Advance Tax vs Self-Assessment Tax
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5 Heads Of Income Tax
As per the Income Tax Act, individuals’ incomes are categorized into five heads for tax purposes. Properly classifying your earnings under these heads at the end of each financial year is crucial for accurate tax assessment. Understanding which earnings belong to each category is important for effective tax planning. Read on to gain a comprehensive understanding of these income heads.
5 Heads of Income
Income from Salary
Income earned from services provided under an employment contract is subject to taxation under this category. This encompasses salary, advance salary, benefits, gratuity, commissions, annual bonuses, and pension received.
The Income from Salary is governed by the following sections:
- Section 15 addresses the tax treatment of income from Salary.
- Section 16 outlines the deductions available for salary.
- Section 17 details the components of Salary, including monetary compensation, perquisites, and other elements.
Under this tax category, certain exemptions are also applicable:
House Rent Allowance (HRA): Salaried individuals residing in rented accommodations can claim House Rent Allowance for partial or complete tax relief.
Transport Allowance: Employees who are blind, deaf and dumb, or orthopedically handicapped can claim an allowance of Rs 1,600 per month for tax benefits.
Income from House Property
Income earned from an individual’s house property or any land connected to such property is categorized under the head of income from house property for taxation purposes. Simply put, this head covers the taxation of rental income derived from owned properties.
Income from House Property is broadly classified into three categories:
- Self-Occupied Property
- Let-Out Property
- Deemed Let-Out Property
If an individual owns more than two self-occupied houses, only two are treated as self-occupied, and any additional properties are considered deemed let-out for taxation purposes. This taxation applies to income generated from both commercial and residential properties.
Income from Profits and Gains from Business or Profession
Income derived from any business or profession is subject to taxation under this category. You can deduct your business expenses from your total income to determine the taxable amount.
The types of income chargeable under this head include:
- Profits from the sale of licenses
- Gains during an assessment year
- Profits earned by organizations
- Cash received from government export schemes
- Business benefits received
- Profits, bonuses, or salaries from partnerships with firms
Individuals or Hindu Undivided Families (HUF) earning income from business or profession must file either ITR-3 or ITR-4 for income tax returns.
Income from Capital Gains
Income derived from the sale or transfer of an asset held for investment purposes is taxed under the head of income from capital gains. Various assets such as gold, bonds, mutual funds, real estate, and stocks are considered capital assets.
Capital gains are further categorized into:
- Short-term capital gains
- Long-term capital gains
The table below outlines the holding period and corresponding tax rates for different asset classes:
The table below outlines the holding period and corresponding tax rates for different asset classes:
Nature of Asset | Holding Period | Short-term tax rate | Long-term tax rate |
Immovable Property | 24 months | Slab Rates | 20% after Indexation |
Unlisted equity shares | 24 months | Slab Rates | 20% after Indexation |
Listed Equity shares or Equity oriented mutual funds | 12 months | 15% | 10% |
Other Capital assets | 36 months | Slabs rate | 20% after indexation |
Non-Equity Mutual funds (Debts funds) – Purchased after 1st April 2023 | Not Applicable | Slab rates | Slab rates |
Details of capital gains must be disclosed in Schedule CG of your Income Tax Return (ITR) form. If you are an individual, you will need to use either ITR-2 or ITR-3 to report this information.
Income from Other Sources
Within the five heads of income tax, this category encompasses any additional income not covered by the preceding four heads. Such income is defined under Section 56(2) of the Income-tax Act and includes earnings from dividends, interest, rental income from plant and machinery, lottery winnings, bank deposits, gambling proceeds, card game winnings, sports prizes, and similar sources.
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