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What are the 5 Heads of Income Tax?

Updated on :  

08 min read.

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.

What are the 5 types of income tax?

The 5 heads of income tax are:

  1. Income from salary
  2. Income from house property
  3. Income from profits and gains from business or profession
  4. Income from capital gains
  5. Income from other sources
  • Income from salary

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:

  1. 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.  
  2. Conveyance Allowance: You can get a monthly tax exemption of up to Rs.800.  
  • Income from house property   

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.  

  • Income from profits and gains from business or profession

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:

  1. Profits generated from the sale of a certain license
  2. Gains earned by an individual during an assessment year
  3. The profits that an organisation makes on its income
  4. Cash received on the export of a government scheme
  5. The benefits that a business receives 
  6. Gains, bonuses or salary that an individual receives due to a partnership with a firm
  • Income from capital gains

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. 

  • Income from other sources    

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.  

What are the differences between heads of income and 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 house or property
  • Capital gains
  • Income from salaries
  • Gains and profits from profession or business
  • Income from capital gains

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 tyres. Income tax is one of the most common taxes in the country. It is 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. 

FAQs

1. Who is liable to pay income tax?

Any individual, Hindu Undivided Families, Firms, LLPs, Companies, Body of Individuals, Association of Persons and any other artificial judicial person not mentioned above are liable to pay income tax. 

2. How to calculate tax amount?

An individual can check his/her tax liability by using a free online tax calculator. 

3. Is agricultural income taxable?

No, agricultural income is not taxable under Section 10 (1) of the Income Tax Act. Moreover, it does not fall under an individual’s total income. 

4. How does the government collect income tax?

The government collects income tax through voluntary payments like Advance Tax and Self-Assessment Tax, Tax Deducted at Source (TDS), and Tax Collected at Source (TCS). 

5. Does income from animal husbandry fall under agricultural income?

No, income from animal husbandry does not fall under agricultural income.