5 Heads of Income in India under Income Tax Act 1961 – All Types of Taxable Income Explained

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5 Heads of Income in India under Income Tax Act 1961. In the previous articles, we have given Income Tax Rates for the A.Y 2019-2020 and Computation of total income of a person. Today in this article, we are providing different heads of income tax act 1961. As per the Section 14 of the Income Tax Act of 1961 (इनकम टैक्स एक्ट 1961), there can be several modes of income for an individual. The income tax computation is an important part and has to be calculated according to the income of a person. For a hassle-free computation, the income has to be classified properly so that there is zero confusion regarding the same. The government has classified the sources of income under separate heads and then the income tax is computed accordingly.

There are total 5 heads in income tax. They are salaries, income from house property, profits and gains of business or professional, capital gains and income from other sources. If you earn any income in a year is classified under these five heads as per income tax act 1961. Heads of Income in India under Income Tax Act 1961 explained here.

Levy of Income Tax in India

Income-tax is a tax levied on the total income of the previous year of every person (Section 4).

A person includes an individual, Association of Persons (AOP), Hindu Undivided Family (HUF), Body of Individuals (BOI), a company, a firm etc.

Total Income and Types of Taxable Income of a Person

Income-tax is levied on an assessee’s total income. Such total income has to be computed as per the provisions contained in the Income-tax Act, 1961.

Earlier we’ve explained the steps to computation of Total Income Tax in India under the Income Tax Act 1961. Check steps to computation of total income of an individual for the purpose of levy of income-tax –

Particulars

Amount

Heads of Income

1. Salaries ***
2. Income from house property ***
3. Profits and gains of business or profession ***
4. Capital gains ***
5. Income from other sources ***
Gross Total Income ***
Less: Deduction u/s 80C to 80U ***
Total Income ***

Heads of Income in India under Income Tax Act 1961

According to Sec.14 of the Income Tax Act 1961, all income of a person shall be classified under the following five heads:

Heads of income and computation of total income under various heads

  1. Salaries
  2. Income from House Property
  3. Profis and Gains of Business or Profession (excluding 42 to 44DB but including sections 43A, 43B, 43AA, 44AB, 44AD, 44ADA and 44AE)
  4. Capital Gains
  5. Income from Other Sources

Classification of income under different heads

Heads of Income in India under Income Tax Act 1961

There is a charging section under each head of income in the Act which defines the scope of income chargeable under that head. These heads of income exhaust all possible types of income that can accrue to or be received by the tax payer. Accordingly, the income is classified as following Heads:

  1. Salary, pension earned is taxable under the head “Salaries”.
  2. House Rental income is taxable under the head “Income from house property”.
  3. Income derived from carrying on any business/self employed or profession is taxable under the head “Profits and gains from business or profession”.
  4. Profit from sale of a capital asset (like land) is taxable under the head “Capital Gains”.
  5. The 5th head of income is the residuary head. The income which is not taxable under the first four heads will be taxed under the head “Income from other sources”.

The tax payer has to classify the income earned under the relevant head of income.

Income from other sources

Income is to be computed in accordance with the provisions governing a particular head of income. For computation of income, all taxable income should fall under any of the five heads of income as mentioned above.

If any type of income does not become part of any one of the above mentioned first four heads, it should be part of the 5th head, i.e. Income from other sources, which may be termed as the residual head.

Significance of heads of income

  • Income chargeable under a particular head cannot be charged under any other head.
  • The Act has self-content provisions in respect of each head of income.
  • If any income is charged under a wrong head of income, the assessee may lost the benefit of deduction available to him under the correct head.

Exemptions: There are certain incomes which are wholly exempt from income-tax e.g. agricultural income. These incomes have to be excluded and will not form part of Gross Total Income.

Also, some incomes are partially exempt from income-tax e.g. House Rent Allowance, Education Allowance. These incomes are excluded only to the extent of the limits specified in the Income Tax Act. The balance income over and above the prescribed exemption limits would enter computation of total income and have to be classified under the relevant head of income.

Allowances & Deductions: There are allowances  and deductions prescribed under each head of income.

For example, while calculating income from house property, municipal taxes and interest on loan are allowed as deduction.

Similarly, deductions and allowances are prescribed under other heads of income. These deductions have to be considered before arriving at the net income chargeable under each head.

Sections of Heads of Income Tax

  • Definition of Salary : Section 17(1) of Income Taxt Act 1961
  • Income from house property : Section – 22, Income-tax Act, 1961-2019
  • Profits and gains of business or profession : Section – 28, Income-tax Act, 1961-2019
  • Capital Gains : Section – 45, Income-tax Act, 1961-2019
  • Income from other sources : Section – 56, Income-tax Act, 1961-2019

We hope with the help of this article, now you understand what are the heads of income tax act 1961 (इनकम टैक्स एक्ट 1961) and their sections. Still, if you have any doubts regarding types of income or any other provision related to income tax then you can ask in Forum. Our experts and members will try to help you. Also, you can download computation of income tax format in excel for individuals in our forum.

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