Section 194 of the Income-tax Act, 2025 taxes specified incomes at fixed rates: 30% on lottery and gambling winnings, virtual digital asset transfers and online game net winnings; 10% on patent royalty and carbon credits; and 12.5% on life insurance business profits.
What section 194 does
Section 194 is a consolidation. Six separate provisions of the Income-tax Act, 1961 — sections 115B, 115BB, 115BBF, 115BBG, 115BBH and 115BBJ — become a single section with a five-column table.
The mechanism in sub-section (1) is the standard split: tax is the aggregate of (a) tax on the specified income at the rate in column D, subject to the conditions in column E, and (b) tax on what the total income would have been had that income been excluded.
The rates that matter to most readers are 30% on virtual digital assets — the crypto rate — 30% on lottery, betting and gambling winnings, and 30% on net winnings from online games. All three come with a condition barring deduction of expenditure.
The Income-tax Act, 2025 takes effect from 1 April 2026 and applies from tax year 2026-27. The Income-tax Act, 1961 continues to govern every year up to 31 March 2026, including assessments, appeals and penalties for those years, because of the repeal and savings provision in section 536. Figures quoted here are the amounts written into the Act as enacted (with the Gazette corrigenda of 3 September 2025); the annual Finance Act can change rates and thresholds.
Old Act and new Act, side by side
The table below shows what the Income-tax Act, 1961 did and where the same ground is covered in the Income-tax Act, 2025.
| Income-tax Act, 1961 | What it did | Income-tax Act, 2025 |
|---|---|---|
| 115BB | Winnings from lotteries, crossword puzzles, races, card games, gambling | 194 — Table serial 1 |
| 115BBF | Royalty on a patent developed and registered in India | 194 — Table serial 2 |
| 115BBG | Transfer of carbon credits | 194 — Table serial 3 |
| 115BBH | Transfer of virtual digital assets | 194 — Table serial 4 |
| 115BBJ | Net winnings from online games | 194 — Table serial 5 |
| 115B | Profits and gains of life insurance business | 194 — Table serial 6 |
Section 194 sub-section by sub-section
Read this alongside the bare text — each heading below is a sub-section of the section as enacted.
Sub-section (1) — how the charge works
Irrespective of anything contained in any other provision of this Act, where the total income of an assessee in column B includes income of the nature in column C, income-tax is the aggregate of (a) tax on that income at the rate in column D, subject to the conditions in column E, and (b) tax the assessee would have paid had total income been reduced by that income. The specified income is therefore ring-fenced and taxed at a flat rate.
Serial 1 — lottery, betting and gambling at 30%
Winnings other than from an online game from a lottery, crossword puzzle, race including a horse race (but not income from owning and maintaining race horses), card game or other game of any sort, or gambling or betting of any form, are taxed at 30%, with no conditions in column E.
Serial 2 — patent royalty at 10%
A person resident in India who is a patentee — the eligible assessee — is taxed at 10% on royalty in respect of a patent developed and registered in India. The conditions bar any deduction for expenditure or allowance in computing that income, and require an option to be exercised in the prescribed manner.
Serial 3 — carbon credits at 10%
Income by way of transfer of carbon credits is taxed at 10%, with no deduction allowed for any expenditure in computing it.
Serial 4 — virtual digital assets at 30%
Any income from the transfer of a virtual digital asset is taxed at 30%. The conditions in column E bar deduction of any expenditure or allowance other than the cost of acquisition, and restrict set off of loss — the same architecture that section 115BBH carried.
Serials 5 and 6 — online games and life insurance business
Income by way of net winnings from any online game is taxed at 30% with no conditions in column E. And profits and gains of life insurance business are taxed at 12.5%, also with no conditions listed.
The section 194 rate table, as enacted
This is the Table to section 194(1) of the Income-tax Act, 2025. Long condition entries are abridged — read the bare section for the full text of column E.
| Sl. No. | Assessee | Income | Rate of tax | Conditions |
|---|---|---|---|---|
| of tax | ||||
| 1. | Any person. | Winnings (other than from any online game) from–– (a) lottery; or (b) crossword puzzle; or (c) race including horse race (not being income from the activity of owning and maintaining race horses); or (d) card game and other game of any sort; or (e) gambling or betting of any form or nature. | 30% | Nil. |
| 2. | A person, resident in India and who is a patentee (herein referred to as an eligible assessee). | Royalty in respect of a patent developed and registered in India. | 10% of tax | (a) No deduction in respect of any expenditure or allowance shall be allowed to the eligible assessee under any provision of this Act in computing his income referred to in column C; (b) an option for taxation of income by way of royalty in respect of a patent developed and registered in India is exercised in the prescribed manner, on or before the due date specified under section 263(1) for furnishing the return of … |
| 3. | Any person. | Income by way of transfer of carbon credits. | 10% of tax | No deduction in respect of any expenditure or allowance shall be allowed to the assessee under any provision of this Act in computing his income referred to column C. |
| 4. | Any person. | Any income from the transfer of any virtual digital asset. | 30% | (a) No deduction in respect of any expenditure (other than cost of acquisition, if any) or allowance or set off of any loss shall be allowed to the assessee under any provision of this Act in computing the income referred to in column C; and (b) no set off of loss from transfer of the virtual digital asset computed herein shall be allowed against income computed under any provision of this Act to the assessee and … |
| 5. | Any person. | Any income by way of net winnings from any online game, computed in the manner, as may be prescribed. | 30% | Nil. |
| 6. | Any person. | Any profits and gains from life insurance business. | 12.5% | Nil. |
Worked example
An individual has the following in tax year 2026-27, and is otherwise taxed under section 202(1).
| Income | Amount | Treatment under section 194 |
|---|---|---|
| Salary income after standard deduction | ₹9,25,000 | Taxed at section 202 slab rates on the reduced total income |
| Gain on sale of cryptocurrency (cost ₹4,00,000, sale ₹7,00,000) | ₹3,00,000 | 30% — serial 4; only the cost of acquisition is deductible |
| Trading expenses, internet and advisory fees on the crypto activity | ₹45,000 | Not deductible — column E bars expenditure other than cost of acquisition |
| Loss on another cryptocurrency | ₹80,000 | Cannot be set off against the gain, under the column E conditions |
| Winnings from an online game (net) | ₹1,20,000 | 30% — serial 5 |
| Lottery prize | ₹50,000 | 30% — serial 1 |
| Tax computation | Working | Amount |
|---|---|---|
| Tax on crypto gain | 30% × ₹3,00,000 | ₹90,000 |
| Tax on online game winnings | 30% × ₹1,20,000 | ₹36,000 |
| Tax on lottery winnings | 30% × ₹50,000 | ₹15,000 |
| Tax on salary of ₹9,25,000 | Section 202 slabs | ₹32,500 |
The ₹45,000 of expenses and the ₹80,000 crypto loss both produce nothing. That is the defining feature of serial 4 — the 30% applies to the gross gain with only cost of acquisition allowed, and losses are ring-fenced.
Compliance checklist and due dates
- For virtual digital assets, deduct only the cost of acquisition — no brokerage, advisory, infrastructure or interest costs.
- Do not set off a loss on one virtual digital asset against a gain on another, or against any other income.
- Distinguish online game winnings (serial 5) from other winnings (serial 1); both are 30% but the entries are separate.
- Income from owning and maintaining race horses is expressly outside serial 1 and is taxed normally.
- For patent royalty at 10%, exercise the option in the prescribed manner and forgo expenditure deductions.
- Remember tax is deducted at source on several of these payments under section 393; reconcile the deduction with the final liability.
- Chapter VIII deductions cannot reduce income taxed under this section — it is ring-fenced by sub-section (1)(b).
Common mistakes
- Claiming trading costs, exchange fees or advisory charges against crypto gains.
- Setting off crypto losses against crypto gains or other income.
- Treating race horse ownership and maintenance income as lottery-type winnings; serial 1 excludes it.
- Claiming the 10% patent royalty rate without exercising the required option.
- Assuming section 194 income can be reduced by Chapter VIII deductions.
This is an explanatory guide, not tax advice, and it does not reproduce the section in full. Read the bare text of the section before you rely on it, and check for later amendments, the Income-tax Rules made under the new Act, and CBDT circulars and notifications.