The taxation of online gaming winnings has been a significant area of regulatory focus, with the Direct Tax Code (DTC) 2025 codifying the framework that was initially introduced through the Finance Act 2023. The DTC consolidates the provisions relating to TDS on online gaming winnings under Section 194(1) (Table: Sl. No. 5) , read with the detailed computation rules prescribed under Rule 135 of the Income-tax Rules, 2026.
The Statutory Framework
Section 194(1) — Tax on Net Winnings
Under Section 194(1) (Table: Sl. No. 5) of the DTC, any income by way of net winnings from any online game is chargeable to TDS at the rate of 30%. The provision applies to every online gaming intermediary responsible for paying any income by way of winnings from any online game during the financial year.
The tax is required to be deducted:
- At the time of withdrawal from the user account; and
- At the end of the financial year on the net winnings remaining in the user account, whichever is earlier.
Section 194(1) (Table: Sl. No. 5) — Scope
The DTC provision applies to all online games, defined as any game that is offered on the internet and accessible through a computer resource, including any telecommunication device. The definition encompasses both games of skill and games of chance, with no distinction made for TDS purposes.
Computation of Net Winnings — The Formula
Tax Year Net Winnings
For the purposes of computing TDS at the end of the financial year, Rule 135(1) prescribes the following formula:
Net Winnings = (A + D) – (B + C)
Where:
- A = Aggregate amount withdrawn from the user account during the tax year
- B = Aggregate amount of non-taxable deposit made in the user account 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
Net Winnings on Withdrawal — First Withdrawal
For TDS at the time of withdrawal, Rule 135(2) provides a separate computation:
Net Winnings = A – (B + C)
Where:
- A = Amount withdrawn from the user account
- B = Aggregate amount of non-taxable deposit made in the user account during the tax year, till the time of such withdrawal
- C = Opening balance of the user account at the beginning of the tax year
Net winnings shall be zero if the sum of amounts B and C is equal to or greater than the amount A.
Net Winnings on Withdrawal — Subsequent Withdrawals
For each subsequent withdrawal during the tax year, Rule 135(4) prescribes:
Net Winnings = A – (B + C + E)
Where:
- A = Aggregate amount withdrawn from the user account during the tax year till the time of subsequent withdrawal, including the amount of such subsequent withdrawal
- B = Aggregate amount of non-taxable deposit made in the user account during the tax year, till the time of such subsequent withdrawal
- C = Opening balance of the user account at the beginning of the tax year
- E = Net winnings comprised in the earlier withdrawal or withdrawals computed under Rule 135(2) or Rule 135(4), during the tax year till the time of subsequent withdrawal, if tax has been deducted on winnings comprised in such withdrawal or withdrawals
Net winnings shall be zero if the sum of amounts B, C and E is equal to or greater than the amount A.
Net Winnings at Year-End
For the end of the financial year, Rule 135(6) prescribes:
Net Winnings = (A + D) – (B + C + E)
Where the variables are the same as above, and E represents the net winnings comprised in the earlier withdrawal or withdrawals during the tax year.
Net winnings shall be zero if the sum of amounts B, C and E is equal to or greater than the sum of amount A and D.
Key Definitions and Concepts
Non-Taxable Deposit
A non-taxable deposit means the amount deposited by the user in his user account which is not taxable. This typically includes:
- Amounts deposited from the user's own funds that have already been taxed
- Amounts that represent the user's own capital
Taxable Deposit
A taxable deposit means 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.
User Account
The user account includes every account of the user, by whatever name called, which is registered with the online gaming intermediary and where any taxable deposit, non-taxable deposit, or the winnings made by the user is credited, and withdrawal by the user is debited.
Special Considerations
Multiple User Accounts
Where there are multiple user accounts of the same user, each user account shall be considered for the purposes of calculating net winnings. The deposit, withdrawal, or balance in the user account shall mean the aggregate of deposit, withdrawal, or balance in all user accounts respectively.
Transfers Between Accounts
Transfer from one user account to another user account, maintained with the same online gaming intermediary, of the same user, shall not be considered as withdrawal or deposit for the purposes of deducting tax.
Bonus, Referral Bonus, and Promotional Money
Where there is a taxable deposit in the form of bonus, referral bonus, incentives, promotional money, or discount, and such deposit can only be used for playing the online games and not for withdrawal or any other purposes, such deposit shall be ignored for the purposes of calculation of net winnings.
However, if such amounts are subsequently recharacterised and allowed to be withdrawn, they shall be deemed as taxable deposit at the time of such recharacterisation.
Payments in Kind
Whenever 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 to such payment shall be deemed to have been deposited as taxable deposit in the user account and the equivalent amount shall be deemed to have been withdrawn from the user account at the same time.
TDS Compliance Requirements
For Online Gaming Intermediaries
Every online gaming intermediary must:
- Deduct TDS at 30% on net winnings at the time of withdrawal
- Deduct TDS at 30% on net winnings at the end of the financial year
- Ensure that tax is deducted on the net winnings in the user account
- Compute net winnings in accordance with Rule 135
- Issue TDS certificates in the prescribed manner
- File TDS returns with the prescribed details
For Gaming Platforms
Gaming platforms must:
- Maintain proper records of user accounts
- Track deposits, withdrawals, and balances
- Apply the net winnings formula correctly
- Ensure TDS compliance across all user accounts
- Report TDS details to the income-tax authorities
For Users
Users of online gaming platforms should:
- Ensure that their user account details are accurate
- Understand how net winnings are computed
- Verify that TDS has been correctly deducted
- Claim credit for TDS deducted in their income-tax returns
Consequences of Non-Compliance
Failure to deduct TDS on online gaming winnings can result in:
- Disallowance of expenditure under Section 35(b)
- Interest under Section 398(3)
- Penalty under Section 448
- Prosecution under Section 476
Expert Legal Guidance
Anuj Desai & Associates provides comprehensive legal advisory services on online gaming taxation and TDS compliance. Our direct tax experts help online gaming intermediaries understand their TDS obligations, implement compliant systems, and navigate the regulatory framework. We assist in drafting TDS policies, reviewing compliance procedures, and representing clients before income-tax authorities.
Disclaimer: This article provides general information and does not constitute legal advice. For specific guidance on TDS compliance for online gaming or any other direct tax matter, please consult qualified legal professionals.
Need Expert Legal Guidance?
Navigating the complex TDS framework for online gaming requires experienced legal counsel. At Anuj Desai & Associates, we provide comprehensive direct tax advisory services, including:
- TDS Compliance: Guidance on TDS obligations for online gaming
- Regulatory Advisory: Interpretation of DTC provisions and rules
- Compliance Audits: Review of TDS compliance procedures
- Representation: Representation before income-tax authorities
Contact us for expert legal guidance on your TDS compliance matters.