5 Heads Of Income Tax

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:

tax

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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Tips for Stock Market Investors to Reduce Income Tax Liability through ITR Filing

Stock Market

Tips for Stock Market Investors to Reduce Income Tax Liability through ITR Filing

Stock Market

When preparing your income tax return (ITR), selecting an investment strategy that offers tax savings is essential. While focusing on investment returns, it’s vital to consider potential tax benefits. Having a grasp of the tax consequences of stock market investments is key to maximizing returns. Experts advise that individuals investing in the Indian stock market can employ various income tax planning tactics to boost their returns.

Long-Term Capital Gains (LTCG) Tax

In India, long-term capital gains tax is applicable to profits from the sale of listed equity shares and equity-oriented mutual funds held for more than one year. It is recommended to hold equity investments for at least one year to qualify for the advantageous LTCG tax rate of 10%.

Gains up to ₹1 lakh in a financial year remain tax-exempt

Equity-Linked Savings Schemes (ELSS)

Investing in ELSS mutual funds offers the potential for capital appreciation and tax benefits under Section 80C of the Income Tax Act. This strategy not only reduces taxable income but also fosters long-term wealth accumulation.

Systematic Investment Plan (SIP)

Investing through Systematic Investment Plans (SIPs) in mutual funds helps investors mitigate the impact of market volatility. Utilize SIPs in equity mutual funds for rupee cost averaging and compounding advantages. Given that LTCG tax doesn’t apply to gains up to ₹1 lakh per year, SIPs represent a tax-efficient investment option.

Stock Market

Tax-Efficient Asset Allocation

To achieve optimal tax efficiency, diversify your investments across different asset classes. Include debt instruments such as bonds and fixed deposits along with equities to achieve a balanced portfolio, optimize returns, and minimize short-term tax obligations.

Utilise Tax-Efficient Investment Options

Discover tax-saving opportunities such as the Public Provident Fund (PPF), National Pension System (NPS), and Tax-Saving Fixed Deposits. These avenues provide deductions and tax advantages while aligning with long-term financial objectives.

Tax Harvesting Strategies

Individuals should consider implementing loss harvesting by selling underperforming investments to offset capital gains and lower their overall tax liability. Opt for growth options when investing in mutual funds to defer long-term capital gains (LTCG) tax until selling rather than receiving dividends.

Investors should seek guidance from a tax advisor or financial planner to comprehend how these strategies impact their unique financial circumstances and ensure adherence to Indian tax regulations. Moreover, given that tax laws and regulations can evolve, staying informed about the latest developments is essential.

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Choosing Between ITR 1 and ITR 4 Forms for Income Tax Return Filing: Get Your Doubts Cleared

ITR 1 and ITR 4

Choosing Between ITR 1 and ITR 4 Forms for Income Tax Return Filing: Get Your Doubts Cleared

ITR 1 and ITR 4

Filing Income Tax Returns for Assessment Year 2024-25: Choosing the appropriate income tax return (ITR) form is crucial for individuals and businesses as it ensures compliance with tax regulations, reducing the risk of penalties or legal complications. Designed for different taxpayer categories such as individuals, businesses, and organizations, each ITR form gathers essential information on income, deductions, exemptions, and tax liabilities.

Moreover, using the correct form allows taxpayers to take advantage of specific tax benefits and deductions that match their income sources and classification, potentially lowering their tax liability and maximizing savings. Additionally, using the right form ensures streamlined processing by tax authorities, minimizing delays and inquiries, and expediting the issuance of any eligible tax refunds.

Difference between ITR 1 Sahaj and ITR 4 Sugam

The income tax return forms for Assessment Year 2024-25 (pertaining to income earned in 2023-24) have been officially released.

Taxpayers can now initiate the filing of their ITR for the financial year 2023-24 (or assessment year 2024-25) as the income tax department has enabled online submission of ITR-1, ITR-2, and ITR-4. These forms cater to individuals, professionals, and small businesses.

ITR 1 and ITR 4

In February 2023, the CBDT introduced certain modifications to the ITR-1 form regarding disclosure under Section 139(1), which is voluntarily filed by individuals with annual taxable income of less than Rs 2.5 lakh. Such individuals will no longer need to declare their fixed deposits exceeding Rs 1 crore in their ITR forms.

ITR-1 and ITR-4 are simplified forms tailored to meet the needs of a wide range of small and medium-sized taxpayers.

ITR-1 Sahaj

The ITR-1 form is applicable for individuals with income up to Rs 50 lakh, deriving earnings from salary, one house property, and other sources like interest. ITR-4, on the other hand, is suitable for individuals, Hindu Undivided Families (HUFs), and firms with total income up to Rs 50 lakh, and earning from business and profession.

ITR-1 can be filed by a resident individual whose:
 
  • Total income does not exceed Rs 50 lakh during the FY
  • Income is from salary, one house property, family pension income, agricultural income (up to Rs 5000), and other sources, which include:-Interest from Savings Accounts-Interest from Deposits (Bank / Post Office / Cooperative Society)-Interest from Income Tax Refund-Interest received on Enhanced Compensation
  • Any other Interest Income
  • Family Pension
  • Income of Spouse (other than those covered under Portuguese Civil Code) or Minor is clubbed (only if the source of income is within the specified limits as mentioned above).

Required Documents for Filing ITR-1

To file ITR-1, you will need Form 16, house rent receipt (if applicable), and investment payment receipts (if applicable). It’s important to note that ITRs are annexure-less forms, meaning you do not need to attach any documents (such as proof of investment or TDS certificates) along with your return, whether filed manually or electronically. However, you should retain these documents as they may be required to be produced before tax authorities for assessments or inquiries.

ITR 4 Sugam

ITR 4 is applicable to resident individuals, Hindu Undivided Families (HUFs), and firms (excluding LLPs) with total income up to Rs 50 lakh, deriving income from business and profession calculated under Sections 44AD, 44ADA, or 44AE, along with agricultural income up to Rs 5,000.

GST Amnesty Scheme

ITR-4 can be filed by a Resident Individual / HUF / Firm (other than LLP) who has:

  • Income not exceeding Rs 50 Lakh during the FY
  • Income from Business and Profession which is computed on a presumptive basis u/s 44AD, 44ADA or 44AE
  • Income from Salary/Pension, one House Property, Agricultural Income (up to Rs 5000/-)
  • Other sources include (excluding winning from Lottery and Income from Race Horses):-Interest from Savings Account-Interest from Deposit (Bank / Post Office / Cooperative Society)-Interest from Income Tax Refund-Family Pension-Interest received on enhanced compensation-Any other Interest Income (e.g., Interest Income from an unsecured loan)

Prepare the following documents (as applicable) for filing ITR-4:

  • Form 16
  • Form 26AS and AIS
  • Form 16A
  • Bank statements
  • Housing loan interest certificates
  • Donation receipts
  • Rental agreement
  • Rent receipts
  • Investment premium
  • payment receipts (LIC, ULIP, etc.)

For further information, taxpayers can refer to the official website of the Income Tax Department at https://www.incometax.gov.in/iec/foportal/help/e-filing-itr4-form-sugam-faq

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