5 Heads of Income Under Income Tax Act - Complete Guide (FY 2026-27)

• Section 13 (previously Section 14) classifies taxable income under five heads: salaries, house property, business or profession, capital gains, and other sources.
• For FY 2025-26, the new tax regime starts with a nil slab up to ₹4 lakh and provides a Section 156 (previously 87A) rebate of up to ₹60,000 when the eligible normal-rate taxable income does not exceed ₹12 lakh.
• A salaried taxpayer may have no tax on normal-rate income up to ₹12.75 lakh after the ₹75,000 standard deduction under the new tax regime.
• Capital-gains rates changed for transfers on or after July 23, 2024, including a 20% rate under Section 196 (previously 111A) and a 12.5% rate under Section 198 (previously 112A) above the ₹1.25 lakh threshold.

Apart from salary, you can earn income in many ways, such as returns from investments, income from property, capital gains, and business income. To make sure that these different types of revenues are chargeable to income tax, Section 14 of the IT Act, 1961, specifies 5 heads of income. To make an income chargeable, it should be under one of the five income heads. So, what are these sources of income?

The classification matters because the computation rules, deductions, loss-adjustment provisions and tax rates differ from one head to another.

This guide covers income earned during FY 2025-26 and reported in AY 2026-27. The Income Tax Act, 1961, applies to this period, while the Income Tax Act, 2025, came into force on April 1, 2026, for tax years 2026-27 onwards.

Also Read: Income Tax Act 1961: Chapters, Provisions & Scope

If you are a salaried employee, your salary falls under this head.

Salary income can include basic pay, dearness allowance, bonuses, commission, advance salary, pension, taxable allowances and taxable perquisites received because of an employer-employee relationship.

For FY 2025-26, the standard deduction is ₹75,000 under the new tax regime and ₹50,000 under the old tax regime.

Under Schedule 11 of the Income Tax Act of 2025 (Section 10(13A) previously), the HRA exemption under the old tax regime is the least of actual HRA received, rent paid minus 10% of salary, or 50% of salary for Delhi, Mumbai, Kolkata and Chennai and 40% elsewhere.

The HRA exemption is not available under the new tax regime, although the standard deduction remains available.

The aggregate employer contribution to a recognised provident fund, the National Pension System and an approved superannuation fund becomes a taxable perquisite to the extent it exceeds ₹7.5 lakh in a year.

Gratuity, leave encashment, and commuted pension may be fully or partly exempt depending on the employee category, the payment type and the applicable conditions; they should not be treated as automatically tax-free.

The next under-5 head of income tax is the income from house property.

Self-Occupied Property

The annual value of a self-occupied property is taken as nil, and a taxpayer can select up to two properties for this treatment. Under the old tax regime, the aggregate Section 22(2) (previously 24(b)) interest deduction can be up to ₹2 lakh for qualifying purchase or construction loans; the deduction is generally capped at ₹30,000 for specified repair or older loan cases.

Under the new tax regime, Section 22(2) (previously 24(b)) interest cannot be claimed for a self-occupied house property.

Let-Out Property

For a let-out property, municipal taxes actually paid by the owner are deducted while determining net annual value, followed by a 30% standard deduction under Section 22(1) (previously 24(a)). Interest payable on borrowed capital is deductible under Section 22(2) (previously 24(b)) without the ₹2 lakh property-level ceiling.

The interest deduction for a let-out property remains available under the new tax regime, but a resulting house-property loss cannot be set off against income under another head or carried forward under that regime.

Deemed Let-Out Property

A second property is not automatically deemed let-out. Where a taxpayer owns more than two properties that could otherwise qualify as self-occupied, only two selected properties can have nil annual value; the remaining properties are generally treated as deemed let-out, and expected rent is considered.

Also Read: Section 24: Deductions From House Property Income

Capital gains are any gains or profits you earn by transferring or selling capital assets held as investments. This includes your investments in stocks, mutual funds, property, and many other types of investments.

For transfers on or after July 23, 2024, short-term gains on listed equity shares, equity-oriented mutual funds and business-trust units covered by Section 196 (previously 111A) are taxed at 20%. Long-term gains covered by Section 198 (previously 112A) are taxed at 12.5% on the amount exceeding ₹1.25 lakh, subject to the Securities Transaction Tax conditions.

Immovable property and gold are generally treated as long-term capital assets when held for more than 24 months; shorter holdings are taxed as short-term gains at the applicable slab rate. Long-term gains on these assets are generally taxed at 12.5% without indexation for transfers on or after July 23, 2024.

Resident individuals and HUFs selling land or a building acquired before July 23, 2024, can compare 12.5% without indexation with 20% using indexation and apply the lower tax outcome.

Units of a specified debt-oriented mutual fund acquired on or after April 1, 2023, fall under Section 76 (previously 50AA), and the gain is treated as a short-term capital gain, so it is taxed at the applicable rate without indexation.

Any kind of income that you obtain from trade, manufacture, commerce, or profession is chargeable under the business income head. Your expenses will be deducted from your revenues to calculate your profits, and the income tax will then be applicable under this head.

• Under Section 58 (previously 44AD), eligible businesses can normally use presumptive taxation where turnover or gross receipts do not exceed ₹2 crore. The limit increases to ₹3 crore only when cash receipts do not exceed 5% of total turnover or gross receipts.
• Presumptive income under Section 58 (previously 44AD) is generally 8% of the eligible turnover and 6% for qualifying receipts through banking or prescribed electronic modes. A taxpayer may voluntarily declare a higher profit.
• Under Section 58 (previously 44ADA), a resident individual or partnership firm other than an LLP carrying on a specified profession can declare 50% of gross receipts as income. The normal receipt limit is ₹50 lakh and rises to ₹75 lakh only when cash receipts do not exceed 5% of total receipts.
• Declaring actual profit above the presumptive percentage does not itself create a tax-audit requirement. Books and audit issues generally arise when a taxpayer declares a profit below the prescribed presumptive amount and meets the statutory conditions.

Also Read: What is Income Tax in India?

Step 1: Calculate the gross total income

• Income from salary - calculate the total gross salary during the financial year. The total will be mentioned in Form 16.
• Income from house property - add net rental income to the gross income. Make sure to claim deductions.
• Income from capital gains includes both long-term and short-term capital gains, which should be added to the gross income. Be careful about rate applicability because not all gains are taxable at a slab rate.
• Income from business and profession - add the income earned from business or profession and make sure to claim expenses, if any.
• Income from other sources - add the income earned from any other source like FD, investments in bonds, etc.
• Check the amounts against Form 130 (previously 16), Form 168 (previously 26AS), the Annual Information Statement and relevant bank, broker, rent and business records before finalising each head.

Step 2: Claim tax deductions and exemptions. This will be deducted from the gross income

Apply only those exemptions and deductions permitted by the selected tax regime. Deductions such as HRA and other deductions are generally associated with the old tax regime, while the new tax regime allows a narrower set of deductions.

Step 3: Calculate the net taxable income

Set off eligible losses only after applying the head-specific restrictions, including the special rules for house property and capital losses.

Step 4: Calculate the tax payable

Apply slab rates to normal income and the relevant special rates to income such as specified capital gains, lottery winnings and virtual digital assets; then add the surcharge and health and education cess where applicable.

Also Read: Income Tax Slabs 2024: New & Old Regime Tax Rates

The new tax regime is the default regime for eligible individual taxpayers and offers lower slab rates with fewer deductions. For FY 2025-26, its slabs are nil up to ₹4 lakh, 5% from ₹4 lakh to ₹8 lakh, 10% from ₹8 lakh to ₹12 lakh, 15% from ₹12 lakh to ₹16 lakh, 20% from ₹16 lakh to ₹20 lakh, 25% from ₹20 lakh to ₹24 lakh and 30% above ₹24 lakh.

A resident individual can receive a Section 156 (previously 87A) rebate of up to ₹60,000 when the eligible normal-rate taxable income under the new regime does not exceed ₹12 lakh, with marginal relief available slightly above that level. Income taxed at special rates, including specified capital gains, is excluded when calculating this rebate.

The old tax regime may produce a lower liability for a salaried person who can claim substantial HRA, Section 126 (previously 80C), health-insurance and home-loan benefits. The new tax regime may work better where deductions are limited, but the result depends on the exact income mix.

Special capital-gains rates generally do not change merely because the taxpayer selects the old or new regime, although rebate availability and deductions against other income can affect the final tax.

Taxpayers with business or professional income who want to opt out of the default regime must generally furnish Form 10-IEA by the return-filing due date, and their ability to switch back is restricted.

Use the Income Tax Department’s official calculator to compare both regimes using your actual salary, interest, rental income, capital gains and deductions before filing.

Section 99 (previously 64) can require income arising from assets transferred directly or indirectly to a spouse without adequate consideration to be included in the transferor’s total income, subject to the statutory exceptions.

A minor child’s income is generally clubbed with the income of the parent whose income is higher, excluding the child’s income. Income earned by the child through manual work or the application of skill, talent or specialised knowledge and income of a child covered by the specified disability exception, is not clubbed.

Where minor-child income is clubbed, an exemption of ₹1,500 per child or the amount clubbed, whichever is lower, is allowed. The clubbed amount must still be reported under the relevant one of the five heads of income.

For AY 2026-27,

• ITR-1 is available to an eligible resident individual with total income up to ₹50 lakh from salary or pension, up to two house properties, specified other-source income, agricultural income up to ₹5,000 and Section 112A long-term capital gain of up to ₹1.25 lakh. It cannot be used for short-term capital gains, business income or other disqualifying cases.
• ITR-2 is generally used by an individual or HUF who is not eligible for ITR-1 and does not have profits and gains from business or profession. It covers cases involving capital gains, foreign assets or income, and other complexities permitted by the form.
• ITR-3 is generally used by an individual or HUF with business or professional income who is not eligible for ITR-4.
• ITR-4 is an optional simplified return for eligible resident individuals, HUFs and resident firms other than LLPs with total income up to ₹50 lakh and presumptive income under Section 58 (previously 44AD, 44ADA or 44AE). Current AY 2026-27 guidance also permits up to two house properties and Section 198 (previously 112A) long-term capital gains up to ₹1.25 lakh, subject to all exclusions.

A frequent filing error is omitting fixed-deposit interest, dividend income, rent or deemed rent, or a small capital gain that already appears in the Annual Information Statement. Match the return with the available tax statements before submission.

The five-head structure is the starting point for computing total income, but the final liability depends on the rules within each head, the applicable special rates, loss adjustments and the selected tax regime. For FY 2025-26, taxpayers should pay particular attention to the revised new-regime slabs, the ₹12 lakh rebate threshold for eligible normal-rate income, the post-July 23, 2024 capital gains rules and the updated AY 2026-27 return-form eligibility. Also, knowing the new sections of the Income Tax Act of 2025 is important for filing returns.

Also Read: Section 56 of Income Tax Act