What are the Heads of Income Under the Income Tax Act?

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 heads of income? Let us have a look-

1. Income from Salary for Computing Your Tax

If you are a salaried employee, your salary falls under this head. Your employer will deduct the TDS as per your income tax slab and pay the same to the government.

Once the total amount of income is calculated, the gross salary is taxed under this head.

Apart from the basic salary, even the gratuity, pension, annuity, commission, fees, leave encashment, and profits that you receive from your employer will go through TDS deduction.

2. Income from House Property for Computing Your Tax

The next under 5 heads of income tax is the income from house property. Section 22 to Section 27 of the IT Act specify the different provisions for computing income of someone owning property or land.
It is essential to know that the tax here is derived from the land or property and not from how much rent you earn from the same unless the property is let out to a business.

3. Income from Business or Profession for Computing Your Tax

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.
Any kind of bonus, salary, or profit received from a partnership in a business organisation will also be calculated as per the business income heads of income tax.

Income can be charged under this head if it meets a few rules-

• Profession or business must exist for income to be taxed.
• The taxpayer should be handling the operations of the profession or business.
• The profession must be operational for a greater part of the previous year.
• If a taxpayer is operating any other profession or business, then this tax will also be levied on them.

4. Income from Capital Gains for Computing Your Tax

Any gains or profits that you earn by transferring or selling capital assets which were held as investments are considered as capital gains.
This includes your investments in stocks, mutual funds, property, and many other types of investment.

5. Income from Other Sources

The last of the income tax five heads is income from other sources. Any kind of income which cannot be categorised under the heads listed above will fall under this income head.
For instance, winnings from horse racing or lottery, gifts received, dividend income, and interest from government bonds and securities fall under this head.
These are the income tax 5 heads that every taxpayer should know about. Consult a tax professional to know more about these heads and determine the correct head under which you should pay income tax.

What are the 6 major sources of tax revenue?

The 6 main sources of tax revenue are income tax, goods and service tax (GST), wealth tax, gift tax, corporate tax and union excise duties.



GST (Goods and Service Tax)

GST is a single tax on the supply of services and goods right from the manufacturer to the end consumer. It is finally levied on a consumer when he purchases a good or service. To simplify the tax structure, 17 large taxes and 13 cesses are combined into 1 tax and named GST.



Direct Tax 

income tax is a direct tax which is levied on a person’s income or profit.



Gift Tax 

The government introduced the Gift Tax Act in 1958 with the objective of imposing taxes on gifts received and given under specific circumstances. These gifts can be in the form of cheques, demand drafts, cash or anything valuable like gold, property etc. this was abolished in 1998, and gifts were tax-free. It was reintroduced in 2004 in a new form under the income tax provision (Section 56(2)). It has to be filed under ‘income from other sources.’



Corporate Tax

a direct tax imposed on the profits made or the net income of businesses. Any company registered in India, (be it private or public) under the Companies Act 1956, is liable to pay corporation tax. The corporation tax is levied at a specific rate under Income Tax Act 1961.



Union Excise Duties

an indirect tax imposed on the manufacturer or producer of goods to the Government. Customs duty is levied on goods coming from outside the country.



wealth tax 

wealth tax is payable on the assets purchased after paying income tax. It is a direct tax aimed at reducing inequality of wealth. It was charged to people belonging to the highest slab rate. Later it was abolished and replaced with an additional surcharge levy of 2%.



What is computation of income under Income Tax Act?

The computation of income under the Income Tax Act is a systematic presentation of all incomes. All calculations are done regarding income, rebates, reliefs, exemptions, and deductions, along with the calculation of taxes. There is no particular format for it. For the computation of income, a few details need to be submitted like


• personal details - the name of the assessee, gender, father's name, contact details, address, email ID, PAN etc.
• bank account details - bank name in which the account is, account number, type of account, IFSC etc.
• income details, calculation of taxes and details of the taxes paid.



How to prepare your income tax computation?

Filing of income tax return is a fairly straight forward practice with the introduction of Annual Information Statement (AIS). Taxpayers should keep the following documents ready to prepare their income tax computations:


1. Salaried individual taxpayers should keep their salary slips and Form 16 ready
2. Form 26AS
3. Proof of investments
4. PAN card
5. Net banking or debit card details for payment of tax



What are the steps of computation of total taxable income?

For the computation of total table income, the following steps need to be followed:



Step 1: Calculate the gross total income

• Income from salary - calculate the total gross salary during the financial year. This 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 - add long-term and short-term capital gains 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.



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

• Salary income deduction, exemptions, allowances
• leave travel concession in clause (50) of Section 10.
• house rent allowance in clause(13A) of Section 10.
• ·other allowances in clause (14) of Section 10.
• standard deduction like employment/professional tax and entertainment allowance in Section 16.
• Rental income from house property deduction
• interest paid on home loan under Section 24.
• 3. deduction from business or profession
• depreciation on assets
• any commission or bonus paid to employees.
• expense incurred in running a business or profession.
• rent, taxes repair, insurance
• contribution towards employee's provident fund.
• deduction from gross income
• medical policy for self, spouse or dependent child.
• repayment of education loan
• contribution to National Pension scheme
• section 80C deduction against PPF, EPF, ELSS mutual fund, repayment of home loan etc.



Step 3: calculate the net taxable income

Deduct exemptions, deductions, and allowances from the gross income. This way you will get net taxable income for the financial year. calculate the taxes payable on this net taxable income.



Step 4: calculate the tax payable

This can be calculated by applying taxes depending on the income tax slab rate.



What is computation formula?

The formula for computation is subtracting all the deductions from the gross taxable income will give the total income on which tax has to be paid depending on the slab rate.

Total income = gross taxable income - all deductions.



What are the different methods of computation?

The Income Tax Act permits only two methods of accounting. These are the cash system of accounting and the mercantile system of accounting.
The cash system of accounting is only taken into account on the actual payment or actually received. This postpones the tax liability to the year of actual receipt of income.

The mercantile system requires all transactions to be recorded when they are due. It is applicable for salary, capital gains and income from properties. One has to decide if the profits or gains are from the profession, business or other sources.



What is the different between calculation and computation?

Calculation and computation are derived from the words calculator computer. We use a calculator to perform simple calculations and for simple arithmetic operations. On the other hand, a computer is used for complicated tasks involving complex algorithms. Thus, the calculation is used for simplicity and compute, and computation is used for complexity.



What is included in Salary Income under the 5 heads of income tax?

Income from salary: any income received for the service provided under a contract for employment is applicable for taxation. This includes salary, advance salary, commission, gratuity, pension, perquisites, and annual bonus. This would also include a conveyance allowance (monthly exemption up to Rs. 800. apart from this HRA (House Rent Allowance) as a salaried person living in a rented house, complete or partial tax exemption can be claimed.

DISCLAIMER

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.