The 5 Heads of Income

The Income Tax Act was brought into force on the 1st day of April 1962. It was made applicable to entire India including the state of Jammu & Kashmir. Since it's evolution, the act has gone through various changes. Innumerable amendments has been made through the Finance Bill every year in the budget announced by the honorable Finance Minister in order to curb/ reduce the increasing tax evasion and malpractices.

It is important to know that the bill is then passed to both the houses of the Parliament. Thereafter, the assent of the President is received before it finally becomes an act. 

The Government of India collects Income tax from the assessee (the taxpayer) who could be a resident/non resident with the help of the Income Tax Act on their earnings. These earnings are basically categorized into the following five heads of income:

• Income from Salary: In this bracket, all the income of an individual earned by serving as an employee of an organization is taxed. There should exist an employee-employer relationship. The most note-worthy point here is that the taxability of the income is done on accrual (salary due) or amount received - whichever is earlier. Eg. If the salary for the month of April' 20 is received on the 25th of May' 20, then, it shall be taxed on the 30th of April' 20 itself and not on the day when it is received.

• Income from House Property: In this head of income, tax on all the revenue earned from letting the properties on rent is computed. In case an individual has taken a house on loan for the purpose of his stay, then, the interest paid on the home loan will also be available for deduction from his total income, whether or not the assessee earns any rental income.

• Income from Profit/ Gains from business/ profession: When an assessee (be it a Company, Partnership, Sole Proprietorship or any other form of business) earns income by trading of goods and/ or providing any kind of services, then, such revenue after deducting the expenses incurred is taxed under this head.

• Income from Capital Gains: Income earned from sale of properties and investments after deducting the purchasing cost and other specific expenses is taxed under the head Capital Gains. They could be stocks, property, gold, bonds, etc.

   

• Income from Other Sources: Finally, all other incomes of any assessee which could not form part of the above 4 heads is taxed under this head. Some examples could be commission, interest income, lottery income, betting, etc.

Now, after reading the above article, you must have got a brief idea of the five heads of income under the Income Tax Act, 1961. The first and foremost step to calculate the tax liability of any assessee i.e. to basket the income earned in any one of the five heads of income. Then, after allowing some deductions and reliefs, we calculate the tax liability of the assessee as per the prevailing tax slabs.

Disclaimer: These are just basic concepts. However, the applicability of the law shall depend on case to case basis.

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