What are The Five Heads of Income Tax Under The Income Tax Act?
The revenue of an assessee is divided into five heads of income for easy computation and proper maintenance of economic power. The government has made this division to improve functioning and initiate better cash flow. However, if a taxpayer does not know which earnings fall under what category, it can lead to incorrect Income tax calculation.
What are the Five Main Heads of Income?
There is a single tax that applies to an individual’s income. However, there are different rules to compute income depending upon the sources. There are five main headings under which they can fall. These 5 heads of income are as follows:
- Income from salary
- Income from house property
- Income from profits and gains of business or profession
- Income from capital gains
- Income from other sources
For correct computation, they have been explained individually.
1. Income from Salary
If you are an employee with a salary as your source of income, this head is applicable to you. Under this heading, all amounts are taken into consideration which counts as employee remuneration. However, remember that there must be an employee-employer relationship between persons making and receiving payments.
The income under the salary head involves the employee’s advance salary, basic wages, pension, perquisites, gratuity, commission and annual bonus. Upon adding these, one can get their gross income.
Remember that the government requires every employer to deduct TDS from their employees.
2. Income from House Property
The second category falling under 5 heads of income includes income from house property. It accounts for all rental income earned by taxpayers. However, if the taxpayer’s house property is not available for rent, then the amount that the person would have received as rent if he/she had let it out would be taxable.
This is a head under which tax is calculated on the basis of assumption. Moreover, tax is levied both on income earned from house property and commercial property. The different deductions that come under this head of income are standard deduction, deductions for home loan interest payment, and deduction for municipal tax.
Here, an assessee will also have to pay 10% TDS on rent if the rent value is more than the specified limit.
Here are a few conditions that must be fulfilled for the income to be taxable under this head:
- The assessee should be the house property owner
- House property can be a house, land appurtenant, or a building
- Individuals must not use their property for any other purposes than residency
3. Income from Profits and Gains of Business/Profession
Income will come under this head if you obtain your earnings from carrying on business/ profession. You must deduct all your expenses from the total revenue earned for the computation of the profit. Then, tax will be applicable under this income head.
This heading also includes bonuses, salary, and profit earned due to a partnership with a business organisation. However, there are some rules applicable here:
- The taxpayers must be controlling the operations of this business or profession
- There must be legitimate existence of a company or profession
- Operations with regard to the profession should be carried out for a significant part of the year
- If taxpayers operate any other professions or businesses, they must also include it
4. Income from Capital Gains
If any profit/gain arises from the transfer or sale of a capital asset held as an investment, it is taxable under capital gains. First, however, check if the income is eligible for an exemption under Sec 54, 54B, 54EC, 54F, 54D, 54ED, 54GA and 54G.
5. Income from Other Sources
For the earnings that do not belong to any of the various heads of income mentioned above, it will fall under the Income from other sources category. Some common examples of earnings that fall under this head include income from lottery, gambling, gift card games, etc. Section 56(2) of the Income Tax Act covers these incomes, which are taxable under the law.
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Final Word
The above are the different heads of income that are taken into account while calculating income tax. Therefore, look into the sections carefully to calculate your net tax payable accurately. Not to mention, it will help you avoid unnecessary penalties and proceeding in case of non-payment of income tax.
FAQs
Ans: Here are some of the incomes chargeable under the earnings from the business head:
1. Profit made from the sale of a license
2. Profit/salary/bonus earned from business partnership
3. Cash received through export
4. Any organisational income
5. Business benefit
Ans: All salaried individuals can gain a deduction on their house rent allowance received. However, it is always the least of the following amounts:
1. The actual amount received as HRA
2. 50% of salary including basic salary and DA in metro cities
3. Actual rental expense less 10% of your salary
Ans: Conveyance allowance is a travel allowance employers offer to their employees to cover their travel expenses incurred when travelling from their residence to the workplace. The IT Department provides relief under this allowance by exempting up to Rs. 800 per month.
Ans: According to Section 54 of the Income Tax Act, an HUF or an individual can enjoy tax exemption on the capital gains upon the sale of a house property. However, make sure to reinvest this capital gain to construct or purchase a residential property.
Ans: The Income Tax Act of 1961 states that income tax must be levied on the net income of an assessee and not their gross income. An assessee can arrive at the net income after deducting expenses incidental to their employment.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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