What are the Different Heads of Income Under the Income Tax Act?

As per Section 14 of the Income Tax Act of 1961, there can be several modes of income for an individual. The income tax computation is an important part and has to be calculated according to the income of a person. For a hassle-free computation, the income has to be classified properly so that there is zero confusion regarding the same. The government has classified the sources of income under 5 separate heads and then the income tax is computed accordingly. The provisions and rules are according to the details mentioned in the Income Tax Act.

5 Different Heads of Income Under the Income Tax Act

1.Income from Salaries

The first head of Income Tax heads is This clause that essentially assimilates any remuneration, which is received by an individual in terms of services provided by him based on a contract of employment. This amount qualifies to be considered for income tax only if there is an employer-employee relationship between the payer and the payee respectively. Salary also should include the basic wages or salary, advance salary, pension, commission, gratuity, perquisites as well as the annual bonus.

Allowances: An allowance is a fixed monetary amount paid by the employer to the employee for expenses related to office work. Allowances are generally included in the salary and taxed unless there are exemptions available.

Specific tax exemptions are allowances allowed by employers as part of the salary. Some of them are.

  • Conveyance Allowance: Up to Rs. 800 per month is exempt from tax.
  • House Rent Allowance (HRA): Salaried individuals can claim House Rent Allowance or HRA to lower taxes who live in a rented house. This can be partially or completely exempt from taxes.

The deduction available is the minimum of the following amounts:

  • Actual HRA received
  • 50% of [Basic salary + DA] for those living in metro cities (40% for non-metros)
  • Actual rent paid less 10% of salary
  • Leave Travel Allowance (LTA): LTA accounts for expenses for travel when you and your family go on leave. While this is paid to you, it is tax-free twice in a block of 4 years.
  • Medical Allowance: Medical expenses to the extent of Rs. 15,000 per annum is tax-free. The bills can be incurred by you or your family.
  • Perquisites: Section 17 of the Income Tax Act deals with perquisites which are basically benefits in addition to normal salary to which an employee has a right by way of his employment. Examples of these are rent-free accommodation or car loan. There are some perquisites that are taxable in the hands of all categories of employees, some which are taxable when the employee belongs to a specific group and some that are tax-free.

2.Income from House Property

The second head of Income Tax heads is Income from House Property. According to the Income Tax Act 1961, Sections 22 to 27 is dedicated to the provisions for the computation of the total standard income of a person from the house property or land that he or she owns. An interesting aspect is that the charge is derived out of the property or land and not on the amount of rent received. However, if the property is utilized for letting out the normal course of business, then the income from the rent will be considered.

3.Profits and Gains from Business and Profession 

The third head of Income Tax heads is Income from Profits of Business in which the computation of the total income will be attributed from the income earned from the profits of business or profession. The difference between the expenses and revenue earned will be chargeable. Here is a list of the income chargeable under the head:

  • Profits earned by the assessee during the assessment year
  • Profits on income by an organization
  • Profits on sale of a certain license
  • Cash received by an individual on export under a government scheme
  • Profit, salary or bonus received as a result of a partnership in a firm
  • Benefits received in a business

4.Capital Gains

Any profits or gains arising from the transfer of a capital asset effected in the financial year shall be chargeable to Income Tax under the head ‘Capital Gains’ and shall be deemed to be the income of the year in which the transfer took place unless such capital gain is exempt under Section 54,54B,54D,54EC,54ED,54F,54G and 54GA of the Income Tax Act. Capital gains tax is based on the holding period of the capital asset. 

There are two categories of capital gains- the Long Term Capital Gain (LTCG) and the Short Term Capital Gain (STCG). 

Short Term Capital Gain: Any asset/property which is sold within less than three years of acquisition is considered as short-term assets, hence the profit earned by selling the asset is called to be short-term capital gain. In shares/equities, if you sell the units before one year of the purchase date, the profit would be considered as the short-term capital gains.

Long Term Capital Gain: Here, the profits earned by selling the property or asset after three years are called long-term capital gains. In the case of equities, LTCG is applicable if the units have been held for at least one year. 

Capital assets that are classified as long-term capital assets if the period of holding exceeds 12 months include: 

  • Units of UTI & Zero-Coupon Bonds 
  • Equity shares that are listed on any stock exchange 
  • The units of equity- oriented Mutual Funds 
  • Any listed Debenture or government security 

5.Income from Other Sources

Any other form of income, which is not categorized in the above-mentioned clauses, can be sorted in this category. Interest income from bank deposits, lottery awards, card games, gambling or other sports awards are included in this category. These incomes are attributed in Section 56(2) of the Income Tax Act and are chargeable for income tax. 

The incomes computed under “income from other sources are:

  • Interest on bank deposits and securities
  • Dividend
  • Income from sub-letting a house property by a tenant
  • Insurance commission
  • Provident Income
  • Income from games like lottery, racecourse, etc

Income Tax Act: An Overview

The Income Tax Act was enacted in the year 1961. It is the statue under which all issues regarding taxation are listed and stated. The act includes all forms of levy, administration, collection and income tax recovery. The fundamental aim of the act is to consolidate and amend the rules of taxation in the country to ensure economic stability and proper circulation of wealth throughout all sectors. The act consists of a long list of varied sections with each section having different aspects relating to the taxation of the country. Under the Section Income Tax in the Act, there are a total of 5 heads of income that touch different topics of taxation applicable and the proper consolidation of it.  

For your reference below is the form issued by IncomeTaxIndia, giving a detailed description of Income from Different Sources
https://www.incometaxindia.gov.in/Charts%20%20Tables/Treatment_of_income_from_different_sources.htm

Frequently Asked Questions (FAQs)

Q.When do I have to pay the taxes on my income?

A.The taxes on income can be finalized only on the completion of the previous year. However, to enable a regular flow of funds and to ease the process of collection of taxes, Income-tax Act has provisions for payment of taxes in advance during the year of earning itself or before completion of the previous year. It is also known as Pay as you Earn concept.

Taxes are collected by the Government through the following means:

  • Voluntary payment by taxpayers into various designated Banks such as Advance tax, Self-Assessment tax, etc.
  • Taxes deducted at source 
  • Taxes collected at source 

Q. What is gross total income?

A.Gross Total Income is a cumulative income of a taxpayer which is computed after combining the five heads of income

Q.What is the difference between gross total income and total income?

A.Total Income is the income on which tax liability is determined. It is necessary to compute the total income to ascertain tax liability with deductions under 80C to 80U of the Income Tax Act from total gross income. 

Q.Can I claim deductions for my personal and household expenditure while calculating my taxable income or profit?

A.No, you cannot claim the deduction of personal expenses while computing the taxable income.While computing income under various heads, the deduction can be claimed only for those expenses which are provided under the Income-tax Act.

Q.Is there any limit of income below which I need not to pay tax?

A.​​​At this moment (i.e., for the financial year 2019-20​) Individual, HUF, AOP, and BOI having income below Rs. 2,50,000 need not pay any Income-tax. In respect of resident individuals the age of 60 years and above but below 80 years, the basic exemption limit is Rs. 3,00,000 and in respect of resident individuals of 80 years ​and above, the limit is Rs. 5,00,000. For other categories of persons such as co-operative societies, firms, companies, and local authorities, no basic exemption limit exists and, hence, they have to pay taxes on their entire income chargeable to tax.

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