Understanding the different types of income is essential for managing your finances and planning for the future. There are 5 heads of income as per the Income Tax Act. It would be best to correctly classify your earnings at each financial year’s end. Under these head of income has its own rules, provisions, and tax treatment. In this article, you will have a clear grasp of where your money comes from and how each type is taxed.
"Deadline For Filing Income Tax Return"
File your Income Tax Return (ITR) for the financial year 2023-2024 (Assessment year 2024-25) by July 31st, 2024 to avoid late fees
The Five Heads Of Income Tax Are:-
- Income from salary.
- Income from house property.
- Income from profits and gains from business & profession.
- Income from capital gains.
- Income from other sources.
1. Income From Salary
Income or Salary that you receive in terms of the service as a result of employment. This head includes wages, pensions, annuities, and gratuities received from an employer.
The following section governs the income from the salary.
- SECTION 15: The Taxability of income from the salary.
- SECTION 16: Deductions available under salaries.
- SECTION 17: The Components of the salary like monetary compensation, perquisites, etc.
Deductions:
You also have a right to claim deductions from your salary income to reduce your taxable amount. These deductions are:-
- Professional tax deducted by your employer.
- TDS already deducted by your employer.
- Employee’s contribution to PPF (Public Provident Fund)
2. Income From House Property
If you own a property that you rent out, the rent you receive falls under this head of income. This includes residential as well as commercial properties. A deduction is allowed for repairs and maintenance expenses incurred on the property.
Key Concepts:
* GROSS ANNUAL VALUE (GAV): The expected annual rent you earn from the property. Some factors 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.
Deemed Ownership
In some cases, you are considered the property owner for tax purposes even if you are not the legal owner. These cases include:
- Transferring property to a spouse or minor child without consideration.
- Holding an Impartible Estate.
- Being a member allotted a house property by a cooperative society, company, or association.
- Being a beneficiary of a trust that owns a house property for your benefit.
3. Income From Profits & Gain From Business And Profession (PGBP)
This third head of income includes income earned from our own business or professional practice. This could be anything from a small business to freelance work.
Here are the types of income that are chargeable under this head.
- Profits and gains from business or profession carried on by you.
- Gains earned by an individual during an assessment year.
- The Benefits that a business receives.
- Gain, bonuses, or salary that an individual receives due to a partnership with a firm.
- The profits that an organization makes on its income.
4. Income From Capital Gain
Capital Gains refer to the profit earned from selling assets like stocks, bonds, or real estate. The Gains are classified as either short-term, depending on the holding period.
5. Income From Other Sources
This is residual category that includes all other types of income not covered under the other heads. For example, include interest earned from savings accounts, dividends, lottery winnings, and gifts. Any expenses incurred to earn this income such as commission paid to an agent, can be deducted from the income to arrive at the taxable income.
Conclusions
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. Remember, each income source may have specific tax implicates. Consulting a professional tax expert can help you navigate tax filing and maximize your financial well-being.
FAQ's
Income from salary includes wages, pensions, annuities, and gratuities received from an employer. It is the compensation received for employment services.
You can claim deductions for professional tax, standard deductions, and employment benefits like house rent allowance (HRA) and leave travel allowance (LTA).
Rental income falls under the head of income from house property. You can claim deductions for property tax and mortgage interest. The net rental income after these deductions is taxed.
You can deduct business-related expenses such as rent, utilities salaries, and office supplies. These deductions help lower the taxable income from the business.
Income from other sources includes interest earned from savings accounts, dividends, lottery winnings, gifts and other income not covered under the other head.