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 is the easiest type of income to understand. It covers all the money you earn through your job. If you are working and receive a salary, wages, incentives, bonus, commission or even pension, it will be counted under this head.
As per the Income Tax Act, any payment that comes to you because of your employment agreement is treated as salary income. This includes basic salary, advance salary, pension, gratuity and benefits like company vehicle, accommodation or meal allowance. The rules for this are covered in Sections 15 to 17 of the Income Tax Act.
- Section 15 tells what income will be treated as salary
- Section 16 lists the deductions like standard deduction and professional tax
- Section 17 explains different salary parts such as allowances, perquisites and other payments
Some exemptions can reduce your taxable salary. For example, if you live on rent, you can claim HRA to bring down your tax amount. In certain cases like physical or visual disability, transport allowance up to ₹1,600 per month can be claimed.
While filing your ITR, the income details under this head have to be shown in Schedule S of the return form.
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 own a house or any other real estate and you earn rent from it, that income is taxed under the head Income from House Property. This applies even if the property is not actually rented out, but has the potential to earn rent.
Under this head, your property can fall into three basic types:
- Self occupied property – This is the house you live in.
- Let out property – This is the house you rent to others.
- Deemed let out property – If you own more than two houses, the extra ones are treated as if they are rented, even if they are empty.
If you stay in your own house, you can still claim deduction on the interest you pay on your home loan. But if you have more than two properties, only two can be shown as self occupied. The rest will be treated as deemed let out.
When you earn rent, 30 percent of that amount is automatically allowed as deduction for repairs and maintenance. The balance income is taxable. All these details must be filled in Schedule HP while filing your income tax return.
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
The fifth and last head of income under the Income Tax Act is called Income from Other Sources. It basically covers all types of income that do not fit into the first four heads. In simple words, if your income does not come from salary, house property, business or profession, or capital gains, then it will be taxed under this head.
Some common examples are:
- Interest income from bank deposits
- Lottery winnings
- Money received above Rs. 50,000 from a person who is not your relative, unless it is through a will or inheritance
- Income from gambling, card games, or similar activities. All these are covered under Section 56(2)
There is also one more example which many people do not know.
- If you are earning by renting out any machinery, plant, or furniture and it is not part of your regular business, then this income is also taxed under Income from Other Sources.
Section 145 of the Income Tax Act explains how such income should be calculated. The person must follow the same accounting method they normally use, either cash basis or mercantile basis.
Types of income covered under Section 56(2):
- Dividend income
- Interest income
- Family pension
- Gifts received
- Royalty income
- Income from giving machinery, plant, or furniture on rent
All these types of income must be declared correctly while filing ITR, and tax must be paid as per the rules.
Conclusion
There are five main heads of income under the Income Tax Act of 1961. These categories help the Government identify what type of income should be taxed. When a person understands these five heads clearly, it becomes easier to manage their taxes properly. It also helps them know what kind of tax they are paying and why. These rules apply to every individual who is eligible to pay tax. If someone tries to hide their income or avoid paying tax, and is found guilty, they can face legal action and penalties as per the law.
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.
5. On which income is tax calculated?
Ans: As per the Income Tax Act of 1961, tax is charged on your net income, not on your total or gross income. Net income is calculated only after deducting expenses that are directly related to your job or work.
