Five Heads of Income Under the IT Act: All you need to know

  • Published on: 18 Apr 2024
Five Heads of Income Under the IT Act: All you need to know

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. 

Income From Salary

Salary is one of the 5 heads of income tax, which is a type of 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 minus 10% of the annual salary, whichever is lower
  • Conveyance Allowance: This is the compensation for the cost of travelling, which is capped at ₹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 

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, and it can only be used for residency purposes. 

Also Read: Income Tax Slab FY 2023 – 24

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

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

Also Read: Tax Free Income in India

Knowing how many heads of income are there under the Income Tax Act of 1961 is important information for tax planning. This is because it helps you 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 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. 


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