What are the income streams of online gamers and how are they taxed?

The online gaming industry in India has experienced unprecedented growth in recent years. From live streaming of video games, to fantasy sports to online gambling, there are different types of online gaming that generate revenue. Users should be aware of the taxation of such income which varies according to the nature of the income.

Professional Streamer Earnings: Professional streamers are players who stream their games online through YouTube and earn on the streaming platform based on the number of views.

Income from professional streamers is taxable under the heading ‘business & profession’ on the net taxable income, ie the income after deduction of professional expenses. The individuals also have the option of presenting income on a presumptive basis under Section 44ADA of the Act if their total income is less than 50 lakh in the previous year. This income is taxable at the applicable sticky rates in the case of individuals and no tax is due if the income is less than the maximum tax amount, i.e., 2.5 million.

Winnings from Real Money Online Games: Gaming platforms like Dream11, Junglee Rummy, Ludo Empire, The Money Drop etc. offer players the chance to win real money. On these platforms, players pool money (wager amount or wager) in a gameplay and the winnings are credited to the accounts of the player who wins the wager or wager. The player is free to transfer the winnings to his/her bank account or use it for further gameplays. Income from real money winnings from online games is taxable under the heading “Income from other sources” under Section 115BB of the Act. player account.

Income from winnings from real money online games is taxable at a flat rate of 31.2%, regardless of the amount of winnings. The income is taxable regardless of whether you have used it for further gameplay or if your total income is lower 2.5 million.

Membership Bonuses and Referral Bonuses: Most real money online games offer players an entry bonus upon login and offer referral bonuses for referring friends. Now the nature of these amounts is different from that of prize gains and accordingly they are not taxable under Section 115BB of the Act.

Income from entry bonuses and referral bonuses is taxable on a net basis at the applicable flat rates in the case of individuals and no tax is due if the income earned is less than the maximum tax amount. For professionals, this income will be taxable under the heading “Income from business and profession” and for others it will be taxable as “Income from other sources”.

Distribution during gaming tournaments: Online gaming tournaments are still gaining popularity in India. During these tournaments, sponsors hand out various merchandise to the participants and the winner takes home cash or a gift.

Gambling tournament winnings are taxed at the level of online gambling winnings under Section 115BB of the Act.

Merchandise received by a professional is taxable under “Income from Business and Profession” regardless of the market value of the merchandise. For others, income is taxable under Section 56(2) of the Act only if the total market value of the merchandise exceeds 50,000.

Income of minors: Being a minor does not exempt you from tax. Under Section 64 (1A) of the Act, the income of a minor child is counted together with the income of the parent, except where the income arises from the application of any skill, talent or specialized knowledge and experience. Since online gambling has been considered a game of skill by various courts, minors’ income from online gambling will be taxed in their own hands depending on the nature of the income. Tax evasion in the gaming industry has recently come under the radar of the tax authorities. The chairman of CBDT stated that one gaming portal, with more than 8 million users, has spread 58,000 crore in the past three years as the gross winning amount. The CBDT has urged online gaming winners to file updated income tax returns (ITRs) and settle any income taxes.

Since the tax lens is now aimed at online gamers and failure to report can result in a fine of up to 200% of the tax amount, it is critical to understand your tax obligations and update the ITR

Neeraj Agarwala is a partner at Nangia Andersen India.

Neetu Brahma, Manager, Nangia Andersen India, contributed to this article.

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