Do you know the five heads of income included in the Income Tax Act of India? Use this guide to understand the different types of income in India and compute your income tax returns efficiently and save better on taxes.
According to the Section 14 of the Income Tax Act of 1961, an individual’s income is classified under five heads. Every year, as you file your income tax returns, you or your chartered accountant has to pull your income under all these five heads together.
Here in this article, you can find a quick primer on these five types of income tax heads and all that they consist of.
- Income from Salary
As the name implies, this is the income you receive from an employer as a pay for your employment. This includes wages (basic salary), pension (annuity), salary advance, commission (bonus), gratuity, leave encashment, salary advance, and other benefits provided by your employer.
The total of all the above, after exemptions, is known as your Gross Salary. You have to pay income tax in India for the gross salary you earn. The basic salary along with the allowances, bonus, and commissions is fully taxable.
- Income from House or other Property
Any property (residential or commercial) that you own is taxable. Even if you have not let out your property and don’t earn any income from it, you have to pay tax for the amount you would gain as rental income, had you done so.
However, when calculating the income from house property, you have to pay tax on the property’s Annual value and not on the actual rent you earn from it.
- Income from Profits/Gain of a Business or Profession
Income that you earn through a business or profession is the next head of the income tax act. This is the income that you receive after deducting the expenses of running a business from the profits gained.
The deductions allowed for running a business include rent for the premises, depreciation of assets, vehicles used for business, advertisements, and other marketing expenses, repairs/purchases of machinery, tools, furniture and several more.
Here’s all the chargeable income that fall under this head:
- Profits earned during the fiscal year (this includes income from an organization, sale of a license and so on)
- Salary (or Bonus) earned as a partner or proprietor of a firm
- Monetary gains received from the business
- Income from Capital Gains
This is the gain or profit earned by an individual as a result of transferring or selling a capital asset. Any property or shares owned by an individual for profession or business are included in capital gains.
- Income from other Sources
The last category of the income tax act in India is the income from other sources. This includes any income received from other sources that are not included in the above four heads. This consists of any amount exceeding INR 50,000 received from others. This includes lottery wins, gifts received during marriages, a will or inheritance, interest earned from bank accounts, and so on.
Understanding that these five heads of income tax are essential in computing your overall income while filing your e-returns. Separating your income into these categories helps you to calculate your income tax and deductions while filing your returns.