Tax on Lottery, Online Games and Crypto Income: 30% Under the Income Tax Act 2025 (Section 194)

Section 194 of the Income-tax Act, 2025 taxes a short list of incomes at a flat rate, whatever your slab. Winnings from lotteries, crossword puzzles, races, card games and betting, net winnings from online games, and income from transferring a virtual digital asset (crypto, NFTs and similar) are each taxed at 30%. Patent royalty and carbon credits are taxed at 10%, and life insurance business profits at 12.5%.

The part that catches people is what is not allowed. For winnings and crypto there is no deduction for expenses, and for crypto a loss cannot be set off against any other income or carried forward. This guide covers each row of the section 194(1) Table, the online game net winnings formula in rule 135, and the related TDS in section 393. Figures are from the Act as amended by the Finance Act, 2026, and the Income-tax Rules, 2026. The examples use tax year 2026-27 and leave out surcharge and cess.

What does section 194 of the Income-tax Act, 2025 cover?

Section 194(1) applies "irrespective of anything contained in any other provision of this Act". Your tax for the year is the sum of two parts: (a) tax on the special income at the rate in column D, and (b) the tax you would have paid if your total income were reduced by that special income. So the special income is carved out and taxed on its own, and the rest of your income is taxed normally.

Sl. No.	Income	Rate	Key condition
1	Winnings (other than from an online game) from lottery, crossword puzzle, race including horse race, card game and other games, gambling or betting	30%	Nil in column E, but section 94(4) bars deductions
2	Royalty on a patent developed and registered in India, for a resident patentee	10%	No expenditure or allowance; option exercised in the prescribed manner by the return due date
3	Income from transfer of carbon credits	10%	No expenditure or allowance
4	Any income from transfer of a virtual digital asset	30%	Only cost of acquisition deductible; no loss set-off or carry forward
5	Net winnings from any online game, computed as prescribed	30%	Nil in column E
6	Profits and gains from life insurance business	12.5%	Nil

The assessee for every row is "any person", except Sl. No. 2, which is limited to a resident who is a patentee.

How are lottery, race, card game and betting winnings taxed?

Under Sl. No. 1, winnings from a lottery, crossword puzzle, race (including a horse race), card game or other game of any sort, or gambling or betting of any form are taxed at 30%. "Lottery" includes winnings from prizes awarded by draw of lots, by chance or in any other manner under any scheme or arrangement, by whatever name called (section 92(5)(e)). Online games are handled separately under Sl. No. 5.

Section 94(4) says no deduction for any expenditure or allowance related to such income is allowed under the Act. The cost of the ticket, travel, or the losses on other bets cannot be deducted from the winnings. There is one carve-out: under section 94(5), the owner of horses kept for running in races can still compute income from the activity of owning and maintaining them in the normal way. Sl. No. 1(c) also excludes that activity.

"Horse race" means a race on which wagering or betting may be lawfully made (section 94(6)).

How are online game winnings taxed, and what is "net winnings"?

An "online game" is a game offered on the internet and accessible by a user through a computer resource, including any telecommunication device (section 194(2)(h)). The 30% applies to net winnings, not to every rupee withdrawn. For the whole year, rule 135(1) gives:

Net winnings = (A + D) minus (B + C)

• A: total withdrawn from the user account during the tax year
• B: total non-taxable deposits made by you during the year
• C: opening balance of the user account at the start of the year
• D: closing balance at the end of the year

Rule 135(9) adds the detail that matters for users of several apps or accounts:

• All accounts of a user with the same intermediary are added together, and transfers between them are not withdrawals or deposits (rule 135(9)(c) and (d)).
• Bonus, referral money or promotional credit that can only be used for playing is ignored in B, C and D (rule 135(9)(e)). If it is later allowed to be withdrawn, it is treated as a taxable deposit at that time (rule 135(9)(f)).
• Winnings paid in kind, or outside the user account, are treated as deposited and withdrawn at the same moment, so they count in A (rule 135(9)(b)).

How is crypto and other virtual digital asset income taxed?

Sl. No. 4 taxes "any income from the transfer of any virtual digital asset" at 30%. A virtual digital asset (VDA) is defined in section 2(111): digital information, code or tokens generated through cryptographic means with a representation of value that can be transferred, stored or traded electronically, non-fungible tokens, any crypto-asset on a cryptographically secured distributed ledger, and anything else the Central Government notifies. Indian and foreign currency are excluded. For this row, "transfer" has the section 2(109) meaning and applies whether or not the VDA is a capital asset (section 194(2)(n)).

Two conditions in column E decide your tax:

1. Only cost of acquisition is deductible. Exchange fees, internet, mining equipment or advisory fees are not. No allowance and no set-off of any loss is allowed in computing this income.
2. A VDA loss is isolated. A loss from transferring a VDA cannot be set off against any other income computed under the Act and cannot be carried forward to later tax years.

How is the tax worked out? Three examples for tax year 2026-27

Example 1: lottery prize

Assumption: Ravi wins Rs 8,00,000 in a lottery in tax year 2026-27. Tickets for the draw cost him Rs 2,000.

Step	Working	Rs
Winnings	Prize received	8,00,000
Deduction for ticket cost	Not allowed (section 94(4))	0
Tax at 30%	8,00,000 x 30%	2,40,000
TDS by payer	Single payment is above the Rs 10,000 limit in section 393(3), Sl. No. 1; tax is deducted on the whole amount	2,40,000
Cash Ravi receives	8,00,000 minus 2,40,000	5,60,000

Ravi's other income is taxed separately at normal rates under section 194(1)(b). The prize is reported as income and the TDS is claimed as credit.

Example 2: online game account with several withdrawals

Assumption: Meena starts the year with Rs 10,000 in her game account (C). She deposits Rs 50,000 of her own money (B), all before the first withdrawal, and withdraws Rs 70,000 and then Rs 50,000 during the year (A = 1,20,000). The closing balance is Rs 20,000 (D). Tax at 30% as per section 194(1), Sl. No. 5.

Event	Formula (rule 135)	Net winnings Rs	Tax at 30% Rs
First withdrawal of 70,000	A minus (B + C) = 70,000 minus 60,000 (sub-rule 2)	10,000	3,000
Second withdrawal of 50,000	A minus (B + C + E) = 1,20,000 minus (50,000 + 10,000 + 10,000) (sub-rule 4)	50,000	15,000
End of year balance	(A + D) minus (B + C + E) = 1,40,000 minus (50,000 + 10,000 + 60,000) (sub-rule 6)	20,000	6,000
Total	Matches the full-year formula: (1,20,000 + 20,000) minus (50,000 + 10,000) = 80,000	80,000	24,000

The platform deducts tax at each withdrawal and at year end under section 393(3), Sl. No. 2, and the three amounts add up to the annual figure. The 30% rate is from section 194(1); section 393 says "rates in force".

Example 3: crypto gain, then a loss on another coin

Assumption: Karan sells coin X for Rs 1,80,000, bought earlier for Rs 1,20,000, and pays Rs 2,000 in exchange fees. In the same year he sells coin Y for Rs 90,000, bought for Rs 1,30,000.

Step	Working	Rs
Coin X gain	Sale 1,80,000 minus cost 1,20,000; fees not deductible	60,000
Coin Y loss	90,000 minus 1,30,000 = loss of 40,000	Cannot be set off or carried forward
Taxable VDA income	Only the 60,000 gain is counted	60,000
Tax at 30%	60,000 x 30%	18,000
TDS on coin X sale (if deducted)	1% of 1,80,000 under section 393(1), Sl. No. 8(vi)	1,800

Karan pays tax on Rs 60,000 even though his net position across both coins is a gain of only Rs 20,000. Whether TDS applied depends on the payer and the threshold below.

What TDS applies to these incomes under section 393?

Payment	Where	Threshold
Winnings from lottery, crossword, card games, gambling or betting	Section 393(3), Sl. No. 1	Rs 10,000 for a single transaction; deduction on the entire amount
Online game winnings	Section 393(3), Sl. No. 2 and Note 1; rule 135(2)-(7)	On net winnings at each withdrawal and at year end
Horse race winnings	Section 393(3), Sl. No. 3	Rs 10,000 for a single transaction; payer is a bookmaker or licensed race operator
Consideration for transfer of a VDA	Section 393(1), Sl. No. 8(vi)	1%; thresholds in section 393(4), Sl. No. 12

For VDA, the exempt limit is Rs 50,000 in the year where an individual or HUF payer has no business or profession income, or has turnover or receipts under Rs 1 crore (business) or Rs 50 lakh (profession) in the preceding year. For every other payer it is Rs 10,000. Where winnings or VDA consideration are wholly in kind, or the cash part is not enough to cover the tax, the payer must make sure the tax is paid before releasing the winnings or consideration (section 393(3), Note 2; section 393(1), Note 6). For online game winnings and VDA consideration that are not wholly in kind, section 476(1)(b) makes failure to pay or ensure payment of the tax a punishable offence, so payers should treat this as a hard stop.

What about patent royalty and carbon credits?

A resident patentee can choose 10% on royalty from a patent developed and registered in India (section 194(1), Sl. No. 2). "Developed" means at least 75% of the expenditure on the invention was incurred in India by the eligible assessee (section 194(2)(c)). The option is exercised by furnishing Form 65 on or before the due date for the return under section 263(1)(c) (rule 134). No expenditure or allowance is allowed against this income. If you take the option and later do not offer the income this way in any of the next five tax years, you lose the benefit for five tax years after that default.

Income from transferring carbon credits (Sl. No. 3) is taxed at 10% with no deduction for expenditure or allowance. A carbon credit is a one-tonne reduction of carbon dioxide emissions or equivalent gases validated by the United Nations Framework on Climate Change and tradable at market price (section 194(2)(a)).

If TDS was already deducted, do I still report the income?

Yes. TDS is only a credit against the tax worked out under section 194(1); it does not change what is taxable. A payer that deducted tax on a lottery prize, online game withdrawal or VDA sale has paid part or all of your 30% in advance. You still report the income and claim the credit, and any shortfall is yours to pay. Match the credits with your tax statements before filing, because a VDA sale with no TDS (for example below the section 393(4) threshold) is still fully taxable.

Real-life situations

Arjun and the bonus credit. Arjun signs up to a gaming app and gets Rs 5,000 as a joining bonus that can only be used to play. He loses it and later wins Rs 3,000 from his own deposits. Under rule 135(9)(e), the bonus is ignored when net winnings are computed, so it does not inflate his opening balance or deposits and he is not taxed on money he never could withdraw.

Sunita runs two accounts. Sunita has two accounts on the same gaming platform and moves Rs 20,000 from one to the other. Rule 135(9)(d) says that move is neither a withdrawal nor a deposit. Her net winnings are computed on the combined balances, not account by account.

Vikram, a CA's client. Vikram, a salaried employee, sold a token at a loss and wants to reduce his salary tax with it. He cannot. Sl. No. 4(b) of the Table blocks any set-off of a VDA loss against income computed under any provision of the Act and any carry forward.

Common mistakes

• Deducting costs. Ticket cost, betting stakes on losing bets and exchange fees are not deductible. Only the cost of acquisition counts for a VDA.
• Netting crypto losses against gains from other coins or other income. The Table disallows set-off against any income computed under the Act, and carry forward.
• Taxing the whole withdrawal from a gaming account. Online games are taxed on net winnings under rule 135, not on gross withdrawals.
• Forgetting TDS credit. The tax a platform or payer deducted is credit against your 30%, not a separate cost. Match it to your annual statement.
• Missing the Form 65 date for patent royalty. The option has to be exercised by the return due date for that year.
• Treating the winnings as part of normal income. Under section 194(1)(a) the special income is taxed at the column D rate on its own, and only the rest of your income is taxed at normal rates under clause (b).

Quick reference

Item	Position	Source
Lottery, betting, card game winnings	30%, no deductions	Section 194(1), Sl. No. 1; section 94(4)
Online game net winnings	30% on rule 135 net amount	Section 194(1), Sl. No. 5; rule 135
VDA transfer income	30%, cost only, no loss carry forward	Section 194(1), Sl. No. 4
Patent royalty	10%, option by Form 65	Section 194(1), Sl. No. 2; rule 134
Carbon credit transfer	10%	Section 194(1), Sl. No. 3
Life insurance business profits	12.5%	Section 194(1), Sl. No. 6
TDS on winnings (non-online)	Rs 10,000 single transaction limit	Section 393(3), Sl. No. 1
TDS on VDA consideration	1%	Section 393(1), Sl. No. 8(vi)

Where this is in the Act

• Section 194(1) and (2): rates, conditions and definitions (online game, carbon credit, patent terms)
• Section 94(4) to (6): no deduction against winnings; horse owners; horse race meaning
• Section 92(5)(e): meaning of lottery
• Section 2(111): virtual digital asset; section 2(109): transfer
• Section 393(1) Sl. No. 8(vi) with Notes 4 and 6, and section 393(4) Sl. No. 12: TDS on VDA consideration
• Section 393(3) Sl. Nos. 1 to 3 with Notes 1 and 2: TDS on winnings
• Rule 135: net winnings from online games; rule 134: Form 65 for patent royalty
• Section 263(1): due date for the return; section 476: offence for non-payment of tax on online game winnings and VDA consideration

If you run a practice, clients with game, lottery or crypto income are usually the ones whose records are scattered across apps and exchanges. Finexo's practice management software helps you track which clients owe you statements and which returns are coming up. It does not compute the tax or file for you. For another section-level walk-through with a similar format, see our guide to TDS on rent under the Income-tax Act, 2025.

This article explains the Income-tax Act, 2025 (as amended by the Finance Act, 2026) and the Income-tax Rules, 2026. It is general information, not tax advice. Surcharge and cess are not covered. Confirm the position for a specific case with a qualified chartered accountant.