India’s young chess prodigy, D. Gukesh, has achieved an extraordinary milestone by winning the 2024 FIDE World Championship, earning a record-breaking prize of Rs 11.45 crore. While this remarkable accomplishment has brought immense pride to the nation, it also raises an important question: Will this substantial prize money be taxed under Indian law?
To answer this, we must dive into the complexities of Indian tax regulations and understand how they apply to such earnings.
Tax Exemption Under Section 10(17A) of the Income Tax Act
Under Section 10(17A) of the Income Tax Act, 1961, any payment made as an award or reward in the public interest is exempt from tax if:
- It is granted by the Central Government.
- It is granted by a State Government.
- It is granted by a body approved by the Central Government.
However, Gukesh’s prize money was awarded by the International Chess Federation (FIDE), the global governing body for chess. Since FIDE is not recognized as a body approved by the Central Government of India, the exemption under Section 10(17A) is not applicable in this case.
Taxation on Prize Money
Flat Tax Rate for Winnings
Prize money earned from winning competitions or games falls under the category of “income from winnings” in Indian tax law. According to CA (Dr.) Suresh Surana:
- Winnings are taxed at a flat rate of 30% under the Income Tax Act.
- This tax is levied on the gross winnings, meaning no deductions are allowed for expenses incurred in earning this income.
Effective Tax Rate Under Different Regimes
- New Tax Regime:
- Base Tax Rate: 30%.
- Surcharge: 25%.
- Health and Education Cess: 4%.
- Effective Tax Rate: 39%.
- Approximate Tax Liability: Rs 4.46 crore.
- Old Tax Regime:
- Base Tax Rate: 30%.
- Maximum Surcharge: 37%.
- Health and Education Cess: 4%.
- Effective Tax Rate: 42.744%.
- Approximate Tax Liability: Higher than the new regime.
Thus, under either regime, Gukesh faces a significant tax liability, with the new regime offering a slightly lower tax burden.
Breakdown of Tax Liability
| Details | New Regime | Old Regime |
|---|---|---|
| Base Tax Rate | 30% | 30% |
| Surcharge | 25% | 37% |
| Health and Education Cess | 4% | 4% |
| Effective Tax Rate | 39% | 42.744% |
| Approximate Tax Amount (₹) | 4.46 crore | Higher than 4.46 crore |
Implications for Gukesh
- Non-Applicability of Tax Exemptions:
- Since the award is not granted by an Indian government body or an approved organization, Gukesh cannot benefit from tax exemptions under Section 10(17A).
- Flat Taxation on Winnings:
- The flat 30% tax rate ensures that Gukesh’s winnings will be taxed irrespective of his total income or tax slab.
- Choice of Tax Regime:
- Opting for the new tax regime could marginally reduce his tax liability compared to the old regime.
- Tax Deduction at Source (TDS):
- FIDE or the tournament organizers may deduct TDS on the prize money before disbursing the amount to Gukesh. He can claim credit for this deduction when filing his tax return.
Legal and Financial Perspective
Gukesh’s case highlights the importance of understanding tax regulations, especially for athletes and professionals earning significant prize money. While the government provides exemptions for certain awards in the public interest, international winnings are taxed rigorously.
To minimize tax liability and ensure compliance, winners like Gukesh should:
- Consult a qualified tax advisor.
- Explore opportunities for legitimate tax planning within the framework of Indian laws.
READ ALSO: How D Gukesh’s ₹11.45 Crore Prize Shrinks by ₹4 Crore: The Tax Math…
FAQs
What is Section 10(17A) of the Income Tax Act?
Section 10(17A) provides tax exemptions for awards or rewards granted in the public interest by the Central Government, State Governments, or approved bodies.
Why doesn’t Gukesh’s prize money qualify for exemption under Section 10(17A)?
The prize was awarded by FIDE, an international body not recognized by the Indian government as an approved organization for tax exemption.
How is prize money from competitions taxed in India?
Prize money is taxed at a flat rate of 30%, with additional surcharges and cess based on the taxpayer’s income and regime.
What is the difference between the old and new tax regimes?
The old regime has higher surcharges (up to 37%), resulting in a higher effective tax rate. The new regime offers a lower surcharge cap (25%) and a slightly reduced tax burden.
Can Gukesh deduct expenses related to his participation in the championship?
No, the tax on winnings is calculated on the gross amount, and no deductions for expenses are allowed.
How much tax will Gukesh pay on his prize money?
Under the new regime, Gukesh’s tax liability will be approximately ₹4.46 crore. Under the old regime, it would be higher due to the higher surcharge.
Is there any way to reduce the tax liability on such winnings?
Taxpayers can explore legal tax-saving avenues such as investing in tax-exempt instruments or charitable contributions, but these may have limited applicability to prize money.
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