5 Heads of Income Tax Act (ITA)?

A taxpayer's income is divided into five heads of income as per the Income Tax Act. For accurate calculation of taxes, you must classify your earnings properly under these five income heads at the end of each financial year. It becomes important for you to understand which earnings belong to which head of income. This blog will give you a clear overview of the five heads of income.

What are the 5 Heads of Income?

According to Section 14 of "heads of income" of the Income Tax Act, 1961, every income subject to taxation under the Income Tax and for the calculation of the total income, must be classified under the following five heads:

• Income from Salary
• Income from Capital Gains
• Income from House Property
• Income from Profits and Gains from Business or Profession
• Income from Any Other Sources

Income From Salary

Income received in return for the service you provide on an employment contract is subject to taxation under this head. It includes salary, advance salary, gratuity, commission, perquisites, annual bonus, and pension. The following sections rule the earnings received from the salary:

• Section 15 states the income taxability received from salary.
• Section 16 states the deductions available under salaries
• Section 17 clarifies the salary's components, such as monetary compensation, perquisites, etc.

This tax includes some exemptions as well, which are as follows:

• HRA (House Rent Allowance): If you are a salaried individual, living in a rented house, you have the option to claim House Rent Allowance (HRA) to acquire either partial or complete tax exemptions.
• Transport Allowance: Employees who are either blind, deaf, dumb, or orthopedically handicapped are eligible to claim an allowance of Rs. 16000 every month.

The following is the structure for calculating tax from salary income, and such information is required to be mentioned in Schedule S of your ITR form.

Income from House Property

An individual's receiving income from his/her residential property or land belongings, such property is subject to taxation under the head of income from house property. In simple words, this head computes tax on the rental income that you get from a residential property. Income from house property is classified into three categories:

• Let out the property
• Self-occupied property
• Deemed let-out property

If you own more than two self-occupied houses, only two of such houses will be considered as self-occupied and the rest will fall under the category of "demmed let-out property". The taxation applies to the income you get from both commercial and residential property. The information on such a house property is required to be mentioned in Schedule HP of your ITR in the format visible in the picture:

Income from Profits and Gains From Business or Profession

Under this head, the profits or gains that you receive from a business or profession will be taxed. You have the option to subtract your expenses from the overall income and determine the amount on which the tax will be levied. The following are the income types that are chargeable under this head:

• The benefits that a business gets
• Profit made by an organization on its income
• Profits earned from the sale of a specific license
• An individual earning gains during an assessment year
• Cash received due to the export of a government scheme
• Individual receiving gains, salary, or bonuses due to partnership with a firm.

An individual, as well as an HUF receiving income from either a business or a profession, must file ITR-3 or ITR-4.

Income from Capital Gains

Profits that you earn by selling or transferring an asset, which were held as an investment, will be taxed under the head of income from capital gains. Numerous assets fall under the capital assets, such as gold, mutual funds, stocks, bonds, real estate, etc. Additionally, the capital gains are subdivided into two, i.e., short-term capital gains and long-term capital gains.

The following table shows the holding period and tax rates for different types of asset classes:

36-month holding period is not applicable if the asset is sold on or after 23rd July, 2024.

Individuals and HUFs are still eligible to claim indexation and pay the tax at a rate of 20%.

You need to mention the details of capital gains in Schedule CG of your ITR form. If you are an individual, you need to choose ITR-2 or ITR-3.

Income From Other Sources

Any other income that is not mentioned in the above four heads will fall under this category. They come under Section 56 sub-section (2) of the Income Tax Act and include income received from dividends, interest, rent on plant and machinery, lottery, bank deposits, card games, gambling, sports rewards, etc.

What is the Difference Between Heads of Income and Sources of Income?

According to the Income Tax Act, the head of income serves as a way to classify the earnings or gains of an individual during a specific year, mandatory for taxation purposes. It includes:

• Capital gains
• Income from Salaries
• Income from House Property
• Profit and Gains from Profession or Business
• Income from Other Sources

On the contrary, the source of income for an individual or a business is monetary sources through which they can receive earnings. In the case of an individual, they are salary, interest, commission, etc. For a business, there are returns on investments, profits, gains from the government, and more.

What are the Five Key Features of Tax?

The five features of tax are:

• Necessary Payments: Every liable citizen must pay tax, as it is not optional, and refusing to do so might put them in trouble because it is a punishable offence.
• Periodic and Regular Payment: Taxes are not paid at one time; you need to pay taxes periodically and regularly, as set by the tax authority.
• Purpose: Taxes are charged to fund the government expenses. Tax payments allow the government to fulfill public expenditures, which contribute to the country's overall development and welfare.
• No Quid-Pro-Quo: Tax doesn't have any direct quid pro quo between the public authority and taxpayers. The aim here is to provide benefits to everyone rather than just a single individual.
• Various Types of Taxes :Taxes can be of numerous types in different countries to cover a wide range of financial activities. Generally, there are two main types of taxes: Direct (income tax) and indirect taxes (goods and services tax). Other types of taxes include business tax, property tax, and sales tax, each having its own purpose and set of rules.

To Conclude

This blog will help you have an understanding of the 5 heads of income with sections. You can now easily classify your income under the proper heads, which is mandatory. However, if you want to compute your overall tax liability accurately and eliminate unnecessary penalties, you can either use an Income tax calculator or contact the experts at Savetaxs.

We are a team of professional Chartered Accountants, company secretaries, and legal experts, carrying over 30 years of experience. We have been helping NRIs for more than two decades now with every tax-related issue. Whether you need help with filing ITR or anything related to taxation, you can contact our experts anytime as they are available 24*7 across all time zones.