5 Heads of Income Under Income Tax Act 1961

Section 14 of the Income Tax Act is for computation of income under five heads. Here is what the provision says :

14. Save as otherwise provided by this Act, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income :—

A.—Salaries.

B.

C.—Income from house property.

D.—Profits and gains of business or profession.

E.—Capital gains.

F.—Income from other sources.

Income from salary

Section 15 to section 21 relate to income charged under the head salary. Salary includes basic salary or wages, any annuity or pension, gratuity, advance of salary, leave encashment, commission, perquisites in lieu of or in addition to salary and retirement benefits.

Allowances : An allowance is a fixed monetary amount paid by the employer to the employee for expenses related to office work. Allowances are generally included in the salary and taxed unless there are exemptions available.

Specific tax exemptions are  allowances allowed by employers as part of salary .Some of them are .

  • Conveyance Allowance : Upto Rs 800/- a month is exempt from tax.
  • House Rent Allowance (HRA) : Hop over the House Rent Allowance article to check on calculation and exemptions available.
  • Leave Travel Allowance (LTA) : LTA accounts for expenses for travel when you and your family go on leave. While this is paid to you, it is tax free twice in a block of 4 years.
  • Medical Allowance : Medical expenses to the extent of Rs 15,000/- per annum is tax free. The bills can be incurred by you or your family.
  • Perquisites : Section 17 deals with perquisites  which are basically  benefits in addition to normal salary to which an employee has a right by way of his employment. Examples of these are rent free accommodation or car loan. There are some perquisites that are taxable in the hands of all categories of employees, some which are taxable when the employee belongs to a specific group and some that are tax free.

Income from house property

Income from any residential or commercial property are  charged to tax under section 22 to section 27 of the Income Tax Act . In fact , if one own more than one house , barring one , other properties are charged to tax despite the fact that the house may not be put on rent.

Income chargeable to tax under the head “Income From House Property” is computed as Annual Value and is the higher of the fair rental value, rent received or municipal rent. Standard deduction of 30% is allowed on the ALV . Further , one can reduce the interest on borrowed capital.

Profits and gains of business or profession

Income earned through your profession or business is charged under the head “profits and gains of business or profession”. The income chargeable to tax is the difference between the credits received on running the business and expenses incurred.

The deductions allowed are depreciation of assets used for business; rent for premises; insurance and repairs for machinery and furniture; advertisements; traveling and many more.

Capital gains

Section 45 is the charging section for capital gains. Any profit or gain arising from transfer of capital asset which is defined under section 2(14) held as investments are chargeable to tax under the head “capital gains”.

The capital gains are charged to tax under two sub-heads -short term capital gains or long term capital gains. Further , Income Tax Act also provide the special rate of tax for charging tax on capital gains on shares and mutual funds.

There are tax exemption from long term capital gains on sale of residential house or other capital asset or even agriculture land under section 54 or section 54F or section 54EC or section 54B of the Income Tax Act.

Income from other sources

Any income that does not fall under the four heads above is taxed under the head “income from other sources”. An example is interest income from bank deposits, winning from lottery, any sum of money exceeding Rs. 50,000 received from a person (other than from relative, on marriage, under a will or inheritance)