5 Heads of Income Tax

As per the Income Tax Act, your income gets categorised into different heads, no matter the amount you earn. But ‘how many heads of income are there?’ is the question here.
The IT Act clearly outlines five heads of income, which classify earnings based on their sources. 

All citizens liable to pay tax must abide by the rules of taxation based on their income categorisation. Given this, knowing the different heads of income under the IT Act is crucial. It helps ensure that you file taxes correctly. Read on for insights into these heads and to understand what they entail. 

What are the 5 Heads of Income?

Here is an explanation of all heads of income for your understanding. 

• Salary Head: Income earned through employment is known as Salary Head. This can include all types of wages, bonuses or advances received from an employer by the employee. It also accounts for the wages from pension. 

• House Property Head: It refers to all the income received from the rental income of the house or property. Self-occupied property is when you have more than one property, even if it is not used for rent purposes. 

• Profits and Gains from Business Head: The income received from profits or gains from being self-employed or owning a business. If you are gaining profit from partnerships with other businesses, you fall under this category.

• Capital Gains Head: If you have recently sold any property, land, mutual funds, bonds, gold, etc., you have gained capital. This is also known as investment head, as you are owning and selling the asset. 

• Other Sources Head: If the income you have is not included in all the above categories, it is a part of other categories. It can include interests gained from a savings account or a lottery win. 

Income From Salary

The salary head of income tax is one of the 5 heads, which is income received as a contractual agreement between you and your employer. As per the agreement, you will receive a certain amount of remuneration for your services. The gross income includes the following components:

• Basic wage
• Annuity
• Pension
• Annual bonus 
• Gratuity
• Commission 
• Leave encashment 

This total amount is taxable under the tax head on income from salary. Under this tax head, you can claim the following tax deductions. 

• House Rent Allowance (HRA): If you live in a rented house, you can claim HRA, 50% of your basic salary, or monthly rent. It will be minus 10% of the annual salary, whichever is lower
• Conveyance Allowance: This is the compensation for the cost of travelling, captured as ₹1,600 per month
• Medical Allowance: You can claim tax exemption of up to ₹15,000 for covering medical expenses for yourself and your family 

Also Read : How to pay income tax online

Income From House Property

When an individual earns income for income from their property, it is taxable under the tax head of income from house property. Sections 22 to 27 of the IT Act, 1961 provide the required details on what classifies as property, computation and calculation of rental income. 

However, this tax head has certain conditions. The taxpayer must own the property that must be used for residency purposes. 

Income From Profits and Gain of Business or Profession

Any income generated from business or profession falls under this tax head, which includes:

• Income generated from the sale of a certain licence
• Total gains of an individual during the particular assessment year
• Profit of an organisation 
• Grant received as a part of a government scheme
• Gains, bonuses or salary revives under a partnership 

Income From Capital Gains

If you earn income from the transfer or sale of a capital asset held as an investment, this is capital gain. An asset can be any asset class, such as stock, bonds, mutual funds, gold, and property, among others, held for 36 months or more. 

They are further divided into short-term capital gains and long-term capital gains, having variable tax rates. To claim deductions, you can refer to sections 54, 54B, 54D, 54EC, 54ED, 54F, 54G, or 54GA of the Income Tax Act. 

Income From Other Sources

This is the last of the income tax heads, and it includes all the other types of income that are not mentioned in the other categories. Section 56 of the Income Tax Act outlines the specifics. This tax head income earnings from: 

• Gifts
• Lottery
• Bank deposits
• Card games
• Gambling
• Bank deposits

Also Read: Tax Free Income in India

This list isn’t exhaustive, and other sources fall under this income head.  

Knowing how many heads of income are there under the Income Tax Act of 1961 is important information for tax planning. It helps calculate your tax liabilities accurately and avoid mistakes when claiming deductions. Thankfully, you can rely on a digital calculator to estimate your tax outgo with ease. 

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FAQs on Heads of Income

How many heads of income tax are classified?

There are five heads of income under the Income Tax Act of 1961: 

• Income from salary
• Income from house property
• Income from profits and gain of business or profession
• Income from capital gains
• Income from other sources

What is the difference between heads of income and sources of income?

The heads are classifications of earnings or gains of an individual within a year, such as:

• Income
• Rental Income
• Capital gains
• Profits from investments
• Profits from the profession 

On the other hand, sources of income are monetary sources that differ for an individual or business. Thus, salary, commission, interest, etc., can be a source of income for an individual. However, profits, return on Investments, and grants from the government are examples of a source of income for a business. 

What type of income is commission classified as?

Commission or brokerage is the sum of an individual or agent receiver when acting on behalf of another individual or entity. Simply put, it’s part of the payment for non-professional services or the sale or purchase of any goods. 

Can I claim a deduction of expenses incurred to earn Income from Other Sources?

Yes. A deduction is claimed on any other expense incurred to earn Income from other sources that has been only spent for gaining income in previous financial year.

How many heads of income tax are classified?

As per the classification, a total of 5 heads of income are there. This includes salary head, house property, capital gains, gains from business, and other gains.

Do I have to pay tax on gifts (income from other sources) if received on the occasion?

Yes, if you receive any gift in a financial year, it will be included in your income from other source heads. However, the inclusion has a limit of ₹50,000.