Income tax in India is categorized into five main heads. These heads cover various sources of income that individuals and businesses earn throughout the financial year. Understanding these categories of income can help us manage our taxes better. Let’s explore each of these heads in simple terms:
1. Income from Salary:
This category includes income earned from employment. It includes components like basic salary, allowances (such as house rent allowance or conveyance allowance), bonuses, and commissions. Your employer also deducts TDS from your salary based on the applicable slab rates.
2. Income from House Property:
Income earned from properties such as houses, apartments, shops, or land comes under this head. If you own a house and receive rent, that rental income is taxable. Deductions such as municipal taxes paid and a standard deduction of 30% of the annual rent can also be claimed.
3. Income from Business or Profession:
This head covers income generated from any trade, profession, or business activities. This includes profits from manufacturing, trading, consultancy, freelancing, etc. It’s your income after subtracting expenses like rent, employee salaries, and the cost of equipment.
4. Income from Capital Gains:
This head covers profits or gains from the sale of capital assets, such as stocks, bonds, real estate, or jewelry. These gains can be short-term (held for three years or less) or long-term (held for more than three years). The tax rates differ based on the holding period of these assets and the type of asset sold.
5. Income from Other Sources:
This head includes income that doesn’t fit into the above categories. It includes various earnings like interest from savings accounts, fixed deposits, lottery winnings, gifts exceeding specified limits, etc. This income is added to your total income and then taxed according to the slab rates applicable.
Conclusion:
These heads have specific rules regarding income, deductions that can be claimed, and the tax rates that are applicable. Understanding these five heads of income is essential for every taxpayer in India. It helps in correctly reporting income while filing tax returns and availing deductions and exemptions allowed under the law. Proper knowledge of these categories ensures compliance with tax regulations and can lead to effective tax planning.
– Ketaki Dandekar (Team Arthology)
Read more about The 5 Heads on Income here – https://cleartax.in/s/5-heads-of-income-tax