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

Online gaming industry in India has seen unprecedented growth in the past few years. From live streaming of video games, to fantasy sports to online gambling, there are various types of online gaming that generate income. Users should know about the taxation of such revenue that varies depending on the nature of income.

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

Income of professional streamers is taxable under the head ‘business & profession’ on the net taxable income, i.e., income after considering business expenses. The individuals also have the option to offer income on presumptive basis under section 44ADA of the Act if their total income is below ₹50 lakh in the previous year. This income is taxable at applicable slab rates in case of individuals and no tax is payable if income is below the maximum amount chargeable to tax i.e., ₹2.5 lakh.

Winnings from real money online games: Gaming platforms such as Dream11, Junglee Rummy, Ludo Empire, The Money Drop etc. provide players a chance to win real money. On these platforms, players pool money (wager amount or stake) into a gameplay and winnings are credited to the accounts of the player who wins the wager or stake. The player is free to transfer the winnings to his/her bank account or to use it for further gameplays. Income from winnings of real money from online games is taxable under the head “Income from other sources” under section 115BB of the Act. Unlike income of professional streamers, no deductions are allowed, and tax is chargeable on the gross winning amount credited to the player’s account.

Income of winnings from real money online games is taxable at a flat rate of 31.2% irrespective of the quantum of winnings. The income will be taxable irrespective of the fact that you used it for further gameplay or that your total income is below ₹2.5 lakh.

Joining bonuses and referral bonuses: Most real money online games provide a joining bonus to its players on log in and provide referral bonuses for referring friends. Now the nature of these amounts is different from that of prize winnings and accordingly, these are not taxable under section 115BB of the Act.

Income from joining bonuses and referral bonuses is taxable on net basis at applicable slab rates in case of individuals and no tax is payable if income earned is below the maximum amount chargeable to tax. For professionals, this income will be taxable under the head “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 yet to gain popularity in India. During these tournaments, sponsors distribute various merchandises to the participants and the winner takes home either cash or gift prize.

Winnings from gaming tournaments are taxed on the lines of winnings from online gaming under section 115BB of the Act.

Merchandise received by a professional is taxable under “Income from business & profession” irrespective 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 absolve you from taxation. Under section 64(1A) of the Act, income of minor child is clubbed with the income of the parent except when the income is on account of application of any skill, talent or specialized knowledge and experience. Given that online gaming has been held to be a game of skill by various courts, income of minor from online gaming will be taxable 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 income tax department. The chairman of CBDT stated that one gaming portal, with over 8 million users has distributed ₹58,000 crore in the last three years as the gross winning amount. The CBDT has urged winners of online gaming to file updated income tax returns (ITRs) and clear any income tax dues.

Since the tax lens is now pointed at online gamers, and non-reporting can lead to penalty of upto 200% of the tax amount, it is crucial to understand your tax liabilities and update the ITR

Neeraj Agarwala is partner at Nangia Andersen India.

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