Deductions Allowed Under ‘Income from Other Sources’

Not every rupee you earn fits neatly into salary, house property, business income, or capital gains. Interest from a savings account, dividends from shares, a family pension, or rent from letting out machinery – all of this lands under the residual head, Income from Other Sources. But taxing the entire gross receipt would be unfair, since earning that income often costs money too. That’s where Section 57 of the Income Tax Act, 1961 steps in, allowing specific, well-defined deductions before the final tax liability is worked out.

For B.Com students studying Income Tax Law and Practice, Section 57 is a favourite exam topic precisely because it’s compact yet layered – a handful of clauses, each covering a distinct real-world situation. Let’s unpack what can actually be deducted, and why the law draws the line where it does.

Why “income from other sources” needs its own deduction rules 🔗

The Income Tax Act classifies income under five heads, and “Income from Other Sources” is the catch-all for anything that doesn’t belong to the other four. This includes dividends, interest on securities and deposits, family pension, income from letting out plant and machinery, lottery winnings, and gifts exceeding specified limits.

Because this head absorbs such varied income types, a one-size-fits-all deduction wouldn’t work. Instead, Section 57 lists out specific, itemised deductions tied to particular kinds of income – a structural choice that keeps the provision precise rather than open-ended.

Commission for realising dividend or interest income 🔗

If you earn dividend income or interest on securities, you may need a banker or an agent to actually collect that money on your behalf. Section 57(i) allows you to deduct any reasonable commission or remuneration paid for this collection service. The key word is reasonable – the deduction isn’t unlimited; the assessing officer can disallow an amount that looks excessive relative to the service rendered, as explained by 5paisa’s breakdown of Section 57.

For instance, if you hold debentures and pay a small fee to your bank for realising the periodic interest, that fee is deductible against the interest income you report.

Interest on money borrowed for dividend income 🔗

A related provision, introduced through an amendment effective from April 2021, allows a deduction for interest paid on money borrowed specifically to invest in shares or mutual fund units, when the return comes back as dividend income. However, this deduction is capped: it cannot exceed 20% of the dividend or mutual fund income earned during the year, as clarified by ClearTax’s explanation of the provision. This cap exists because dividend income can fluctuate year to year, while interest liability on a loan stays fixed – the 20% ceiling prevents the deduction from wiping out the taxable income entirely in a low-dividend year.

Repairs and insurance on let-out machinery, plant, or furniture 🔗

Suppose you own machinery, plant, or furniture and let it out on rent – with or without a building attached – and the rental income falls under “Income from Other Sources” rather than business income. Section 57(ii) allows you to deduct:

• Current repair costs incurred on the let-out asset during the year
• Insurance premium paid to protect the asset against damage or loss
• Depreciation, provided you are the legal owner of the asset

This mirrors the logic used for house property and business income – an asset that generates taxable income should also get credit for the genuine upkeep costs behind that income. A landlord renting out a fully furnished flat with air conditioners and furniture, for example, can claim repair and insurance costs on those fittings against the rental receipts attributable to them.

Any other expense wholly and exclusively for earning the income 🔗

Section 57(iii) is the broadest clause in this section, and also the one most frequently tested and litigated. It permits a deduction for any expenditure, other than capital expenditure or personal expenses, laid out wholly and exclusively to earn income taxable under this head.

This could include legal fees paid to recover overdue rent on a let-out asset, or accountant’s fees for managing miscellaneous income, as outlined by CallMyCA’s discussion of Section 57(iii). Two conditions matter here, and courts have repeatedly tested both:

The expense must be revenue in nature, not capital 🔗

Buying a new asset or making a permanent improvement is capital expenditure and stays outside Section 57(iii), no matter how directly it relates to the income.

The expense must be wholly and exclusively for earning that specific income 🔗

A mixed personal-and-income-related expense doesn’t qualify. And crucially, if the underlying income itself is exempt from tax, the expenses incurred to earn it cannot be deducted either – you can’t claim a deduction against income that was never going to be taxed in the first place.

Standard deduction on family pension 🔗

When a government or private sector employee passes away, their legal heirs often continue to receive a monthly payment from the former employer. This is family pension, and because there’s no employer-employee relationship between the payer and the recipient, it’s taxed as “Income from Other Sources” rather than salary – which also means the salary standard deduction doesn’t apply here.

Instead, Section 57(iia) provides its own standard deduction: the lower of one-third of the family pension received, or a fixed ceiling amount. This ceiling has changed with recent budget announcements. Under the old tax regime it remains ₹15,000, while under the new tax regime it was raised to ₹25,000 from FY 2024-25 onward, as confirmed in the government’s official announcement on revised standard deductions.

Take a practical example: if a family pension of ₹90,000 is received in a year, one-third works out to ₹30,000. Under the new regime, the deduction is capped at ₹25,000, leaving a taxable family pension of ₹65,000. Under the old regime, the cap is ₹15,000, leaving ₹75,000 taxable – a meaningful difference for pensioner households deciding between the two regimes, as detailed in the CBDT’s e-filing validation rules for the current assessment year.

What family pension deduction doesn’t cover 🔗

It’s worth being precise here since students often confuse the two: family pension received by legal heirs is different from a pensioner’s own pension, which is taxed as salary and eligible for the ₹75,000 standard deduction under Section 16. Family pension gets the separate, smaller deduction under Section 57(iia) instead, as noted by TATA AIG’s overview of Section 57. One exception worth remembering: family pension received by dependants of armed forces personnel who died in the course of duty, or who were awarded gallantry honours like the Param Vir Chakra or Maha Vir Chakra, is fully exempt from tax and doesn’t even reach the Section 57(iia) calculation.

Interest on enhanced compensation 🔗

One more deduction worth knowing: when a taxpayer receives interest on compensation or enhanced compensation – typically in land acquisition cases – that interest is taxable under “Income from Other Sources” in the year of receipt. Section 57(iv) allows a flat 50% deduction on this interest income, without requiring proof of any actual expenditure. This deduction exists because such interest often accumulates over several years of litigation before being paid out in a lump sum, and taxing the full amount without relief would be disproportionately harsh.

What Section 57 does not allow 🔗

Understanding the boundary is just as useful as knowing the deductions themselves. Section 58 expressly disallows certain claims – personal expenses, capital expenditure, and interest or amounts payable outside India without tax deduction at source are excluded from Section 57 relief. Winnings from lotteries, crossword puzzles, card games, and betting also get no deduction whatsoever, even for genuine expenses incurred in earning them; the entire winning amount is taxed at a flat rate under a separate provision.

Putting it together 🔗

Section 57 essentially draws a line between income that arrives with zero associated cost and income that requires genuine effort or expenditure to earn. A retiree’s family pension, a small investor’s dividend collection charges, a landlord’s insurance premium on rented-out furniture – each gets a tailored deduction rather than a blanket rule. For anyone preparing computation problems in Income Tax Law and Practice, the trick is matching the right clause to the right fact pattern, then checking whether Section 58’s exclusions apply before finalising the deduction.

What do you think? If tax laws allowed a full deduction for every expense related to “Income from Other Sources,” instead of these specific clauses, would that make tax filing simpler or open the door to more disputes with the tax department? And should the family pension deduction be indexed to inflation rather than fixed at a flat rupee ceiling?

References

1. https://www.5paisa.com/blog/deductions-under-section-57-of-the-income-tax-act
2. https://cleartax.in/s/section-57-of-the-income-tax
3. https://callmyca.com/blog/section-57-iii-deduction-for-expenses-to-earn-income-from-other-sources
4. https://www.newsonair.gov.in/standard-deduction-for-salaried-employees-increased-to-rs-75000-under-new-tax-regime
5. https://www.incometax.gov.in/iec/foportal/sites/default/files/2026-05/CBDT_e-Filing_ITR%201_Validation%20Rules_AY%202026-27.pdf
6. https://www.tataaig.com/health-insurance/section-57-of-income-tax-act