5 Heads of Income for Computation of Income Tax

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As per Section 14 of the Income Tax Act, for the purpose of charging of tax and computation of total income, all incomes are classified under the following 5 Heads of Income:-

  1. Salaries
  2. House Property
  3. Profits and Gains of Business or Profession
  4. Capital Gains
  5. Other Sources

The total income under all these 5 heads of Income is then added and disclosed in the Income Tax Return. The tax on the total taxable income (after allowing deductions) is then calculated as the Income Tax Slab Rates of the taxpayer.

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Under these 5 heads of Income, there are several incomes which are tax free and there are several incomes from which deductions are also allowed which help a taxpayer in reducing his tax liability substantially.

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Why Total Income is classified under 5 Heads of Income?

Although there is only one tax on the income calculated under various heads, but, there are different rules of computation of income under each head and income has to be computed under that head of income after applying such rules only.

The 5 Heads of Income have been briefly explained here under

1. Income from Salaries

An Income can be taxed under head Salaries if there is a relationship of an employer and employee between the payer and the payee. If this relationship does not exist, then the income would not be deemed to be income from salary.

If there is no element of employer-employee relationship, the income shall be not assessable under this head of income.

The method of computation of Income from Salaries has been explained in detail in the following link.

2. Income from House Property

Tax on Income from House Property is the tax on rental income which is being earned from the House Property. However, in case the property is not being rented out, tax would be levied on the expected rent that would have been received if this property was rented out.

Income from House Property is perhaps the only income that is charged to tax on a notional basis. Tax under this head does not only include Income from letting out of House Property but also includes Income from letting out of Commercial Properties and all types of properties. Various Deductions like Standard Deduction, Deduction for Municipal Taxes paid and Deduction for Interest on Home Loan is also allowed under this head of income.

TDS on Rent @ 10% is also to be deducted in case the value of rent is more than a specified limit. Service Tax on Rent is also to be levied in certain cases.

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3. Profits and Gains from Business or Profession

Any income earned from any trade/commerce/manufacture/profession shall be chargeable under this head of income after deducting specified expenses.

4. Income from Capital Gains

Any profits or gains arising from the transfer of a capital asset effected in the financial year shall be chargeable to Income Tax under the head ‘Capital Gains’ and shall be deemed to be the income of the year in which the transfer took place unless such capital gain is exempt under section 54, 54B, 54D, 54EC, 54ED, 54F, 54G or 54GA.

5. Income from Other Sources

Any Income which is not chargeable to tax under the above mentioned 4 heads of income shall be chargeable under this head of income provided that income is not exempt from the computation of total income.

A Personal Finance enthusiast, Karan is the founder of charteredclub.com and loves to discuss about Money related matters.