Introduction
Under Section 14 of the Income Tax Act, 1961, the total income of an individual is classified under five distinct heads. This classification facilitates proper computation of taxable income and ensures compliance with tax laws. The five heads of income are:
- Income from Salaries
- Income from House Property
- Profits and Gains of Business or Profession
- Capital Gains
- Income from Other Sources
1. Income from Salaries
Income under this head is reported in Schedule S of the Income Tax Return (ITR) form. It encompasses all monetary benefits received by an individual as a result of employment. This includes basic salary, wages, advance salary, bonuses, commissions, pensions, gratuity, and perquisites such as company-provided accommodation, cars, or meal allowances.
Sections 15 to 17 of the Income Tax Act govern this head:
- Section 15 defines what constitutes salary income.
- Section 16 outlines permissible deductions such as the standard deduction and professional tax.
- Section 17 details various components of salary including perquisites and allowances.
Certain exemptions like House Rent Allowance (HRA) and Transport Allowance are available under specified conditions. For instance, a visually or physically handicapped individual may claim a transport allowance exemption of ₹1,600 per month.
2. Income from House Property
This head pertains to rental income earned from owned property, even if the property is not actually rented but is capable of generating rental income. These details are reported in Schedule HP of the ITR form.
Properties are classified as:
- Self-occupied Property: Occupied by the owner for personal use.
- Let-out Property: Rented out for income.
- Deemed Let-out Property: Applicable if a taxpayer owns more than two properties; only two can be claimed as self-occupied.
For let-out or deemed let-out properties, a standard deduction of 30% is allowed on rental income for repairs and maintenance. Deduction on interest paid on home loans is also available even for self-occupied properties.
3. Profits and Gains from Business or Profession
This head applies to individuals, firms, and companies engaged in trade, commerce, or professional services. Income under this head is declared in Schedule BP of the ITR form and is generally filed under ITR-3 or ITR-4.
Incomes included:
- Profits from any business or trade
- Professional fees or earnings
- Share of income from partnership firms
- Profits from licenses or trade rights
Taxpayers can claim deductions for business expenses such as salaries paid, rent, utility bills, and depreciation on assets. The net taxable income is the difference between gross receipts and allowable expenses.
4. Income from Capital Gains
Capital gains arise from the sale of capital assets such as real estate, stocks, mutual funds, or gold. This income is reported under Schedule CG of the ITR.
Capital gains are classified into:
- Short-term Capital Gains (STCG): For assets held for a shorter duration (e.g., equity shares held for less than 12 months).
- Long-term Capital Gains (LTCG): For assets held for a longer period (e.g., real estate held for more than 24 months).
The tax rate varies depending on the type and duration of the asset held. For example, LTCG on listed equity shares is taxed at 10%, whereas STCG is taxed at 15%, subject to applicable conditions and exemptions.
5. Income from Other Sources
This is a residual head that encompasses all taxable income not falling under the other four heads. It is disclosed under Schedule OS of the ITR.
Examples include:
- Interest income from savings accounts or fixed deposits
- Dividend income
- Winnings from lotteries, betting, or gambling
- Gifts exceeding prescribed limits
This category ensures that all miscellaneous earnings are appropriately taxed, maintaining the comprehensiveness of income reporting.
Heads of Income vs. Sources of Income
It is crucial to distinguish between heads of income and sources of income:
- Heads of Income are categories under which income is classified for tax purposes (e.g., Salaries, Capital Gains).
- Sources of Income refer to the actual origin of income (e.g., salary from an employer, rent from a tenant, interest from a bank).
Understanding this distinction enables proper classification of earnings, which is vital for accurate tax computation and compliance.
Conclusion
Comprehending the five heads of income under the Income Tax Act is essential for precise tax filing and optimal tax planning. Each head has specific provisions for deductions, exemptions, and tax treatment. Accurate classification not only ensures lawful compliance but also helps in minimising tax liability and avoiding penalties. Taxpayers are encouraged to categorise their earnings carefully while filing returns.
Disclaimer
The content provided above is intended solely for informational and explanatory purposes. It should not be considered financial advice or solicitation material. The information is based on publicly available sources and subject to change. Readers are advised to consult with a qualified financial advisor or tax professional before making any financial or tax-related decisions.
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