What are 5 Heads of Income: Explore Types of Income

There are 5 heads of income as per the Income Tax Act. To ensure precise tax calculation at the end of the financial year, it is crucial to classify your earnings correctly under these categories. This guide will simplify these heads of income for you.

Deadline for filing Income Tax Return

File your Income Tax Return (ITR) for the Financial Year 2023-24 (Assessment Year 2024-25) by July 31st, 2024, to avoid late fees.

What are 5 Heads of Income?

Section 14 of the Income Tax Act, 1961, outlines five heads under which all income should be classified for tax calculation and total income computation:

1. Income from Salaries
2. Income from House Property
3. Income from Profits and Gains from Business/Profession
4. Income from Capital Gains
5. Income from Other Sources

These categories must be accurately reported in Schedule S of your ITR form.

Income from Salary 

Any income you receive for the services you provide during your employment is applicable for taxation under this head. This includes basic salary, advance salary, perquisites, gratuity, commission, annual bonus, and pension. 

Key Sections governing this income head are:

Section 15: Taxability of income from salary.

Section 16: Deductions available under salaries.

Section 17: Components of salary, such as monetary compensation and perquisites.

Deductions: 

You can claim deductions from your salary income to reduce your taxable amount. These deductions include:

• Professional tax deducted by your employer
• TDS already deducted by your employer
• Employee's contribution to Public Provident Fund (PPF)

Exemptions for the 'Income from Salary' head:

1. Leave Travel Allowance (LTA): Exemption for travel expenses during leave, allowable for up to two trips in a four-year period.
2. House Rent Allowance (HRA): Exemption based on rent paid, salary, and the location of the residence (metro or non-metro cities).
3. Standard Deduction: A flat deduction of ₹50,000 from the gross salary.
4. Conveyance Allowance: Exemption up to ₹19,200 per annum (₹ 1,600 per month) for conveyance allowance.
5. Education Allowance: Exemption subject to specified limits per child for a maximum of two children.

Income from House Property

What it is: This refers to earnings from a property owned by an individual or entity. It includes income from rent received from tenants, vacant property, or any building used for business or profession.

Key Concepts:

1. Gross Annual Value (GAV): The expected annual rent you can earn from the property. It's crucial for calculating taxable income. Factors affecting GAV include:

• Expected rent for similar properties in the area
• Actual rent received and/or due from the tenant
• Municipal valuation by local authorities for property tax
• Fair market rent
• Standard rent fixed by the Rent Control Act

1. Net Annual Value (NAV): The income earned after deducting some expenses from the GAV. This is the final taxable amount.
2. NAV Calculation: NAV = GAV - Municipal taxes - Loss due to vacancy

Income from House Property Tax Deductions:

1. Section 24 allows deductions for:

• Standard deduction: 30% of NAV (regardless of actual expenses),
• Interest on borrowed capital: Interest paid on loans taken to acquire, construct, repair, or renovate the property.

Conditions:

• Interest deduction is only available from the year of construction completion or acquisition.
• Pre-construction interest can be claimed in five equal installments starting from the completion/acquisition year.
• Construction/acquisition must be completed within five years from the loan year to claim the full interest deduction.

1. Section 80EE (for loans taken between April 1, 2016, and March 31, 2017): Provides an additional deduction of up to ₹50,000 per year for home loan interest, with specific loan amount and property value limits.
2. Section 80EEA (for loans taken between April 1, 2019, and March 31, 2022): Offers an interest deduction of up to ₹1.5 lakhs per year with specific loan amount, property value, and carpet area limitations.

Deemed Ownership: In certain situations, you are considered the property owner for tax purposes even if you are not the legal owner. These situations include:

1. Transferring property to spouse or minor child without consideration (unless for living apart or child's benefit),
2. Holding an impartible estate,
3. Being a member allotted a house property by a cooperative society, company, or association;
4. Being a beneficiary of a trust that owns a house property for your benefit.

Details of income from house property must be reported in Schedule HP of your ITR.

Income From Profits and Gains from Business and Profession (PGBP)

This covers profits and gains earned from any profession or business carried on during the previous year. It includes:

1. Compensation received from the termination of agency or modification of contracts, and sums from keyman insurance policies,
2. Sums received under a keyman insurance policy (taken by a business entity on a key employee/partner's life).

Sources of Income Listed under Section 28:

1. Profits and gains from business or profession carried on by you,
2. Payments from contract modifications or terminations,
3. Sums from keyman insurance policies,
4. Profits on transferring a capital asset, being certain works of art, collections, books, etc., held as stock-in-trade,
5. Profits on transferring specific schemes introduced by the government to promote exports (Duty Entitlement Pass Book Scheme, Duty-Free Replenishment Certificate Scheme, Duty Drawback Scheme),
6. Interest, salary, bonus, commission, or remuneration received from a firm where you're a partner (from the firm's profits),
7. Sums received for using any model, patent, invention, design, secret formula, process, etc., by the owner or someone with exclusive rights to use it,
8. Sums received for imparting technical, industrial, commercial, or scientific knowledge, experience.

Income from Capital Gains

What it is: Income from the transfer of capital assets, categorized into short-term (held for less than 36 months) and long-term (held for more than 36 months). The computation involves subtracting transfer-related expenses, acquisition cost, and improvement cost from the full value of consideration.

Income from Capital Gains Exemptions:

1. Section 54: Exemption on long-term capital gains from residential property transfer if reinvested in another property.
2. Section 54B: Exemption on capital gains from agricultural land transfer if reinvested in new agricultural land.
3. Section 54EC: Exemption on long-term capital gains if invested in specified bonds within six months of transfer.

Indexed Cost Calculation: Adjusts the acquisition and improvement costs for inflation using the Cost Inflation Index (CII).

Income from Other Sources

What it is: A residual head covering any income not taxed under salary, house property, business/profession, or capital gains. Here are some examples of such income:

1. Dividends from companies
2. Interest from savings accounts, FDs, bonds
3. Winnings from lotteries and gambling
4. Gifts in cash or kind
5. Royalty and patent income
6. Income from unexplained investments

Conclusion

In conclusion, managing your finances involves understanding different sources of income. Your salary provides a steady stream, while property and investments can offer additional income. Capital gains from selling assets and income from other sources like interest or royalties add to your financial picture. Remember, each income source may have specific tax implications. Consulting a tax professional or the Income Tax Department website can help you navigate tax filing and maximize your financial well-being.

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