The Income Tax Act of India categorises income into five main categories, known as "heads of income." These categories help in calculating and assessing income for tax purposes. Here is a simple explanation of these five heads of income as defined in the Income Tax Act of 1961:
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1. Income from Salary
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This includes all income earned from employment, such as:
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Basic Salary: The main part of your salary.
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Allowances: Payments like house rent allowance (HRA) and leave travel allowance (LTA).
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Perquisites: Benefits like a company car or rent-free accommodation.
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Retirement Benefits: Contributions to provident funds and gratuities.
Alternatively, it can also be a single component in case of small organizations.
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2. Income from House Property
Under this head, income is derived from owning real estate that is not used for business or professional purposes. It mainly consists of rental income from properties. Specific provisions exist to compute income or loss under this head if the property is self-occupied.
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3. Profits and Gains of Business or Profession
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This covers income from running a business or practicing a profession, such as:
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Business Profits: Earnings from business activities.
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Professional Fees: Income for services provided by , professionals, freelancers or consultants belonging to specific professions like interior decoration, consulting, engineering, accounting, law, medical practice, architecture, and acting
Note that Income from F&O Trading is also considered under this head of income.
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4. Capital Gains
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This is income from selling or transferring capital assets like real estate, stocks, bonds, bullions (Gold and Silver) and mutual funds. It includes:
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Short-Term Capital Gains (STCG): Gains from assets held for a short period.
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Long-Term Capital Gains (LTCG): Gains from assets held for a longer period.
The tax rates and exemptions depend on how long you hold the asset.
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5. Income from Other Sources
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This includes all other incomes not covered under the above heads, such as:
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Interest Income: From savings accounts, fixed deposits, and recurring deposits.
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Dividend Income: Earnings from shares.
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Winnings: From lotteries, online gaming and horse races.
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Gifts: Money or valuables received as gifts.
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Miscellaneous Income: Any other types of income.
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Different types of income under this head are taxed at different rates. For example:
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Interest, Gifts, and Dividends: Taxed according to your income tax slab.
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Winnings from Lotteries and Horse Races: Taxed at a flat rate of 30%.
Understanding these categories helps taxpayers file their returns correctly and optimize their tax liabilities. Each head has its own rules for calculations, deductions, and tax rates. If you have questions about these income categories or tax matters, feel free to ask.
Bonus Question: Taxation of Gifts Received During Marriage or Inheritance
Gifts Received During Marriage: The net income (Sale Price-Purchase price of the person giving the gift) from selling such gifts is taxed based on the type of asset, such as capital gains or income from other sources. It is important to note that Cash receipts are not taxable.
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Inheritance: When you sell an inherited asset, the profit or loss is calculated by subtracting the original purchase value (paid by the person who passed the asset to you) from the current sale value.