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Heads of Income

Income is classified under five Heads of Income in the Indian Income Tax Act. Under chapter 4 of Income Tax Act, 1961 (Section 14), income of a person is calculated under various defined heads of income. The total income is first assessed under heads of income and then it is charged for Income Tax as under rules of Income Tax Act. According to Section 14 of Income Tax Act, 1961 there are following heads of income under which total income of a person is calculated:

  1. Income From Salary
  2. Income From House Property
  3. Income From Capital Gain
  4. Income From Business/ Profession
  5. Income From Other Sources
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Income from Salary

What is Salary:

Income under heads of salary is defined as remuneration received by an individual for services rendered by him to undertake a contract whether it is expressed or implied.

According to Income Tax Act there are following conditions where all such remuneration are chargeable to income tax:

  • When due from the former employer or present employer in the previous year, whether paid or not
  • When paid or allowed in the previous year, by or on behalf of a former employer or present employer, though not due or before it becomes
  • When arrears of salary is paid in the previous year by or on behalf of a former employer or present employer, if not charged to tax in the period to which it

What Income Comes Under Head of Salary:

Under section 17 of the Income Tax Act, 1961 there are following incomes which comes under head of salary:

  • Salary (including advance salary)
  • Wages
  • Fees
  • Commissions
  • Pensions
  • Annuity
  • Perquisite
  • Gratuity
  • Annual Bonus
  • Income From Provident Fund
  • Leave Encashment
  • Allowance
  • Awards

The aggregate of the above incomes, after exemptions available, is known as Gross Salary and this is charged under the head income from salary.

Basic salary along with commissions and bonuses is fully taxable.

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.

The following allowances are fully taxable : dearness allowance, city compensatory allowance, overtime allowance, servant allowance and lunch allowance.

Form 16

The employer will give the employee Form 16 which will contain all the earnings, deductions and exemptions available.

Particulars
Amount

Basic Salary

Add:

1. Fees, Commission and Bonus

2. Allowances

3. Perquisites

4. Retirement Benefits

5. Fees, Commission and Bonus

Gross Salary

Less: Deductions from Salary

1. Allowance u/s 16

2. Professional Tax u/s 16

Net Salary

Quick Note about the difference between Exemption and deduction?

If an income is exempt from tax, then it is not included in the computation of income. However, the deduction is given from income chargeable to tax. Section 80 C to 80 U deals with deduction.

Exempt income will never exceed the amount of income. However, the deduct may be less than or equal to or more than the amount of income. Section 10 deals with exemptions.


Income From House Property

 According to Chapter 4, Section 22 - 27 of Income Tax Act, 1961 there is a provision of income under head of house property. In every section from 22-27 there are detail specification of house property income. It is defined as income earned by a person through his house or land.

 

What Income Comes Under Head of House Property:

Annual value of building or land owned by assessee. There is a charge on the potential of property to generate income not on the rent received. But if property is used for making profit in business then it will be taxable not under this head but will be taxable under head of profit in business/ profession. The building can be house, office building, go downs etc.

Points to be remembered

Assessee should be Owner of the Property

Should be not be used for Business or Profession by the assessee In case of dispute regarding title

Any residential or commercial property that you own will be taxed as well. Even if your piece of real estate is not let out, it will be considered earning rental income and you will need to pay tax on it. The income tax blokes are a bit easy going on this – they tax you on the capacity of the real estate to earn income and not the actual rent. This is called the property’s Annual Value and is the higher of the fair rental value, rent received or municipal rent.

Fair Rent – The rent which a similar property will fetch at the same or nearby similar locality Municipal Rent – The value fixed by municipal or local authority

Fair Rent or Municipal Rent whichever is higher taken into consideration Standard Rent – Rent which a owner can claim maximum from his tenant Actual Rent – Rent for which property has been let out.

Standard Rent or Actual Rent whichever is lesser is taken into Consideration

The Annual Value can go through a standard deduction of 30% and if you reduce the interest on borrowed capital, then you get the value which is charged under the head income from house property.

 

Income From Business / 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.

According to Income Tax Act, 1961 income under this head is defined as the income earned by assessee as a profit or gain in his business or profession. Income under this head must follow these conditions:

  • There must be a business/ profession
  • Business/ profession is being carried by assessee
  • Business/ profession have been carried out by assessee in assessment year for which income tax is filling

What Income Comes Under Head of Profit in Business

 

  • Profits and gains of assessee from any business or profession during assessment year
  • Any payment or compensation due or received by a person for his services to organization as a part of his business
  • Making profit in trade Income of professional or organization against services provided by that professional/organization
  • Profits on sale of a license granted under the Imports (Control) Order, 1955, (EXIM control Act, 1947)
  • Cash received or due by any person against exports under government schemes
  • Any benefit whether it is not in cash coming from business/ profession
  • Any profit, salary, bonus or commission received by company partners

 

Income from Capital Gain

 What is Capital Gain:

According to Income Tax Act,1961 heads of capital gain is defined as gains derived on transfer of capital asset. Capital Gain is the profit or gain of an assessee coming from the transfer of a capital asset effected during the previous year or assessment year. "Capital Asset" and transfer are predefined in income tax act.

What is Capital Asset:

Under section 2(14) of the Income Tax Act,1961 Capital Asset is defined as property of any kind held by assesse including property held for his business or profession. It includes all type real property as well as all rights in property. It is also defined as gains on transfer of assets in which there in no cost of acquisition like:

  • Goodwill of business generated by assessee
  • Tenacy rights
  • Stage carriage permits
  • Loom hours
  • Right to manufacture
  • Processing & production of any article or things

 

Assets Which Don't Come Under Heads of Capital Assets

 According to Income Tax Act,1961 there are few assets which don't form a part of Capital Assets, which are as follows:

  • Stock of goods and raw materials used by assessee for his business or profession
  • Those properties which are movable like wearing apparel, furniture, automobile, phone, household goods etc. Held by assessee. But Jewelry which is also an movable assets comes under heads of Capital Assets
  • Few Gold Bonds issued by government
  • Few special bonds issued by central government like Special Bearer Bonds, 1991

 

Income from other Sources

 Every type of income comes under a specified heads. But there are few incomes, which don't come under any of following heads:

  • Salary
  • House Property
  • Profit In Business/ Profession
  • Capital Gains

Any income that does not fall under the four heads above is taxed under the head “ Income From Other Sources”.

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