5 Heads Of Income

Whether you are a salaried individual or you run your own business, your income can be categorised under different heads. Each head has it’s own provisions for deductions and exemptions. Let’s see what these heads are and which income qualifies for the same.

Income from salary

Section 15 to section 21 relate to income charged under the head salary. Salary includes basic salary or wages, any annuity or pension, gratuity, advance of salary, leave encashment, commission, perquisites in lieu of or in addition to salary and retirement benefits.

Allowances: An allowance is a fixed monetary amount paid by the employer to the employee for expenses related to office work. Allowances are generally included in the salary and taxed unless there are exemptions available.

Specific tax exemptions are allowances allowed by employers as part of salary .Some of them are.

Conveyance Allowance: Up to Rs 800/- a month is exempt from tax.

House Rent Allowance (HRA): If you are a salaried individual living on rent, you can claim a part of it under HRA allowance.

Leave Travel Allowance (LTA): LTA accounts for expenses for travel when you and your family go on leave. While this is paid to you, it is tax free twice in a block of 4 years.

Medical Allowance: Medical expenses up to the extent of Rs 15,000/- per annum is tax free. The bills can be incurred by you or your family.

Perquisites: Section 17 deals with perquisites which are basically benefits in addition to normal salary to which an employee has a right by way of his employment. Examples of these are rent free accommodation or car loan. There are some perquisites that are taxable in the hands of all categories of employees, some which are taxable when the employee belongs to a specific group and some that are tax free.

Income from house property

Income from any residential or commercial property is charged to tax under section 22 to section 27 of the Income Tax Act. In fact, if one owns more than one house, barring one, other properties are charged to tax despite the fact that the house may not be put on rent.

Income chargeable to tax under the head “Income from House Property” is computed as Annual Value and is the higher of the fair rental value, rent received or municipal rent. Standard deduction of 30% is allowed on the ALV. Further, one can reduce the interest on borrowed capital.

Profits and gains of business or profession

Income earned through your profession or business is charged under the head “profits and gains of business or profession”. The income chargeable to tax is the difference between the credits received on running the business and expenses incurred.

The deductions allowed are depreciation of assets used for business; rent for premises; insurance and repairs for machinery and furniture; advertisements; travelling and many more.

Capital gains

Section 45 is the charging section for capital gains. Any profit or gain arising from transfer of capital asset which is defined under section 2(14) held as investments are chargeable to tax under the head “capital gains”.

The capital gains are charged to tax under two sub-heads -short term capital gains or long term capital gains. Further, Income Tax Act also provides the special rate of tax for charging tax on capital gains on shares and mutual funds.

There are tax exemptions from long term capital gains on sale of residential house or other capital asset or even agriculture land under section 54 or section 54F or section 54EC or section 54B of the Income Tax Act.

Income from other sources

Any income that does not fall under the four heads above is taxed under the head “income from other sources”. An example is winning from lottery, any sum of money exceeding Rs. 50,000 received from a person (other than from relative, on marriage, under a will or inheritance).

Some more examples for income from other sources are:

  1. Interest on bank deposits and securities
  2. Dividend
  3. Income from sub-letting a house property by a tenant
  4. Insurance commission
  5. Income from royalty and more.

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