Section 194 Income Tax Act 2025: What Special Tax Rates Apply to Certain Incomes?

Section 194 of the Income-tax Act, 2025 prescribes special rates for six categories of income: certain winnings, qualifying patent royalties, carbon-credit transfers, virtual digital assets, online-game winnings and life-insurance business profits.

Applicable law: Income-tax Act, 2025, effective from 1 April 2026. Section 194 is titled "Tax on certain incomes" and forms part of Chapter XIII. This is not Section 194 (dividend TDS) of the Income-tax Act, 1961.

How does Section 194 calculate tax?

Under Section 194(1), where an assessee has one of the specified incomes, the total income-tax is the sum of (a) tax on the specified income at the special rate in the statutory table, subject to its conditions, and (b) tax on the remaining total income calculated as though the specified income were excluded. Applicable surcharge and health and education cess are additional, where required by law.

What are the special tax rates under Section 194?

Table entry	Income category	Special rate
1	Lottery, crossword, specified race or horse-race winnings, card games, other games, gambling or betting (excluding online-game winnings)	30%
2	Qualifying patent royalty of a resident patentee, for a patent developed and registered in India	10%
3	Income from transfer of carbon credits	10%
4	Income from transfer of virtual digital assets	30%
5	Net winnings from online games, computed as prescribed	30%
6	Profits and gains from life-insurance business	12.5%

These are statutory income-tax rates before any applicable surcharge and cess. The rate alone does not establish whether a particular receipt qualifies; classification and conditions must be checked.

What conditions and restrictions apply?

Lottery, betting and other non-online winnings

Entry 1 applies at 30% to the specified winnings, excluding winnings from online games, which fall under entry 5. It does not treat income from the activity of owning and maintaining racehorses as horse-race winnings for this entry.

Patent royalty: option and five-year restriction

Entry 2 applies to a resident patentee receiving royalty from a patent developed and registered in India. The eligible assessee must exercise the prescribed option by the due date for the return under Section 263(1). No expenditure or allowance deduction is permitted in computing this royalty income under the special regime. A failure to offer the income under this regime during any of the five succeeding tax years triggers the statutory five-year restriction on claiming the benefit thereafter.

Carbon credits

Entry 3 taxes income from transfer of carbon credits at 10%, without a deduction for expenditure or allowance in computing that income.

Virtual digital assets

Entry 4 taxes income from transfer of a virtual digital asset at 30%. Cost of acquisition, if any, is the only permitted expenditure deduction for this computation. Losses from such transfers cannot be set off against other income or carried forward. The statutory transfer definition applies whether or not the asset is a capital asset.

Online games

Entry 5 applies a 30% rate to net winnings from online games calculated using the prescribed method. This differs from the treatment of non-online winnings in entry 1.

Life-insurance business

Entry 6 provides a 12.5% special rate for profits and gains from life-insurance business. This concerns the business profits of the insurer, not a general 12.5% tax on policyholders' insurance receipts.

Relevant statutory definitions in Section 194(2)

Carbon credit: A unit representing reduction of one tonne of carbon dioxide emissions, or equivalent greenhouse-gas emissions, validated under the United Nations Framework Convention on Climate Change and tradable at market price.

Developed: At least 75% of expenditure incurred in India by the eligible assessee for an invention for which a patent is granted under the Patents Act, 1970.

Online game: A game offered on the internet and accessible through a computer resource, including a telecommunications device.

Patentee: The true and first inventor entered in the patent register as patentee, including qualifying joint patentees.

Patent royalty: Consideration for licensing or transferring patent rights, information about its working or use, use of the patent, or connected services, subject to exclusions for capital-gains consideration and sale of products made using the patented process or article.

Virtual digital asset transfer: The meaning of "transfer" in Section 2(109) applies to virtual digital assets whether or not they are capital assets.

Section 194(2) also defines or incorporates meanings for computer resource, horse race, internet, invention, lump sum, patent, patented article, patented process and true and first inventor. Consult the statutory text for their full wording.

Illustrative tax calculations

Example 1: Non-online lottery winnings. If qualifying winnings are Rs. 1,00,000, the special income-tax component is Rs. 30,000 (30% of Rs. 1,00,000), before applicable surcharge and cess. Other taxable income is assessed separately under the applicable provisions.

Example 2: Virtual digital asset transfer. If a qualifying asset is sold for Rs. 5,00,000 with acquisition cost of Rs. 3,00,000, the special-rate income is Rs. 2,00,000 and income-tax at 30% is Rs. 60,000, before applicable surcharge and cess, assuming no other relevant adjustments.

Frequently asked questions

Does Section 194 impose 30% tax on every kind of income?

No. It applies distinct rates to six specified income categories. The residual total income remains subject to the tax otherwise applicable.

Are lottery winnings and online-game winnings treated identically?

No. Lottery and other specified non-online winnings fall under entry 1; net winnings from online games fall under entry 5 and require the prescribed computation.

Can virtual digital asset losses be set off against salary or other gains?

No. Section 194(1), table entry 4 restricts set-off and carry-forward of losses from virtual digital asset transfers.

Is 10% patent royalty tax available to every patent owner?

No. The resident patentee, Indian development and registration, option requirements and other statutory conditions must be met.

Is this the same as Section 194 of the Income-tax Act, 1961?

No. Section 194 of the 1961 Act concerns tax deduction at source on dividends. The 2025 Act's Section 194 consolidates several special income-tax rate provisions formerly found principally in Sections 115B, 115BB, 115BBF, 115BBG, 115BBH and 115BBJ.

Official legislation and further reading

Official Section 194 Income-tax Act, 2025 - amended text Income Tax Department resources

Updated: 10 November 2026. This article is general statutory information. Apply the text, rules and applicable Finance Act for the relevant tax year.