Deemed Income ut1
What is Deemed Income?
Deemed income refers to income that is not actually received by a person but is still considered taxable
by the government. The Income Tax Act treats certain types of benefits or earnings as “deemed income”
to prevent tax avoidance.
Why Deemed Income?
Some people try to reduce tax by receiving income in indirect ways. To stop this, the tax law includes
certain incomes that are not actually received but are still taxed.
Examples of Deemed Income
1. Unexplained Cash Credits (Section 68)
If a person receives money, but they cannot explain where it came from, the tax department considers it
as income.
Example:
Mr. A deposits ₹10 lakh in his bank but cannot prove where it came from. The tax department will treat
it as his income.
2. Unexplained Investments (Section 69)
If a person buys something (like property or shares) but cannot explain the source of money, the tax
department will count it as income.
Example:
Mr. B buys a house worth ₹50 lakh but cannot show how he got the money. The tax department will add
₹50 lakh to his income and tax it.
3. Unexplained Expenditure (Section 69C)
If a person spends a large amount of money but cannot explain where the money came from, it will be
taxed as income.
Example:
Mr. C has a lavish wedding function costing ₹30 lakh but cannot show any income source. The tax
department will treat ₹30 lakh as his income and tax it.
4. Gifts Above ₹50,000 (Section 56(2)(x))
If a person receives a gift of more than ₹50,000 in a year from someone who is not a relative, the full
amount is taxed as income.
Example:
Mr. D gets a gift of ₹1 lakh from a friend. Since it is above ₹50,000 and from a non-relative, the full ₹1
lakh will be added to his income and taxed.
5. Clubbed Income (Under Clubbing Provisions)
Sometimes, income is earned by a family member, but the tax law considers it as the income of the
original person.
Example:
Mr. E transfers money to his wife, who earns interest on it. Since the money was originally Mr. E’s, the
interest will be added to his income.
Why is Deemed Income Taxed?
• To prevent misuse of ownership.
• To ensure fair taxation of income.
• To close legal loopholes in transfer of income/assets.
• To ensure people don’t escape tax by shifting income to others.
Conclusion
Deemed income ensures that people do not avoid tax by hiding income sources. Even if the money is
not directly received, it is still taxable under certain conditions.
