5 heads of income under Income Tax Act
A summary of 5 heads of income tax
What Are 5 Heads Of Income Tax?
1.Income from Salary
Income from salary includes all the money you earn from your job, such as your regular pay, bonuses, commissions, advance payments, and pensions. To be taxed under this category, a clear employer-employee relationship must exist. Even payments or pensions received after leaving your job are included.
Some exemptions, like the standard deduction, house rent allowance, and conveyance allowance, can reduce your taxable income, helping you pay less in taxes.
Once standard deductions (currently ₹50,000) and allowances like House Rent Allowance (HRA), Leave Travel Allowance (LTA), and others are taken into account, salary income is taxed at the rates for that income slab. Tax is deducted at source (TDS) by the employer.
2.Income from House Property
If you rent out a property or land, you must report your rental income. If you have a home loan for a property you live in, you can deduct the interest from your taxable income. This rule applies whether the property is for your use or rented out.
However, if you own more than one property, only one will be considered your main home for tax purposes. The other properties will be treated as rental properties, even if you don’t rent them out.
The property’s net annual value (NAV), calculated as the gross yearly rent minus municipal taxes, is taxed. A 30% deduction on NAV and interest on house loans (up to ₹2 lakh for self-occupied properties) are allowed. The remaining income is taxed at the appropriate slab rates.
3.Income from Profits and Gains from Business or Profession
This type of income is classified under “Business or Profession” in the tax system. It includes earnings from running a business or being self-employed. To calculate your profit, subtract your business expenses from your total revenue. This profit is then subject to tax.
This category includes income from business or self-employment, as well as bonuses, salaries, and profits from partnerships with businesses.
Income is calculated by subtracting allowed expenses (such as rent, wages, supplies, and utilities) from total sales or receipts. Some companies pay a fixed presumptive tax. Tax rates vary according to the type of business (person, firm, or company) and income level, with additional taxes such as the Minimum Alternate Tax (MAT) applying in some situations.
Here are the key criteria:
- Control of Operations: You must control and manage the business or profession. You’re responsible for its activities.
- Legitimacy: The business or profession must be legal and comply with all regulations.
Personal Involvement: You need to be actively involved in the business or profession, not just a passive investor or silent partner. - Substantial Involvement: You should have been engaged in the business or profession for most of the previous year, showing that the income comes from your efforts.
- Inclusion of All Activities: If you run multiple businesses or engage in different professions, include all these income sources for tax purposes.
4.Income from Capital Gains
When you sell things like land, buildings, shares, jewellery, bonds, or mutual funds for a profit or loss, you must report this as capital gains. These items are considered capital assets, which you hold for investment.
There are two types of capital gains: short-term and long-term. The type depends on how long you have owned the asset before selling it. You must also report that income on your taxes if you have other jobs or businesses.
What are short-term capital gains?
Definition: Short-term capital gains come from selling a capital asset held for one year or less.
Taxation: In India, short-term capital gains tax is 15% for equity mutual funds held for less than a year. Debt funds are also taxed at 30%.
Impact: Short-term gains can increase your tax bill, especially for high earners.
What are long-term capital gains?
Definition: Long-term capital gains occur when you sell a capital asset held for over a year (the holding period may differ by asset class in some countries).
Taxation: In India, long-term capital gains tax (LTCG) is 10 or 20 % on stocks and equity mutual funds held for over a year. For debt funds, LTCG is charged at 12.5% on units held for more than 36 months.
Benefits: Lower tax rates on long-term gains encourage long-term investing, allowing your investments to grow with a smaller tax burden when sold.
5.Income from Other Sources
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Suppose you have income that doesn’t fit into the categories we have discussed. In that case, it should be reported as “income from other sources.” This includes interest from savings or deposits, dividends from shares or mutual funds, lottery or game winnings, and gifts. It’s any money you earn that fits outside the other categories we have talked about.
Income under this category is taxed at the individual’s slab rate. Certain types of income, such as dividends, may be subject to special tax treatment. Lottery, game, and other winnings are taxed at a flat 30% rate, with no deductions allowed.
Conclusion
Understanding your income sources helps you file taxes accurately and plan your finances more effectively. Knowing where your income comes from allows you to predict taxes, make informed investment choices, and avoid penalties for mistakes in your tax returns.
We have reached the end of this post. Please share your queries with us in the comment section below.
FAQs
1. What are some of the incomes that are charged to the business head?
Ans: Here are some of the incomes charged to the earnings from the business head:
- Profit made from the sale of a licence.
- Profit/salary/bonus earned through business partnership.
- Cash received via export.
- Any organisational income.
- Business benefits.
2. Who has to pay income tax?
Ans: Individuals, associations, and businesses generating gross annual income over ₹3 lakh must pay income tax.
3. Can I claim a deduction for expenses paid while earning income from other sources?
Ans: You can claim a deduction for such expenses if they are directly related to such income.
4. Do I have to pay taxes on gifts (money from other sources) received on the occasion of my marriage?
Ans: No, all gifts received (cash or in-kind) on the occasion of marriage are entirely exempt from income tax.
