According to the Income Tax Act, a taxpayer’s earnings are divided into 5 heads of income. At the end of each financial year, you must correctly classify your earnings under these heads of income for accurate tax calculation.
It is essential for you to know which of your earnings falls under what category. To get a clear understanding of the income heads, keep reading.
The 5 heads of income tax are:
Any income that you receive in terms of the service you provide on a contract of employment is applicable for taxation under this head. This includes salary, advance salary, perquisites, gratuity, commission, annual bonus and pension.
This tax head also includes some exemptions:
An individual’s income from his or her property or land is taxable under the head of income from house property. To put it simply, this head includes the policy for calculating tax on rental income that you receive from your properties.
In case you own more than one self-occupied house, then only one house is considered to be occupied and the rest are considered to be rented out. The taxation occurs on income received from both commercial and residential property.
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:
When you earn profits 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 short-term capital gains and long-term capital gains.
When you sell your capital assets after holding them for a period of 36 months or more, they will fall under long-term capital gain and will have a tax rate of 20%. Alternatively, if you sell your capital assets within a period of 36 months, the tax deduction will be under short-term capital gain at the rate of 15%. In the case of securities, this is applicable if you sell your holdings within 12 months from the purchase date.
Among the five heads of income tax, this one includes any other income that does not have any mention in the above 4 heads. They fall under Section 56 sub-section (2) of the Income Tax Act and include income from lottery, bank deposits, gambling, card games, sports rewards, etc.
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:
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:
In case of businesses, they are:
The five features of tax are:
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.