Income Tax Act, 1961 classifies income under different heads for the purpose of taxation. The five main heads of income in India are:
Income from Salary:
Income from Salary refers to the earnings that an individual receives from their employment in the form of a regular salary or wages. In India, income from salary is one of the primary sources of income for a majority of the working population.
Here are some key points related to income from salary in India:
- Definition: Income from salary is defined under the Income Tax Act, 1961, and includes all the remuneration received by an individual for the services they render under an employer-employee relationship. It comprises basic salary, allowances, bonuses, commissions, perquisites, and any other monetary benefits received by an employee.
- Taxation: Income from salary is subject to income tax in India. The tax is calculated based on the income slab rates applicable for the specific financial year. Employers deduct tax at source (TDS) from the employee’s salary and deposit it with the government on their behalf.
- Form 16: Employers issue a Form 16 to their employees, which is a certificate of TDS. It contains details of the salary paid, tax deducted and other allowances provided during the financial year. It is an essential document for filing income tax returns.
- Allowances: Apart from the basic salary, employees may receive various allowances such as house rent allowance (HRA), transport allowance, medical allowance, and others. Some of these allowances are exempt from tax up to a certain limit, as per the Income Tax Act and rules.
- Perquisites: Perquisites, commonly known as perks, refer to additional benefits or facilities provided to employees by the employer. Examples include accommodation, company car, club membership, stock options, etc. Perquisites are also taxable, and their value is added to the employee’s salary for taxation purposes.
- Deductions and Exemptions: Certain deductions and exemptions are available to salaried individuals under the Income Tax Act. These include deductions for expenses like house rent (if HRA is not received), medical insurance premiums, contributions to provident funds, and investments in specific financial instruments such as the Public Provident Fund (PPF), National Savings Certificate (NSC), etc.
- Employer’s Contribution: In addition to the salary received by the employee, some organizations offer contributions to the employee’s provident fund (EPF), employee’s state insurance (ESI), and other retirement benefit schemes. These contributions are not taxable for the employee.
- Income from Other Sources: In addition to salary income, an individual may have income from other sources like interest on savings accounts, rental income, capital gains, etc. These incomes need to be declared and taxed separately as per the applicable provisions.
Income from House Property:
Income from House Property refers to the earnings generated from owning and renting out a property in India. It is one of the five heads of income under the Income Tax Act, of 1961. Here are some key points related to income from house property in India:
- Scope: Income from house property includes any income earned from a property that is owned by an individual, irrespective of whether it is self-occupied or rented out to tenants. It covers residential houses, commercial properties, and land.
- Calculation of Income: The income from the house property is calculated based on the annual value of the property. The annual value is the potential rental income that the property can generate. However, for self-occupied properties, the annual value is considered as nil, and a notional rental value is not added to the individual’s income.
- Standard Deduction: From the calculated annual value, a standard deduction of 30% is allowed to cover expenses related to repairs, maintenance, and collection of rent. This deduction is available even if the actual expenses incurred are less than 30% of the annual value.
- Municipal Taxes: The municipal taxes paid by the owner of the property can be deducted from the annual value to arrive at the taxable value of the property.
- Deduction of Home Loan Interest: If the property is a residential house and a home loan has been taken to finance its purchase, the interest paid on the home loan is eligible for deduction. Currently, a maximum deduction of up to ₹2 lacks per year is allowed for self-occupied properties. For rented properties, the entire interest paid is allowed as a deduction without any limit.
- Loss from House Property: If the total deductions, including interest on the home loan and standard deduction, exceed the annual value of the property, it results in a loss from the house property. This loss can be set off against other heads of income like salary, business income, or other income, subject to certain limits and conditions.
- Multiple Properties: If an individual owns more than one property, only one property can be considered as self-occupied and the other properties are deemed to be rented out. The notional rent for the deemed rented properties is calculated based on certain factors like market value, standard rent, etc.
- Taxation: The income from house property is subject to income tax at the applicable slab rates. The net income from house property is added to the individual’s total income and taxed accordingly.
Profits and Gains from Business or Profession:
Profits and Gains from Business or Profession refer to the income earned by individuals or entities engaged in a trade, business, or profession in India. It is one of the five heads of income under the Income Tax Act, of 1961. Here are some key points related to profits and gains from business or profession in India:
- Scope: This head of income includes income earned from any form of business or professional activity, such as manufacturing, trading, providing services, consultancy, freelancing, and any other commercial venture.
- Calculation of Income: The income from a business or profession is calculated by deducting the expenses incurred for carrying out the business or profession from the gross receipts or turnover. The resulting figure is the net profit or loss from the business or profession.
- Accounting Methods: Businesses or professions can choose between two accounting methods: cash basis or accrual basis. Under the cash basis, income and expenses are recognized when they are received or paid, respectively. Under the accrual basis, income and expenses are recognized when they are earned or incurred, irrespective of actual receipt or payment.
- Expenses Deductions: Expenses that are incurred wholly and exclusively for the purpose of the business or profession are allowed as deductions from the gross receipts. This includes expenses like rent, salaries and wages, office expenses, depreciation on assets, interest on business loans, advertisement costs, and other relevant expenses.
- Depreciation: Depreciation is allowed as a deduction for the wear and tear of assets used in the business or profession. The Income Tax Act specifies the rates of depreciation for different types of assets, and they can be claimed as a deduction over their useful life.
- Loss from Business or Profession: If the expenses exceed the gross receipts, it results in a loss from the business or profession. This loss can be set off against other heads of income like salary, house property, or other income, subject to certain limits and conditions.
- Presumptive Taxation: For small businesses or professions with a turnover or gross receipts below a certain threshold, the Income Tax Act provides for a presumptive taxation scheme. Under this scheme, the income is calculated as a percentage of the turnover, and no detailed accounting or maintenance of books of accounts is required.
- Taxation: The net income from a business or profession is added to the individual’s total income and taxed at the applicable slab rates. In the case of businesses, different tax rates may apply based on the legal structure (e.g., partnership firm, company).
Capital Gains refer to the profits or gains arising from the sale or transfer of capital assets, such as real estate, stocks, mutual funds, or other investments. In India, capital gains are considered as a separate head of income under the Income Tax Act, of 1961. Here are some key points related to capital gains in India:
- Types of Capital Assets: Capital assets can include immovable property (e.g., land, house), movable property (e.g., jewelry, vehicles), financial assets (e.g., stocks, bonds), and intangible assets (e.g., patents, trademarks).
- Classification: Capital gains are classified as either short-term capital gains (STCG) or long-term capital gains (LTCG) based on the period of holding of the asset. For immovable property, the holding period is 24 months or more to qualify as LTCG, while for other assets, it is 36 months or more.
- Taxation of Short-term Capital Gains: Short-term capital gains are added to the individual’s total income and taxed at the applicable slab rates. The tax rates for short-term capital gains are the same as those for the respective income slabs.
- Taxation of Long-term Capital Gains: Long-term capital gains are taxed at a lower rate compared to short-term capital gains. For listed securities (e.g., stocks) and equity-oriented mutual funds, LTCG exceeding ₹1 lakh is subject to a flat tax rate of 10%. For other assets, LTCG is taxed at a rate of 20% with indexation benefits. Indexation allows adjusting the purchase price of the asset for inflation, reducing the tax liability.
- Indexation Benefit: Indexation is the process of adjusting the cost of acquisition and improvement of the capital asset with reference to the Cost Inflation Index (CII) published by the government. It helps in accounting for the impact of inflation and reduces the taxable LTCG.
- Exemptions and Deductions: The Income Tax Act provides certain exemptions and deductions to reduce or eliminate the tax liability on capital gains. Some common exemptions include reinvesting LTCG in specified assets like residential property or specified bonds under Section 54 and Section 54EC, respectively. Additionally, deductions under Sections 80C and 80D are also available, subject to specific conditions.
- Transfer Consideration: The transfer consideration is the amount received or accrued from the sale or transfer of the capital asset. It can include the sale price, consideration received in kind, or any other monetary or non-monetary consideration.
- Calculation of Capital Gains: The capital gains are calculated by deducting the cost of acquisition, cost of improvement, and other permissible expenses from the transfer consideration. The resulting figure is the capital gains on the asset.
Income from Other Sources:
Income from Other Sources refers to the earnings that do not fall under any of the specific heads of income mentioned in the Income Tax Act, of 1961. It is a residual category that includes income sources not covered by the other heads like salary, house property, business or profession, or capital gains. Here are some key points related to income from other sources in India:
- Nature of Income: Income from other sources includes various types of income such as interest earned on savings accounts, fixed deposits, recurring deposits, and bonds. It also includes rental income from assets other than a house property, income from winnings, gifts, dividends, royalties, and any other income not covered under specific heads.
- Taxation: Income from other sources is generally taxable at the applicable slab rates. However, there are specific provisions for certain types of income that may have different tax treatment or deductions.
- Interest Income: Interest earned on savings accounts is taxable under the head of income from other sources. However, there is a deduction of up to ₹10,000 available under Section 80TTA for interest earned on savings accounts with banks, cooperative societies, or post offices. For senior citizens, an additional deduction of up to ₹50,000 is available under Section 80TTB for interest income from deposits with banks, post offices, or cooperative societies.
- Rental Income: If an individual receives rental income from assets other than a house property (e.g., machinery, equipment, vacant land), it is considered income from other sources. Such rental income is taxed after deducting any applicable expenses related to the rental activity.
- Dividends: Dividends received from investments in shares of domestic companies are taxable as income from other sources. However, dividends up to ₹10 lakh are exempted from tax under Section 10(34) of the Income Tax Act.
- Gifts: Income received in the form of gifts from individuals or entities is generally taxable under the head of income from other sources. However, there are certain exemptions available for gifts received from specified relatives, on occasions like marriage, etc., subject to specified limits and conditions.
- Royalties: Royalties earned from copyrights, patents, books, artistic works, etc., are considered income from other sources. Such income is taxable after deducting any allowable expenses related to the creation or acquisition of intellectual property.
- Other Miscellaneous Income: Income from sources like winnings from lotteries, game shows, horse races, or any other gambling activity, as well as any other income not specifically mentioned under other heads, is considered income from other sources.
It’s important to note that tax laws and regulations are subject to change, so it’s advisable to consult a tax professional or refer to the latest updates from the Income Tax Department of India for accurate and up-to-date information.