employer-employee relationship with the recipient. Section 57(iia) allows a flat standard deduction here.

Old tax regime: The deduction is the lower of one-third of the family pension received, or Rs 15,000.

New tax regime (Section 115BAC): Following the Finance (No. 2) Act, 2024, this limit was raised. From AY 2025-26 (FY 2024-25) onward, taxpayers computing tax under the new regime can claim the lower of one-third of the family pension, or Rs 25,000.

Example under the new regime: If a family member receives a pension of Rs 90,000 in a year, one-third of this works out to Rs 30,000. Since the cap under the new regime is Rs 25,000, the lower figure, Rs 25,000, is what gets deducted. The taxable family pension becomes Rs 90,000 - Rs 25,000 = Rs 65,000.

This raised limit was announced specifically to make the new tax regime more attractive to pensioners, alongside the increase in the standard salary deduction from Rs 50,000 to Rs 75,000 in the same budget.

Deduction for Any Other Expense - Section 57(iii)

Beyond the specific categories above, Section 57(iii) is a general clause. It permits deduction of any expenditure, other than a capital expenditure or personal expense, that was laid out wholly and exclusively to earn income taxable under this head. This could include, for instance, reasonable costs directly tied to generating a specific stream of other-source income.

Two restrictions apply here:

• The expense must not be capital in nature.
• This clause is not available to a foreign company, unlike the other deductions under this section.

Deduction on Interest from Enhanced Compensation - Section 57(iv)

When land or property is acquired by the government and the original compensation is later enhanced through a court order or arbitration, the interest received on that additional compensation is taxable as income from other sources in the year it is received, under Section 56(2)(viii). Section 57(iv) allows a flat deduction of 50% of such interest income, with no further expense permitted against it beyond this fixed rate. This 50% deduction is subject to conditions and is available regardless of whether you actually spent that amount.

What Section 58 Does Not Allow

While Section 57 lists what you can deduct, Section 58 lists what you cannot. It's worth knowing the boundary:

• Personal expenses cannot be claimed under any clause of Section 57.
• Any expenditure incurred to earn income in the form of lottery winnings, crossword puzzles, races, card games, gambling, or betting is expressly disallowed. Such winnings are taxed flat at 30% under Section 115BB on the gross amount, and no deduction reduces this figure, no matter how much you spent to participate.
• Interest, salary, or payments made outside India without tax deduction at source can also be disallowed in specified cases.

Section 57 at a Glance

Frequently Asked Questions

What is Section 57 of the Income Tax Act, 1961?

It is the provision that lists the deductions a taxpayer can claim while computing income chargeable under the head "Income from Other Sources," covering dividend collection charges, rental asset expenses, family pension, enhanced compensation interest, and other related outgoings.

Which ITR form should I use to claim a Section 57 deduction?

The family pension deduction under Section 57(iia) can be claimed in ITR-1. For any other deduction under this section, such as those relating to dividend income, rental machinery income, or enhanced compensation, you need to file ITR-2 or a higher form, since ITR-1 does not support these schedules.

Is the family pension deduction available under the new tax regime?

Yes. Section 57(iia) is one of the few deductions preserved under the new tax regime, and it was actually increased from Rs 15,000 to Rs 25,000 from FY 2024-25 onward for taxpayers under this regime.

Can I claim depreciation on a rented-out building under Section 57?

Depreciation under Section 57(ii) applies to plant, machinery, and furniture. For a building, depreciation is allowed only if you are the actual owner of the property, not if you are merely subletting it.

Can I deduct expenses against my lottery or gambling winnings?

No. Section 58(4) specifically disallows any expenditure against winnings from lotteries, card games, races, or betting. These are taxed at a flat 30% on the full amount received, regardless of what you spent.

How much can I deduct against dividend income after the 2020 amendment?

Only interest paid on money borrowed to purchase the shares or mutual fund units, and that too limited to 20% of the gross dividend or income received during the year. No other expense against dividend income is allowed.

Is the deduction on enhanced compensation interest fixed, or based on actual expense?

It is a flat 50% of the interest received on enhanced compensation, regardless of what you actually spent to earn or recover that interest.

Final Word

Section 57 of the Income Tax Act gives genuine relief on income that would otherwise be taxed in full, but each clause comes with its own cap and condition. Whether you are a pensioner deciding between the old and new tax regime, an investor who borrowed money to buy shares, or someone who has just received enhanced compensation from the government, checking which clause applies to your situation before filing your return can meaningfully lower your final tax outgo. When the numbers involved are significant, it is worth having a tax professional confirm the applicable deduction against your specific documentation.