Introduction Income is the backbone of every individual’s life. It is the primary source of survival for everyone. In India, income is categorized into 5 heads for the purpose of taxation. These heads are a part of the Income Tax Act, 1961, and they determine the total income of an individual or an entity. In this article, we will discuss the 5 heads of income in India and their different components.
- Income from Salary Income from salary is the income earned by an individual for the services rendered to an employer. It includes basic salary, allowances, bonuses, and other benefits. The following are the components of income from salary:
- Basic salary: It is the fixed amount paid to an employee for the services rendered. It does not include any allowances or bonuses.
- Allowances: These are the payments made by the employer to the employee to meet the expenses incurred while performing the job. It includes House Rent Allowance (HRA), Transport Allowance, and Medical Allowance.
- Perquisites: These are the benefits or facilities provided by the employer to the employee. It includes free or subsidized accommodation, car, club membership, and so on.
- Income from House Property Income from house property is the income earned by an individual from a property he/she owns. It includes rent received from the property. The following are the components of income from house property:
- Rent received: It is the rent received from the property owner from the tenant.
- Municipal taxes paid: The municipal corporation levies a tax on the property, which the owner needs to pay.
- Standard deduction: The government allows a standard deduction of 30% on the rental income received. This deduction can be claimed by the owner to reduce the taxable income.
- Income from Business or Profession Income from business or profession is the income earned by an individual from his/her business or profession. It includes income from self-employment, freelancing, consultancy, and so on. The following are the components of income from business or profession:
- Gross receipts: It is the total amount received by the individual for the services rendered.
- Expenses incurred: It includes the expenses incurred in the course of business or profession, such as rent, salaries, raw material cost, and so on.
- Depreciation: It is the decrease in the value of assets used in the business or profession. The individual can claim depreciation on the assets used to reduce the taxable income.
- Income from Capital Gains Income from capital gains is the income earned by an individual from the sale of capital assets. It includes gains from the sale of property, shares, mutual funds, and so on. The following are the components of income from capital gains:
- Short-term capital gains: It is the gain from the sale of assets held for less than 36 months.
- Long-term capital gains: It is the gain from the sale of assets held for more than 36 months.
- Cost of acquisition: It is the cost incurred to acquire the asset. It includes the purchase price, brokerage, and so on.
- Indexed cost of acquisition: It is the cost of acquisition adjusted for inflation.
- Income from Other Sources Income from other sources is the income earned by an individual from other sources that do not fall under the other four heads of income. It includes interest earned on savings accounts, fixed deposits, and other investments, lottery winnings, and so on. The following are the components of income from other sources:
- Interest earned: It is the interest earned on savings accounts, fixed deposits, and other investments.
- Winnings from lotteries, crossword puzzles, and other games: It includes the winnings from lotteries, crossword puzzles, and other games of chance or skill.
- Gifts: It includes the value of gifts received by an individual exceeding Rs. 50,000 in a financial year.
- Dividends: It is the income earned by an individual from dividends received from shares of companies.
Final Conclusion
The 5 heads of income in India play a significant role in determining the total income of an individual or an entity for the purpose of taxation. Understanding the components of each head of income is crucial for individuals and businesses to comply with the income tax regulations and minimize their tax liability. Therefore, it is essential to maintain proper records of income and expenses to ensure accurate computation of income under each head. By doing so, individuals and businesses can plan their finances effectively and minimize their tax liability.
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Frequently Asked Questions:
What is “Salary Income”?
Salary income is the compensation you receive from your employer for the services you provide. It includes your basic pay, allowances, bonuses, and any other benefits you receive as an employee. Your employer will deduct taxes from your salary and issue you a Form 16, which you can use to file your tax returns.
What is “Income from House Property”?
Income from house property refers to the rental income you receive from a property that you own. It could be a residential or commercial property, and the income is calculated after deducting property taxes, standard deduction, and any other expenses related to maintaining the property.
What is “Capital Gains”?
Capital gains refer to the profit you make from selling an asset such as stocks, mutual funds, or real estate. It is the difference between the purchase price and the sale price of the asset. Depending on how long you held the asset, it could be classified as short-term or long-term capital gains, and the tax rate would vary accordingly.
What is “Business or Profession Income”?
Business or profession income refers to the income earned by individuals or businesses engaged in a trade, profession, or business activity. This could include self-employed professionals, small business owners, or individuals engaged in freelance work. The income is calculated after deducting any expenses related to the business or profession.
What is “Other Sources of Income”?
Other sources of income include any income that does not fall under the four heads mentioned above. This could include winnings from lotteries or game shows, gifts received, interest earned on savings accounts, and any other sources of income that are not specifically covered under the other heads. This income is taxable and must be reported in your tax return.
