Rule 135 of Income explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Rule 135 of the Income-tax Rules, 2026 prescribes four formulas for net winnings from online games — for the tax year under section 194(1) , and for the first withdrawal, each subsequent withdrawal and the year-end balance under section 393(3) — plus rules on bonuses, multiple accounts and payments in kind.
The four formulas
1. Net winnings for the tax year — sub-rule (1)
For the purposes of section 194(1) :
Net winnings = (A + D) − (B + C)
- A = aggregate amount withdrawn from the user account during the tax year;
- B = aggregate amount of non-taxable deposit made in the user account by the assessee during the tax year;
- C = opening balance of the user account at the beginning of the tax year;
- D = closing balance of the user account at the end of the tax year.
2. Net winnings in the first withdrawal — sub-rules (2) and (3)
For the purposes of section 393(3) :
Net winnings = A − (B + C)
- A = amount withdrawn from the user account;
- B = aggregate non-taxable deposit made by the owner of the account during the tax year, till the time of that withdrawal;
- C = opening balance at the beginning of the tax year.
Sub-rule (3): net winnings are zero if B + C is equal to or greater than A.
3. Net winnings in each subsequent withdrawal — sub-rules (4) and (5)
Net winnings = A − (B + C + E)
- A = aggregate amount withdrawn during the tax year till the time of the subsequent withdrawal, including that withdrawal;
- B = aggregate non-taxable deposit during the tax year till that time;
- C = opening balance at the beginning of the tax year;
- E = net winnings in the earlier withdrawal or withdrawals computed under sub-rule (2) or this sub-rule during the tax year till that time, if tax has been deducted under section 393(3) on the winnings in those withdrawals.
Sub-rule (5): net winnings are zero if B + C + E is equal to or greater than A.
The definition of E is conditional — earlier net winnings enter the subtraction "if tax has been deducted" on them. Winnings that were computed but not subjected to deduction do not reduce the current withdrawal's base, which prevents an earlier untaxed amount from sheltering a later one. Deduction records, not computation working papers, drive E.
4. Net winnings in the account at year end — sub-rules (6) and (7)
Net winnings = (A + D) − (B + C + E), with A, B, C and D as in sub-rule (1) and E as the earlier withdrawals' net winnings computed under sub-rule (2) or (4) on which tax has been deducted. Sub-rule (7): the result is zero if B + C + E is equal to or greater than A + D.
Definitions — sub-rule (8)
| Term | Meaning |
|---|---|
| Non-taxable deposit | The amount deposited by the user in his user account which is not taxable |
| Taxable deposit | Any amount deposited in the user account which is not a non-taxable deposit, and includes any amount paid directly to the user not through the user account |
| Withdrawal | Any amount withdrawn by the user from any user account |
The six clarifications — sub-rule (9)
(a) What a user account is
It includes every account of the user, by whatever name called, registered with the online gaming intermediary and to which any taxable deposit, non-taxable deposit or winnings are credited and from which withdrawals are debited. Naming an account a "wallet", "bonus balance" or anything else does not take it outside the rule.
(b) Payments in kind
Where there is payment to the user in kind or in cash, or partly in kind and partly in cash, which is not from the user account, the money equivalent is deemed to have been deposited as a taxable deposit in the user account and the equivalent amount deemed withdrawn at the same time, and is included in amount A.
This is what stops a prize car, a holiday or an off-platform cash payment from escaping the computation.
(c) Multiple accounts are aggregated
Where there are multiple user accounts of the same user, each is considered, and deposit, withdrawal or balance means the aggregate across all of them.
(d) Internal transfers are neither
A transfer from one user account to another user account of the same user maintained with the same online gaming intermediary is not a withdrawal or a deposit for deduction purposes.
Clause (d) protects transfers within the same intermediary. A movement of funds to an account with a different intermediary is outside the clause and is a withdrawal from the first and a deposit into the second, computed under each intermediary's own account records.
(e) Play-only bonuses are ignored
Where there is a taxable deposit in the form of bonus, referral bonus, incentives, promotional money or discount, by whatever name called, and it can only be used for playing the online games and not for withdrawal or any other purpose, that deposit is ignored for computing net winnings and is not included in amount B, C or D.
(f) Recharacterised bonuses come back in
Where such a bonus was excluded under clause (e) and is subsequently recharacterised and allowed to be withdrawn, it is deemed a taxable deposit at the time of recharacterisation, and it is deemed that the equivalent amount was deposited in the user account at that time.
Clauses (e) and (f) together are the practical heart of the rule for platform operators: the bonus ledger must record not only the credit but the moment its withdrawability changes.
Rule 133 and rule 135 compared
| Point | Rule 133 (1962) | Rule 135 (2026) |
|---|---|---|
| Annual computation provision | Section 194BA | Section 194(1) |
| Withdrawal-level deduction provision | Section 194BA | Section 393(3) |
| Annual formula | (A+D) − (B+C) | (A+D) − (B+C) |
| First withdrawal | A − (B+C) | A − (B+C) |
| Subsequent withdrawal | A − (B+C+E) | A − (B+C+E) |
| Bonus treatment | Play-only bonuses ignored | Ignored, with recharacterisation rule |
| Multiple accounts | Aggregated | Aggregated; same-intermediary transfers neutral |
The arithmetic has been carried across intact. What changed is the statutory anchor — and for a platform's tax logic, the section references in its documentation and its deduction certificates.
Worked example
A user starts tax year 2026-27 with an opening balance of Rs 4,000 (C). During the year the user makes non-taxable deposits of Rs 20,000 (B) and withdraws twice.
- First withdrawal, Rs 15,000. Non-taxable deposits till then are Rs 12,000. Net winnings = 15,000 − (12,000 + 4,000) = negative, so zero under sub-rule (3). No deduction.
- Second withdrawal, Rs 30,000. A is now the aggregate — Rs 45,000. B till then is Rs 20,000, C is Rs 4,000, and E is nil because no tax was deducted on the first withdrawal. Net winnings = 45,000 − (20,000 + 4,000 + 0) = Rs 21,000, on which tax is deducted.
- Year end. Closing balance D is Rs 6,000. Net winnings = (45,000 + 6,000) − (20,000 + 4,000 + 21,000) = Rs 6,000, being the amount still in the account on which tax had not yet been deducted.
- A Rs 2,000 play-only bonus credited in the year is ignored entirely and does not enter B, C or D — unless it is later made withdrawable, when it becomes a taxable deposit at that moment.
Compliance checklist
- Compute at every withdrawal, not only at year end — sub-rules (2) and (4) drive the deduction.
- Carry E only where tax was actually deducted on the earlier withdrawal.
- Aggregate all accounts of the same user, and treat same-intermediary transfers as neutral.
- Flag play-only bonuses in the ledger and exclude them from B, C and D.
- Trigger a taxable deposit entry the moment a bonus becomes withdrawable.
- Bring payments in kind and off-platform cash into amount A at money equivalent.
- Cite section 194(1) and section 393(3) , not section 194BA.
Common mistakes
- Deducting on the gross withdrawal rather than on net winnings.
- Including E for an earlier withdrawal on which no tax was deducted.
- Treating a bonus balance as outside the user account — clause (a) says "by whatever name called".
- Missing a bonus recharacterisation and never bringing it into the computation.
- Computing each account of a user separately.
- Ignoring prizes paid in kind.