Under the Indian Income Tax Act, 1961, there are five heads of income under which an individual or entity can classify their income for tax purposes. These heads of income are used to determine the taxable income and the applicable tax rate.
Five Heads of Income
Income from Salary
This head includes income received as salary, wages, pensions, and any other form of remuneration from employment. It encompasses regular salary payments, bonuses, allowances, commissions, and other benefits received by an employee.
Income from House Property
This head includes income generated from owning or renting out a property. It covers rental income from residential or commercial properties, as well as any deemed rental income for properties not rented out. Certain deductions are allowed, such as standard deduction and interest on home loans, to arrive at the taxable income.
Profits and Gains of Business or Profession
This head includes income generated from a business, trade, or profession. It covers income from self-employment, partnerships, and freelancing activities. All expenses related to the business or profession, such as rent, salaries, and utilities, are deducted from the gross receipts to determine the taxable income.
Income from Capital Gains
This head includes income earned from the sale or transfer of capital assets such as real estate, stocks, mutual funds, or other investments. The taxable capital gains are calculated by deducting the cost of acquisition/improvement and allowable expenses from the sale proceeds. Depending on the holding period, capital gains may be classified as short-term or long-term, attracting different tax rates.
Income from Other Sources
This head includes income that does not fall under the four previous heads. It encompasses income from sources such as interest on savings accounts, fixed deposits, dividends, rental income from machinery or plant, lottery winnings, and gifts exceeding a specified limit.
