1. Heads of Income
Income is classified under five heads in the Indian Income Tax Act. Under chapter 4 of
Income Tax Act, 1961 (Section 14), income of a person is calculated under various defined
heads of income. The total income is first assessed under heads of income and then it is
charged for Income Tax as under rules of Income Tax Act. According to Section 14 of
Income Tax Act, 1961 there are following heads of income under which total income of a
person is calculated:
1. Income From Salary
2. Income From House Property
3. Income From Capital Gain
4. Income From Business/ Profession
5. Income From Other Sources
Income from Salary
What is Salary:
Income under heads of salary is defined as remuneration received by an individual for
services rendered by him to undertake a contract whether it is expressed or implied.
According to Income Tax Act there are following conditions where all such remuneration are
chargeable to income tax:
· When due from the former employer or present employer in the previous year,
whether paid or not
· When paid or allowed in the previous year, by or on behalf of a former employer or
present employer, though not due or before it becomes due.
· When arrears of salary is paid in the previous year by or on behalf of a former
employer or present employer, if not charged to tax in the period to which it relates.
What Income Comes Under Head of Salary:
Under section 17 of the Income Tax Act, 1961 there are following incomes which comes
under head of salary:
· Salary (including advance salary)
· Wages

2. · Fees
· Commissions
· Pensions
· Annuity
· Perquisite
· Gratuity
· Annual Bonus
· Income From Provident Fund
· Leave Encashment
· Allowance
· Awards
The aggregate of the above incomes, after exemptions available, is known as Gross Salary
and this is charged under the head income from salary.
Basic salary along with commissions and bonuses is fully taxable.
Allowances : An allowance is a fixed monetary amount paid by the employer to the employee
for expenses related to office work. Allowances are generally included in the salary and taxed
unless there are exemptions available.
The following allowances are fully taxable : dearness allowance, city compensatory
allowance, overtime allowance, servant allowance and lunch allowance.
Specific exemptions are available for some allowances as shown below.
Conveyance Allowance : Upto Rs 800/- a month is exempt from tax.
House Rent Allowance (HRA) : Hop over the House Rent Allowance article to check on
calculation and exemptions available.
Leave Travel Allowance (LTA) : LTA accounts for expenses for travel when you and your
family go on leave. While this is paid to you, it is tax free twice in a block of 4 years. Medical
Allowance : Medical expenses to the extent of Rs 15,000/- per annum is tax free. The bills
can be incurred by you or your family.
Perquisites : Perquisites (or personal advantage) are benefits in addition to normal salary to
which an employee has a right by way of his employment. Examples of these are rent free
accommodation or car loan. There are some perquisites that are taxable in the hands of all

3. categories of employees, some which are taxable when the employee belongs to a specific
group and some that are tax free.
The employer will give the employee Form 16 which will contain all the earnings, deductions
and exemptions available.
Income From House Property
According to Chapter 4, Section 22 - 27 of Income Tax Act, 1961 there is a provision of
income under head of house property. In every section from 22-27 there are detail
specification of house property income. It is defined as income earned by a person through
his house or land.
What Income Comes Under Head of House Property:
Annual value of building or land owned by assessee. There is a charge on the potential of
property to generate income not on the rent received. But if property is used for making profit
in business then it will be taxable not under this head but will be taxable under head of profit
in business/ profession. The building can be house, office building, go downs etc.
Points to be remembered
Assessee should be Owner of the Property
Should be not be used for Business or Profession by the assessee
In case of dispute regarding title
Any residential or commercial property that you own will be taxed as well. Even if your
piece of real estate is not let out, it will be considered earning rental income and you will
need to pay tax on it. The income tax blokes are a bit easy going on this – they tax you on the
capacity of the real estate to earn income and not the actual rent. This is called the property’s
Annual Value and is the higher of the fair rental value, rent received or municipal rent.
Fair Rent – The rent which a similar property will fetch at the same or nearby similar locality
Municipal Rent – The value fixed by municipal or local authority
Fair Rent or Municipal Rent whichever is higher taken into consideration
Standard Rent – Rent which a owner can claim maximum from his tenant
Actual Rent – Rent for which property has been let out.
Standard Rent or Actual Rent whichever is lesser is taken into Consideration

4. The Annual Value can go through a standard deduction of 30% and if you reduce the interest
on borrowed capital, then you get the value which is charged under the head income from
house property.
Income From Business/Profession
Income earned through your profession or business is charged under the head “profits and
gains of business or profession”. The income chargeable to tax is the difference between the
credits received on running the business and expenses incurred.
According to Income Tax Act, 1961 income under this head is defined as the income earned
by assessee as a profit or gain in his business or profession. Income under this head must
follow these conditions:
· There must be a business/ profession
· Business/ profession is being carried by assessee
· Business/ profession have been carried out by assessee in assessment year for which
income tax is filling
What Income Comes Under Head of Profit in Business
· Profits and gains of assessee from any business or profession during assessment year
· Any payment or compensation due or received by a person for his services to
organization as a part of his business
· Making profit in trade Income of professional or organization against services
provided by that professional/organization
· Profits on sale of a license granted under the Imports (Control) Order, 1955, (EXIM
control Act, 1947)
· Cash received or due by any person against exports under government schemes
· Any benefit whether it is not in cash coming from business/ profession
· Any profit, salary, bonus or commission received by company partners

5. Income from Capital Gain
What is Capital Gain:
According to Income Tax Act,1961 heads of capital gain is defined as gains derived on
transfer of capital asset. Capital Gain is the profit or gain of an assessee coming from the
transfer of a capital asset effected during the previous year or assessment year. "Capital
Asset" and transfer are predefined in income tax act.
What is Capital Asset:
Under section 2(14) of the Income Tax Act,1961 Capital Asset is defined as property of any
kind held by assesse including property held for his business or profession. It includes all
type real property as well as all rights in property. It is also defined as gains on transfer of
assets in which there in no cost of acquisition like:
· Goodwill of business generated by assessee
· Tenacy rights
· Stage carriage permits
· Loom hours
· Right to manufacture
· Processing & production of any article or things
Assets Which Don't Come Under Heads of Capital Assets
According to Income Tax Act,1961 there are few assets which don't form a part of Capital
Assets, which are as follows:
· Stock of goods and raw materials used by assessee for his business or profession
· Those properties which are movable like wearing apparel, furniture, automobile,
phone, household goods etc. Held by assessee. But Jewelry which is also an movable
assets comes under heads of Capital Assets
· Few Gold Bonds issued by government
· Few special bonds issued by central government like Special Bearer Bonds, 1991
Income from other Sources
Every type of income comes under a specified heads. But there are few incomes, which don't
come under any of following heads:
· Salary
· House Property
· Profit In Business/ Profession
· Capital Gains
Any income that does not fall under the four heads above is taxed under the head “ Income
From Other Sources”.

6. An example is interest income from bank deposits, winning from lottery, any sum of money
exceeding Rs. 50,000 received from a person (other than from relative, on marriage, under a
will or inheritance).

7. An example is interest income from bank deposits, winning from lottery, any sum of money
exceeding Rs. 50,000 received from a person (other than from relative, on marriage, under a
will or inheritance).