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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Different 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 the rules applicable to that head 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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heads-of-income

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.

  • Recommended Read: Tax on Income from any Business or Profession

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.

Why are there 5 different 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 after applying such rules only.

Judicial Pronouncements

  1. Income under each head has to be determined in the manner provided by the appropriate sections mentioned against each head above [CIT v Dr. Ramesh Lal Pahwa (1980) 123 ITR 86 (Cal)].
  2. If there is an income which cannot be brought to tax by computation under the above heads, it would not be included in the total income for the purpose of taxability [CIT v Justice R.M. Datta (1989) 180 ITR 86 (Cal)]
  3. The computation of income under each of the above 5 heads of income will have to be made independently and separately. There are specific rules of deduction and allowance under each head. No deduction or adjustment on account of any expenditure can be made except as provided by the act. [Tuticorin Akali Chemical and Fertilizers Ltd v CIT (1997) 227 ITR 172 (SC)]
  4. The above mentioned 5 heads of income are mutually exclusive of each other. Thus, where an item of income falls specifically under one head, it has to be charged under that head only and not under any other head. [United Commercial Bank v CIT (1957) 32 ITR 688 (SC)].

Karan is CA by Qualification with the rare distinction of being awarded All India Rank 22. He is also the founder of this website and is an expert in helping people save Taxes legally. He can be reached by booking an appointment for Tax Advisory Service.