What are the Heads of Income Under Income Tax Act?

Under the Income Tax Act, there are five heads which are known as the heads on income. At the end of each year, you or your accountant is expected to classify your yearly earning under these heads of income as per the Income Tax Act to calculate the amount of tax payable by you as a registered citizen of a country abiding the laws of the prevailing Government. These heads of income are here to ensure the proper maintenance of monetary power within the social and governing system.

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Having these rules allows better cash flow in the economy which helps elevate the functioning if the government to provide the citizens and the common people better standers to living and transportation.

Before going into details of the different heads of income, it is important and crucial to know about the Income Tax Act under which these heads prevail for it is the founding and the basic structure on which the heads of income stand.

Income Tax Act

The Income Tax Act was enacted in the year1961. It is the statue under which all issues regarding taxation is listed and stated. The act includes all forms of levy, administration, collection & income tax recovery. The fundamental aim of the act is to consolidate and amend the rules of taxation in the country to ensure economic stability and proper circulation of wealth throughout all sectors. The act consists of long lists of varied sections with each section having different aspects relating to the taxation of the country.
Under the section income tax in the act, there are a total of 5 heads of income that touch different topics of taxation applicable and the proper consolidation of it. Those five heads are: 

Heads of Income Tax

  • Income from salary

  • Income from house property

  • Income from profits and gain of business or profession

  • Income from capital gains

  • Income from other sources

These heads detail the information about when the Tax is to be charged and the certain requirement to be fulfilled for taxation liabilities. Each of these head has their own separate conditions that are needed to be fulfilled so as to make the income generated from these sources taxable. These conditions are mentioned in different Sections of the Income Tax Act itself.

Income from Salary

If there exists a relation of payer and payee in a firm or agreement, and the relation is defied on of employer and employee where the employee is being paid a certain amount of remuneration for his or her services, then the income can be charged under this head in the Income Tax Act. A salary could be any sort of monetary compensation. This could be any basic and normal wage, annuity, pension, gratuity, leave encashment, etc.
After making a total aggregate of the total amount of income excluding the exemptions if, at all present, the total amount or gross salary is then charged under this income head of the Act.
All basic salaries along with commissions and bonuses are completely liable to taxation.
Under the income head for salary, the salaries include allowances and there are some allowances that are exempt from tax under some conditions. Allowances are; as per the Act, a fixed amount of money paid to an employee in regard to the labor and service are done by him. The allowance is generally included with the salary unless specific exemptions are mentioned. Some exemptions for allowances are conveyance allowance: allowance given for the purpose of the allowance is exempt from tax up to a limit of rupees 800 per month.

Leave travel allowance:

Leave allowance trade or LTA denotes the expenditure incurred for travel when you go on a trip for vacation purposes alone or with a group of friends of the family. As this is paid, it is free of tax twice in a span of 4 years.

Medical allowance:

Up to a limit of rupees 15,000 per annum, medical allowance is tax-free, and you can bear the bill and your family.

These are some of the many types of allowances and their clauses for tax deductions. Other monetary payments made to employees by an employer also have their own methods of taxation. 

Income from House Property

Another head in the Income Tax Act, this clause shed light and detail about the taxation policy on the house or real estate that you as a tax payer are residing in. Vacant house property is considered as ‘self-occupied’ in regards to the purpose of income tax. In the situation that a taxpayer owns more than a single self-occupied house, then only one house is treated and considered as a single self-occupancy house property. Rest is considered to be let out.

This is the second head of the Income Tax Act is dedicated from section 22 to 27 which correspond to the computation and calculation of total standards amount of income by a person in the house or property which he or she rightfully owns. The tax amount charged is not acquired from the amount of rent that is received but rather on the property or land as a whole. Nonetheless, is the; and or property is being used for a normal course of business, then the income generated from the rent will also be included to be charged for tax income.
Any and all commercially owned resident or property owned is also subjected to taxes.
For income from house property to be taxable, a few conditions must be satisfied and fulfilled.

  • The house property has to consist of a house, building or any land appurtenant.

  • The taxpayer should be the owner of the house property.

  • The house property must not be used for any business or professional venture done and carried out by the taxpayer. It can only be used for residential purposes.

Having these conditions met, the income generated by house property thereby becomes chargeable and liable to tax deduction as per the Income Tax Act.

Income from Profits and Gain of Business or Profession

This is the third head under the Income Tax Act. A business includes any kind of trade, commerce manufacturing or any nature of trade. Profession implies the acquisition of specific or special knowledge in a particular field after a period of education and verified examination. Under this head of income, profits and gains made during the tenure of business are subjected to complete and total taxation. Section 28 of the same Act also states that any form of compensation or other sorts of payments which are due to particular individuals is also not beyond tax. Income formed by the practice of trade o commerce in the specific field of the professional is also liable to tax. Profits incurred on the sale of imports, incentives, any interest or form of salary or bonus, a commission from a firm, all are taxable under the head of income in the Income Tax Act. Even any amount that is received by a key man policy company is not exempt from taxation. For an income to be charged under the head of income from profits and gains from business or profession, there are some rules and conditions that must be fulfilled according to the Section 28 of the Income Tax Act.

  • For income to be charged, business or profession must exist in the first place.

  • The business or profession must be carried out by the taxpayer or assesse him/herself.

  • The profession or business whose income is to be charged must be operational and be carried on for a greater part of the previous year.

  • The tax charge is based on the profits and gain made by the business during its running and operating time of the previous year.

  • The charged made can be extended to any and all business or profession that is ongoing or being carried on by the assesse.

Only and only if these conditions are applicable, then the income from profits and gains generated can be charged for tax under the Income Tax Act. It is important to note that to be charged under this head, the business or profession need not be operational throughout the entire previous year. As long as it has been carried on by the assesse for some time during the previous year, it is chargeable.

Income from Capital Gains

Being the fourth head of income under the Income Tax Act, income gained from any capital asset, be it movable or immovable, is deemed as taxable. Capital gains are divided into two parts: long-term capital gains and short-term capital gains.
For short-term capital gain, if any capital holder sells his capital within a period of thirty-six months, the deduction of tax can be taken. The same can be said for securities sold within twelve months of its purchase. Under the Section 11A on the Income Tax Act, equity and equity shares funds that have been sold in stock exchange and securities transaction tax on such short-term capital gains is chargeable to tax at a rate of 10 percent up to 2008-9 and 15 percent from 2009-10 onwards.
On the other hand, long-term capital gains are taxed at a rate of 20 percent. Under sections 80C to 80U, no long-term tax deductions are allowed. However, in the case of single and HUF where the amount of income is lower than the minimum income requited to be exempted from tax, the basic exemption limit is adjusted against the long-term capital gains.
Long-term capital gains are those which are held up for more than a period of thirty-six months and for the case of securities and shares it is a span of twelve months since the date of purchase. The long-term capital gain can be found by taking out the net sale consideration of the long-term capital asset along with the index cost of acquiring those assets and the cost of the improvement. The remainder that is left is then charged with tax by the Income Tax Act

Income from Other Sources

The fifth and last head of income under the Income Tax Act is the income from other sources. Any income derived from sources other than the previously mentioned four heads is considered to be under this category of income. Some example of other sources of income could be, interest gained from bank deposits, winning in the lottery or even any sum of money which is more than rupees 50,000 received from another individual who does not form a part of the taxpayers relative, spouse or if the money is acquired via inheritance or will. All these sources, even if it is gambling or even card games are chargeable for tax under Section 56(2) of the Act.
Section 145 of the Income Tax Act states the details for the computation and income tax calculator generated from other sources. As per the Section, in come from other sources shall be computed and calculated by the regular accounting method which is followed by whoever the assesse is. This can be either in cash or in a mercantile accounting system.

These are the five heads of income under the Income Tax Act of 196. These detail and specify the different incomes and monetary functions that are liable for taxation by the Government. Knowing the details of these five heads of income will allow proper management of tax. The taxpayer can be clear as to the nature of the tax they are paying to the government and the collection of said tax become much smoother and over all convenient. All citizens who are eligible for taxpayers must abide by these heads of income. If any taxpayer is caught not abiding by the clauses mentioned in the Income Tax Act and make an effort to withhold from paying the due tax amounts, he or she if punishable by the law’s full extent.

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