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What are Windfall Gains? ( Definition as per Income Tax Act)
Windfall Gains are any kinds of benefits received suddenly. It includes winnings in lottery, prizes, tips, baksis, jitauri and similar gains received. However it does not include gifts, prizes and awards received in relation to Employment as these gains are included within Employment Income. The provision of TDS on Windfall Gain in Nepal is stated in the Section 88A of Income Tax Act 2058.
Examples of Windfall Gain in Nepal.
- Winnings in Case of Lottery System organized by any party.
- Winnings on scratch and win system.
- Winnings on special events based on your transaction( ex winnings of 1Kg of Gold on Annual Subscription of Kantipur Newspaper)
- Winnings based on competition ( Voice of Nepal, Nepal Idol, Who wants to be a Millionaire.)
- Winnings on Games like Casino.
- Jitauri ( Tips) provided by winners.
- Any other winnings Received Suddenly.
What is The TDS Rate for Windfall Gain in Nepal?
Section 88A of Income Tax Act deals with TDS on Windfall Gain in Nepal. The TDS rate in case of windfall gain is 25%.
What are the Exemptions in Windfall Gain?
It is to be Noted that not every Windfall gains attract TDS @ 25%. Subsection 2 of Section 88A of Income Tax Act contains the provisions of exempting whole gain as Windfall Gain ( i.e. No TDS on windfall gain in Nepal and also not included as income as per Income on Windfall Gain) when some criteria are fully satisfied. The criteria for Exemption of Windfall gain are listed below.
- The windfall gain should be Prize. No other forms of windfall gains like gifts, awards, etc are included for exemption.
- The Monetary Value of the prize should not exceed Rs 5 lakhs. Prize above Rs 5 lakhs are not exempted.
- The prize should be provided for the person’s contribution in the fields of literature, arts, culture, sports, journalism, science & technology and Public Administration.
- The prize should be National or International level prize.
Example of TDS on Windfall Gain in Nepal ( How Does TDS on Windfall Gain in Nepal work?)
Ram had taken part in a lottery competition organized by Samsung Nepal. The Lottery system included a purchase of any products of Samsung from the Authorized Samsung Store. Ram had purchased a Washing machine worth Rs 75,000. The Lottery Prize was a cash of Rs 1,00,000. The Lottery winner was announced as per Random Selection Basis.
Fortunately, Ram won the lottery!!. In this case, the authorized dealer of Samsung Nepal from whom the cash payment will be made has to deduct 25% of the winnings( ie Rs 25,000) and make the payment of Rs 75000 to Mr Ram. As TDS on Windfall Gain is a Final Withholding, Ram will not need to show the gain as Income in his Final Tax Computation and the TDS deducted of Rs 25,000 cannot be used by him to set off other tax liabilities arisen from other sources of Income.
Example 2 on TDS on Windfall Gain in Nepal.
Let us suppose, Hari had been actively Involved in providing Awareness Programs regarding health and Sanitation in the remote areas of Nepal. Government of Nepal Recognized this contribution of Mr. Hari and provided him with a “Influential Personality” Award along with Cash prize of Rs 4 lakhs. In this case, as all the exemption criteria of TDS on Windfall Gain is satisfied, no TDS @ 25% is levied on Mr Hari and no Windfall Gain tax is levied to Hari (meaning it becomes an Exempt Income for him).
Example 3 on TDS on Windfall Gain in Nepal. ( No Exemption Example)
Mr. A, a astronomical scientist was awarded Rs 3,50,000 as a recognition of his work in the fields of Science and technology and also for his contribution in that field. However, the award was provided by a Private Organization and it was not a national level prize. In such case, as all the windfall gain TDS exemption criteria are not fulfilled, the organization has to deduct TDS @ 25%.
Is TDS @ 25% is attracted when there is a transfer of Asset within 3rd Generation? ( transfer of parental property)
Though it may seem as if transfer of assets between parents and siblings attracts TDS @ 25%, such transfer are treated as disposal and gain is calculated only when such transferred property is sold to other party. Details regarding Disposals in later post.
NOTE: Nepal Government can exempt Windfall Gain of any value by publishing a notification in Nepal Gazette for National or International Prize awarded for the person’s contribution in the fields of literature, arts, culture, sports, journalism, science & technology and Public Administration.
Comment From the Author regarding TDS on Windfall Gain in Nepal
Contradicting Provision regarding Gift.
Treatment of Gift as per Section 10 of Income Tax Act.
Section 10 of Income Tax Act defines all kinds of gifts, inheritance and scholarships obtained other than based on employment, business and investment as Exempt items and levies no tax on the same.
Treatment of Gift as per Section 88A of the Act.
Here in Section 88A, it defines any gifts, lottery, tips, winnings and prizes obtained other than employment, business and investment as windfall gain as taxes at 25%.
So, there has been a much debate between Taxpayer and The Tax Authority regarding how such Gains are to be dealt with. Any contradicting provisions present in the act has to be revised and amended as soon as possible.
In case any taxpayer does not deduct TDS on Windfall Gain in Nepal, fee @ 2.5% and fines @ 15% is levied. TDS on Windfall Gain in Nepal