Heads of Income Meaning - Definition / Legal Terminology - Income Tax

HEADS OF INCOME The five Heads of Income have been briefly explained here under: INCOME FROM SALARIES Income under this head is chargeable only if an employer-employee relationship exists between the payer and payee. If this relationship does not exist, then the income would not be deemed to be income from salary. Salary includes basic salary or wages, any annuity or pension, gratuity, advance of salary, leave encashment, commission, perquisites in lieu of or in addition to salary and retirement benefits. The aggregate of the above incomes, after exemptions available, is known as Gross Salary and this is charged under the head income from salary. INCOME FROM HOUSE PROPERTY Tax on Income from House Property is the tax on rental income which is being earned from the House Property. However, in case the property is not being rented out, tax would be levied on the expected rent that would have been received if this property was rented out. Income from House Property is perhaps the only income that is charged to tax on a notional basis. Tax under this head does not only include Income from letting out of House Property but also includes Income from letting out of Commercial Properties and all types of properties. Various Deductions like Standard Deduction, Deduction for Municipal Taxes paid and Deduction for interest on Home Loan is also allowed under this head of income. PROFITS AND GAINS OF BUSINESS OR PROFESSION For the computation of total income, income earned from business or profession is chargeable under the head Income from Profits and Gains of Business or Profession. The difference between the revenue earned from the business and the expenses incurred shall be chargeable to tax under this head. The Income Tax Act also allows certain deductions such as depreciation of assets used for purpose of business, rent paid, expenses of insurance, repairs for machinery and furniture, travelling expenses, etc. and other such expenses incurred in the normal course of business. INCOME FROM CAPITAL GAINS Any profit or gain arising from transfer of capital asset held as investments are chargeable to tax under the head capital gains . For the purpose of computation, capital gains are divided into Long Term Capital Gains and Short Term Capital Gains. There are tax exemption from long term capital gains on sale of residential house or other capital asset or even agriculture land under various sections of the Income Tax Act. The Act provides for indexation benefit to reduce tax outgo. INCOME FROM OTHER SOURCES Any other income which does not fall within the above four heads of income shall be chargeable to tax under Income from Other Sources. For example: Interest income from bank deposits Winnings from lottery, card games, gambling or other such sports Dividend income Income from insurance policy Any amount exceeding 50,000/- received from a person (other than from relative, on marriage, under a will or inheritance)