What are the 5 Heads of Income Tax?

In India, the income of taxpayers is classified into five heads of income, such as Salary, House Property, Capital Gain, Business and Profession and Income From Other Sources. The income of a person shall be reported in each head of income accordingly. Each head has a different set of rules for deduction and exemption of income & expenses, such as a standard deduction available under the salary head, a deduction for interest paid on a home loan available under the house property head, etc. Classifying income correctly under each head ensures accurate tax filing and avoids penalties, making expert guidance valuable.

What are the Five Heads of Income? 

The Five Heads of Income Tax are:

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

Note: Each of these income heads is governed by specific provisions of the Income Tax Act and has its own set of tax rules.

Income from Salary

Income from the salary head covers the  income that you receive in terms of the service you provide on a contract of employment that is applicable for taxation under this head. This includes salary, advance salary, perquisites, gratuity, commission, annual bonus and pension. 

The following section governs the Income from the Salary

• Section 15 describes the taxability of income from Salary
• Section 16 explains about deduction available under salaries
• Section 17 explains the components of the Salary like Monetary compensation, Perquisites etc.

This tax head also includes some exemptions:

• House Rent Allowance (HRA): As a salaried individual, if you live in a rented house, you can claim House Rent Allowance for partial or complete tax exemptions.  
• Transport Allowance: In case of blind/deaf and dumb/orthopedically handicapped employees, you can claim allowance of  Rs 1,600 per month.

The tax calculation structure of salary income is as follows, and such information needs to be filled in Schedule S of your ITR form.

Income from House Property   

Income from House Property head of income covers an individual’s income from his or her house property or land appurtenant such property is taxable under the head of income from house property. To put it simply, this head includes the policy for calculating the tax on rental income that you receive from your properties.

Broadly Income from House Property has three sub-classifications

1. Self Occupied Property 
2. Let out Property 
3. Deemed Let out Property

In case you own more than two self-occupied houses, then only two of such houses are considered to be self-occupied and the rest are considered to be deemed let out. The taxation occurs on income received from both commercial and residential property.  

Details on such house property need to be declared in Schedule HP of your ITR in the below format 

Income from Profits and Gains from Business or Profession

The  Profits and Gains from Business or Profession head of income cover the profits that you earn from any kind of business or profession are taxable under this head. You can subtract your expenses from the total income in order to determine the amount on which tax is chargeable. 

Here are the types of income that are chargeable under this head:

• Profits generated from the sale of a certain license
• Gains earned by an individual during an assessment year
• The profits that an organisation makes on its income
• Cash received on the export of a government scheme
• The benefits that a business receives 
• Gains, bonuses or salary that an individual receives due to a partnership with a firm.
• Presumptive scheme of taxation like 44AD, 44ADA, and 44AE.
• Profit & loss from Future & Option Trading, Intraday Trading.

Individual or HUF earning income from business and profession must file ITR-3 or ITR-4

Income from Capital Gains

Capital Gain head of income covers profits earned  by transferring or selling an asset that was held as an investment, that income is taxable under the head of income from capital gains. A large number of assets, like gold, bonds, mutual funds, real estate, stocks, etc., fall under capital assets. 

Now, you can subdivide capital gains into 

1. Short-term capital gains and 
2. Long-term capital gains. 

Here is a table showing the holding period and tax rates for different asset classes as follows;

*Holding period of 36 months not applicable if sold on or after 23rd July, 2024.

** Individuals and HUF still have the option to claim indexation and pay tax at 20%

Details of capital gains need to be disclosed in Schedule CG of your ITR form. If you are an individual, you will have to opt for ITR 2 or 3.

Income from Other Sources    

Under the head of Income from other source covers income that does come under other four head income and includes income from dividends, interest, rent on plant and machinery, lottery, bank deposits, gambling, card games, sports rewards, etc.

Heads of Income vs Sources of Income

The heads of income are ways to classify the earnings or gains of an individual during a given year as per the Income Tax Act. This is necessary for taxation purposes. They are:

• Income from Salaries
• Income from House Property
• Profits and Gains from Profession or Business
• Capital Gains
• Income from other sources

On the other hand, sources of income for any person or business are monetary sources from which they can earn an income. 
For individuals, they are:

• Salary
• Interest
• Commission, etc. 

In case of businesses, they are:

• Returns on investments
• Profits
• Grants from the government and more

What are the Five Features of Tax?

The five features of tax are:

• Taxes can be of various types. Income tax is one of the most common taxes in the country. Taxes are of 4 types: Direct tax, Indirect tax, Business tax, and Property and Sales Tax.
• It is compulsory for all liable citizens to pay tax, and refusing to do so is a punishable offence.
• Tax is payable periodically and regularly as determined by the tax authority.
• It is levied in order to meet the government’s public expenditure.
• Tax does not have any direct quid-pro-quo between the public authority and taxpayers.

Now that you know the 5 heads of income with sections, you can easily classify your income under the proper heads. However, to calculate your net tax accurately and avoid unnecessary penalties, you may opt for a tax professional.

Conclusion

By understanding and correctly applying the 5 heads of income, you can easily categorize your earnings for tax filing. However, ensuring compliance with tax laws and maximizing tax benefits can be complex. It’s advisable to consult a tax expert for precise guidance.