Income Tax

Heads of Income Tax

The Section 14 of Income Tax Act classifies all incomes under the following heads:

  1. Salaries
  2. Income from House Property
  3. Profits and Gains from Business or Profession
  4. Capital Gains
  5. Income from other sources

The total income is calculated by clubbing all the income categories. The tax on the total taxable income (after deductions) is then calculated as per the Income Tax slab rates.

Although the tax laws for income are same, there are different rules for computation of income. The income from that head is determined after applying that specific set of rules.

  • Income from Salaries

An income is taxable under Salary head if there is a relationship of employer and employee. This means there should be a relationship between the payer and the payee. If the relationship does not exist or cannot be proved, then the income will not be deemed to be income from salary.

For example, Mr Rakesh works in XYZ Ltd. owned by his brother. In spite of being related, he takes a salary of ₹75,000 as his monthly income. In this example, he has an employee-employer relationship with his brother. Therefore, his monthly income shall be chargeable under the head of Income from Salary.

  • Income from House Property

The rental income earned from the house property is taxable under the Income from House Property. The income calculated is levied on the expected rent if the property is not rented out. This would be the rent that would have been received from the property.

Income from House Property is the only income that is taxed on a notional basis. Tax is not only levied on the income from house property but income from commercial property and other forms of property. Various deductions such as tax deduction on a home loan are allowed under this income head.

For example, Mr Ram owns two properties and has rented out one of them whereas self-occupied the other. The income from the first property will be the rent amount received whereas the income from the second property will be calculated on an estimated rent which Ram would have earned based on the rental value of the property.

  • Profits and Loss from Business or Profession

Any income that is earned from a profession/trade/manufacture/commerce shall be taxable under the income head, “ Profits and Loss from Business or Profession”.

For example, the Profit & Loss Account of M/s XYZ Limited as on 31.03.19 shows an amount of net profit as Rs.5,00,000/-.

Income from Capital Gains

Any profit or gain earned under a transfer of an asset in the effective financial year shall be chargeable under the head of Income of Capital Gains and shall be deemed to be the income of the financial year in which the transfer took place unless the gain is exempt under Section 54, 54B, 54D, 54EC, 54ED, 54F, 54G or 54GA.

For example, Vinita sold her house property for ₹50 lakhs whereas Vinita inherited a house from her father. Therefore, the income earned by Vinita is chargeable under the head of Income from Capital Gains.

  • Income from other sources

Any income that does not come under the above 4 heads of income shall be chargeable under this head.

The incomes computed under “income from other sources are:

  1. Interest on bank deposits and securities
  2. Dividend
  3. Income from sub-letting a house property by a tenant
  4. Insurance commission
  5. Income from royalty and more.

The individual’s income is an important part of the computation of income tax. Which is why it is essential to understand the basics of income tax and what income comes under which head

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