Heads Of Income
Heads of Income
> Introduction:
According to the Income Tax Act, income tax is charged on the total income earned during the financial year. For the computation of total income and charging income tax thereon, income has to be classified under the following heads of income:
* Income from House Property
* Profits and gains of business or profession
* Capital Gains
* Income from other sources
* Here, we aim to give you a basic overview of each head of income, which will serve as a guide for correctly classifying income under each head for the accurate computation of income tax.
1. Salary: Any amount earned by a person from their employer under a contract of employment is covered under this head. It includes wages, commission, gratuity, pension, etc.
Salary is taxable on a due or receipt basis, whichever is earlier. This means that all arrears of salary shall be included in this head in the period they became due, even if they haven’t been paid. Similarly, any advance salary shall also be included in this head when it is paid, even if it hasn’t become due.
It is to be noted that the amount classified under ‘salary’ should be received in accordance with the contract of employment. If a person receives any amount from their employer outside the office and not in the nature of employment, such an amount shall not be covered under this head.
The income under salary is taxed after allowing certain deductions like standard deduction, professional tax, etc. The TDS on salary, if income becomes taxable, is deducted at the average rate, i.e., the whole tax liability of the employee on income earned during the financial year is deducted through TDS deductions from the salary of that financial year and deposited to the government on behalf of the employee.
To read more, refer to Income from Salary.
2. Income From House Property: To put it simply, all rental income from house properties owned by the taxpayer is covered under this head. This includes rent earned on the property as well as the land connected to the property. For income to fall under this head, the property should not be used for carrying out business or a profession by the property owner. If the property owner is in the business of letting out properties, then such
income shall be classified under the next head of income, i.e., profits and gains from business/profession. The properties let out can be either commercial or residential in nature.
Certain deductions are also allowed to be deducted from income earned under this head. These include municipal taxes on a payment basis, standard deduction, and interest on the home loan taken for the said property. TDS is required to be deducted by the tenant if the rent exceeds the specified limit.
To read more, refer to Income from House Property.
3. Profits And Gains Of Business Or Profession: The income earned by a person from the business or profession carried out by them during the financial year is classified under this head. The scope of income covered under this head of income and the deductions allowed is very vast under the Income Tax Act. Generally, the income earned by the taxpayer, minus the related expenditure incurred, is considered as profits earned, which is chargeable to income tax.
To read more, refer to profits and gains of business or profession.
4. Capital Gains: Income under this head includes the amount earned on selling a capital asset. The Income Tax Act has thoroughly defined the capital asset. To put it simply, it is an asset that can be movable or immovable but is bought with the purpose of making an investment. The amount chargeable to tax is the sale value deducted by the cost at which the capital asset was acquired, including any related expenditure on such asset.
Capital gains may be long-term or short-term (each attracting a different rate of tax), depending on the duration for which it is held, which ranges between 12, 24, and 36 months depending on the type of capital asset.
A number of exemptions are available from income classified under this head, each requiring fulfillment of certain conditions.
To read more, refer to capital gains.
5. Income From Other Sources: There aren’t any specific criteria to determine income to be classified under this head of income. Any income that is not covered under the above heads is classified under this head of income unless it is specifically excluded under the Income Tax Act.
Examples of income falling under this head include:
* Pension and Family pension
* Dividend income
* Income from lotteries
* Interest on bank deposits
To read more, refer to income from other sources.
You can connect with the expert team of InvestMyFunds for a better understanding of the subject or for assistance with filing Income Tax Returns.
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