Why Online Gaming Income Now Faces Strict TDS Rules-and How to Stay Compliant
If you thought online gaming was only about fun and luck, the taxman has quietly joined the game & tracked your gaming wallet more closely than most people track their bank accounts. With Section 194BA and Rule 133 now fully operational, thousands of players are receiving AIS mismatch messages, refund adjustments, and even scrutiny notices. The rules are not difficult, but the way gaming apps function-constant deposits, withdrawals, bonuses, and losses – it creates confusion. This column simplifies what the law really says, where taxpayers go wrong, and how even genuine players end up with surprise tax demands.
Online Gaming Taxation Vs Gambling Taxation: Key Differences (The Shift from 194B to 194BA):
Prior to 1st April 2023, only winnings from any lottery, crossword puzzle, card/other game of any sort, gambling or betting of any form or nature was subject to TDS under Section 194B if the amount exceeds ₹10,000. Gaming platforms simply broke payouts into smaller chunks and escaped TDS. To plug this loophole, the government w.e.f. 01.04.2023 introduced Section 194BA and Section 115BBJ and created a separate compartment for taxation of income from online gaming. The most important change was that tax now applies not on gross winnings at the time of payment (as existing under section 194B) but on “net winnings” at withdrawal or year-end balance as computed using Rule 133 of Income Tax Rules-1962. The threshold of ₹10,000 is also gone for online gaming income. Every rupee of net winnings is now subject to TDS, even if the player never withdraws the amount. Section 194B continues to operate now for lotteries/gambling but not for online gaming income.
Net Winnings: The Heart of the New System:
Rule 133 provides a uniform formula: Net Winnings = (Amount Withdrawn + Closing Balance) – (Opening Balance + Deposits Made). This formula is used twice – once at the time of each withdrawal and again at the end of the financial year for balance remaining in the gaming wallet. Bonuses / promotional chips are not treated as ‘deposits’, so they cannot reduce net winnings. However, bonuses form part of closing balance, and hence indirectly increase net winnings in the formula.
When Is TDS Deducted?
Two situations trigger TDS under Section 194BA. First, at every withdrawal to the extent the withdrawal represents net winnings. Second, on 31st March of every year, on the net winnings still lying in the user’s gaming account. This second trigger is where most users get unexpected TDS entries in their AIS. “I never withdrew anything, so why TDS?” Because Rule 133 imposes year-end TDS on un-withdrawn winnings as well.
A Practical Example: How TDS Works Even When Later Losses Happen:
Take a simple real-life scenario. A user deposits ₹1,000 on 1 September 2025. By 30 September, his balance became ₹5,000, meaning he made ₹4,000 in net winnings. On 1 October he withdrew ₹3,000. At this point, the withdrawal is entirely out of winnings, so TDS is required on ₹3,000 at 30%. The platform deducts ₹ 900 and credits ₹2,100.
After the withdrawal, his balance becomes ₹2,000. Now suppose, he loses ₹1,900 between October and March, leaving a closing balance of ₹100 on 31 March 2026. Now Rule 133 applies again for year-end TDS. Opening balance for the year-end computation is the post-withdrawal balance of ₹2,000. Deposits after the withdrawal are zero. Closing balance is ₹100. Year-end net winnings therefore become: 0 + 100 – 2000 – 0 = negative figure. Since further losses cannot reduce tax already deducted, this negative amount is ignored and no additional TDS is required. Negative net winnings do not result in refund of TDS at the TDS stage – but they reduce taxable net winnings in the ITR. The taxable annual winning amount in the hands of the user for FY 2025-26 shall be Rs.2,100/- which is the taxable income under Section 115BBJ(& not Rs. 3,000 on which TDS is done).
This example explains an important point: players may have TDS in their AIS (i.e., on Rs. 3000) even though they finally ended the year with a loss or lesser profit (i.e., Rs.2100 in present case). Many will be eligible for refunds because tax was deducted earlier on withdrawals, but subsequent losses reduced the net winnings for the year. A lower final net winning may allow refund if earlier TDS exceeds the final tax liability.
Surcharge and Cess on Gaming Income:
Although TDS is deducted at a flat 30% without surcharge, the tax on gaming income under Section 115BBJ is 30% plus applicable surcharge and 4% cess. If the taxpayer’s total income crosses ₹50 lakh, surcharge becomes applicable. Many players assume that because platforms deduct TDS at 30%, their tax is fully paid. But surcharge & cess liability may still arise at the return-filing stage.
Common Errors Leading to AIS Mismatches and Notices:
Most notices arise from simple mistakes. Some players withdraw small amounts multiple times and do not realise that each withdrawal may include an element of net winnings. Others ignore the closing balance on 31 March, thinking that only withdrawals attract TDS. Many users enter incorrect PAN details on gaming apps, and the AIS captures income under that PAN regardless of who actually played. The biggest mistake, however, is claiming refund of TDS without declaring gaming income. The CPC system now automatically adjusts refunds in such cases, and repeated mismatches can invite a scrutiny notice under Section 143(2).
Gaming vs Gambling: Not the Same for Tax Purposes:
Online gaming is governed by Sections 115BBJ (Taxation) and 194BA (TDS), whereas gambling, lottery, and betting are covered by Sections 115BB and 194B. Winnings from gambling are taxed on gross payouts, while online gaming uses the net winnings formula. The two systems are different, but many taxpayers confuse them and under-report income. This also triggers notices.
A Final Word:
Understanding the online gaming taxation framework under Section 194BA is now essential for all players. Players should check their AIS carefully and reconcile all entries with statements from gaming platforms. Whether one plays occasionally or regularly, compliance with Section 194BA is unavoidable. As long as players track their net winnings correctly and report them honestly, they can avoid unexpected notices and even claim refunds where losses occur after initial withdrawals. In short, enjoy the game, but keep an eye on the tax rules running silently in the background.
[Views expressed are the personal view of the author. Readers are advised to seek professional advice before taking any decisions. Readers may forward their feedback & queries at nareshjakhotia@gmail.com. Other articles & response to queries are available at www.theTAXtalk.com]
