Understanding Heads of Income

Most of us strive for better living standards, better facilities etc for which we work tirelessly and earn money. This can be through various sources like salary, rent, business, interest, dividend etc. However, in order to determine the taxability of the same, the income tax department has categorized these into five distinct heads. So, today lets dive into understanding these heads of income:

  1. Income from Salary

As the name suggests, income from salary includes any wages, salary, compensation, or allowances received by an individual as a part of their employment. Moreover, this head also includes retirement benefits like gratuity, commission, bonus, and pension.

For the income to be qualified under this head, there must be an employer-employee relationship between the employer and employee. If a taxpayer receives arrears of salary or pension after termination or retirement from employment, those amounts will also be included under this head.

Nowadays, ESOP’s (Employee stock option plan) are commonly issued by companies (In an ESOP plan, the employee gets the company’s stock at a low cost. These are perks provided in order to retain employees). The taxation on ESOP normally happens twice. The first time is when they are issued/ exercised by the employees and the second time is when they are sold in the open market. Normally ESOPs are issued to the employees at a lesser price than the market price of the shares of the concerned company. The difference between the market price and the exercise price is considered to be a perquisite, which is taxed as salary in the hands of the recipient,

Additionally, under this head, certain exemptions are also provided such as standard deduction, house rent allowance (HRA), conveyance allowance, etc.

  1. Income from House Property

Under this category, income generated from rentals earned from properties or land which they have rented is assessed. The taxpayers have the option to claim the deduction of the interest amounts paid on a home loan for self-occupied property as well as let out property under the head income from house property.

Here, some people may wonder that what if I have a commercial premise and I have rented it out?

To answer their queries, income generated from renting out a shop falls under this category itself.

  1. Income from Capital Gains

Under this head, income generated on selling of assets is assessed, these assets could be capital asset such as land, buildings, shares, jewellery, bonds, mutual funds, and others.

Moreover, this category comprises two subcategories: short-term capital gains and long-term capital gains. The duration of ownership determines whether the gains are classified as short-term or long-term and, on this basis, there are various exemptions available.

The ESOPs which we discussed in the Salary head, when sold by the employees are taxed under this head.

  1. Income from Business and Profession

The income from business and profession includes profits or losses generated from any business or profession. Business comprises trade, commerce, manufacturing, and other similar activities. On the other hand, the term profession refers to specialized knowledge gained after undergoing formal education and examination in a specific field.

Under this head, there are three different sub-categories for business income:

  • Speculative Business Income (Intraday is taxed as Speculative Business Income)
  • Non-Speculative Business Income (F&O is taxed as Speculative Business Income)
  • Specified Business Income (Some specified businesses like cold chain facility, warehousing facility etc.)

If a person has income under this head, the income tax provides him with an option to report their incomes under the presumptive scheme where the taxpayers are allowed to declare their profits at reduced rates and subsequently pay taxes based on this declaration.

  1. Income from Other Sources

Any income that does not fall under any of the above-mentioned categories will be reported under the head income from other sources. A few examples of income from other sources are interest from savings banks or deposits, dividends from shares or units of mutual funds, winnings from lotteries or games, gifts received, etc.      

To understand more about such interesting concepts along with further interesting examples, check out my course on Mastering Money Management.

Until next time !!!


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