Harshvardhan Mishra
In India, the Income Tax Act classifies income into five distinct categories known as the “Heads of Income.” These categories help individuals and organizations understand how their earnings are taxed. Each head serves a unique purpose, defining the nature of income and providing clarity on applicable deductions, exemptions, and tax liabilities. Let’s delve into each head of income in detail to understand their significance and components.
1. Income from Salary
Income from salary includes all earnings received by an individual as an employee from an employer. It is one of the most common sources of income and includes:
- Basic Salary: The fixed component of an employee’s earnings.
- Allowances: These are additional benefits provided to employees, such as:
- House Rent Allowance (HRA): Helps cover rental expenses.
- Travel Allowance: Covers travel-related costs.
- Dearness Allowance (DA): Adjusts for inflation.
- Perquisites: Non-monetary benefits such as a company car, free accommodation, or concessional loans.
- Bonuses and Commissions: Additional payments based on performance or sales targets.
- Retirement Benefits: Includes gratuity, pensions, and leave encashment.
Key Points:
- Employers are required to deduct TDS (Tax Deducted at Source) on salary income.
- Taxable income from salary can be reduced by claiming standard deductions, exemptions like HRA, and deductions under Section 80C, 80D, etc.
2. Income from House Property
This head deals with income earned from owning real estate. It applies even if the property is not rented out under specific conditions.
Components:
- Rental Income: Income earned by letting out property.
- Notional Rent: Imputed rent for properties that are not self-occupied (except under certain exemptions).
Deductions Available:
- Municipal Taxes Paid: Deductible from gross annual value.
- Standard Deduction: A fixed 30% deduction on net annual value for maintenance.
- Interest on Home Loan: Taxpayers can claim deductions on interest paid for loans taken to purchase or construct the property. The maximum deduction is:
- ₹2,00,000 for self-occupied property.
- Unlimited for let-out properties (subject to other income provisions).
Example:
If you earn a rental income of ₹2,40,000 per year and pay municipal taxes of ₹20,000, you can deduct these taxes and 30% of the remaining amount as maintenance expenses.
3. Income from Business or Profession
This head is applicable for individuals or entities earning profits from business activities or providing professional services. It is highly detailed, as it covers various types of revenue and deductions.
Inclusions:
- Income from trading or manufacturing.
- Professional fees earned by doctors, lawyers, accountants, etc.
- Profits or losses from partnerships.
- Income from freelancing.
Key Points:
- Taxable income is calculated as total revenue minus allowable business expenses.
- Allowable expenses include rent, employee salaries, raw material costs, travel expenses, and depreciation on assets.
- Taxpayers can opt for presumptive taxation under Sections 44AD, 44ADA, and 44AE for simplified calculations.
Example:
If a freelance writer earns ₹6,00,000 in a year and incurs expenses of ₹1,50,000 on software, internet, and other tools, the taxable income would be ₹4,50,000.
4. Income from Capital Gains
Capital gains arise when a capital asset is sold at a profit. Assets include property, stocks, mutual funds, gold, and more. Capital gains are divided into:
- Short-Term Capital Gains (STCG):
- Assets held for a short period (e.g., less than 12 months for shares).
- Taxed at 15% for certain equity transactions.
- Long-Term Capital Gains (LTCG):
- Assets held for a longer period (e.g., more than 24 months for property).
- Taxed at 10% beyond ₹1,00,000 for equities, and 20% with indexation for others.
Exemptions Available:
- Section 54: Exemption on LTCG if proceeds are reinvested in a new residential property.
- Section 54EC: Exemption by investing in specified bonds within six months of the sale.
Example:
If you sell a house for ₹70,00,000 and the indexed cost of acquisition is ₹40,00,000, the LTCG is ₹30,00,000. You can save tax by reinvesting the amount in another property or specified bonds.
5. Income from Other Sources
This head acts as a catch-all category for income that does not fall under the other heads. It includes:
- Interest income from savings accounts, fixed deposits, or bonds.
- Dividend income from shares and mutual funds.
- Lottery winnings, prize money, or game show earnings.
- Income from gifts received above ₹50,000 (under certain conditions).
- Pension received by family members after the death of the pensioner.
Key Points:
- Deductions are available under Section 80TTA (savings account interest) and 80TTB (senior citizens).
- Lottery and gambling income are taxed at a flat rate of 30% without deductions.
Example:
If you earn ₹20,000 as interest from a fixed deposit and ₹5,000 as interest from a savings account, only the savings account interest up to ₹10,000 is eligible for deduction under Section 80TTA.
Conclusion
Understanding the five heads of income is crucial for effective tax planning and compliance. Each head has specific rules for taxation, deductions, and exemptions, allowing taxpayers to minimize their liabilities. Whether you earn from a salary, rental income, capital gains, or other sources, proper classification ensures accurate filing and better financial management. Consult a tax advisor to stay updated on changes and optimize your tax strategy effectively.
