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Introduction:

The Income Tax Act categorizes a taxpayer’s earnings into five distinct heads. For appropriate tax calculations, you must accurately classify your earnings under these income heads at the end of each financial year. It is essential that you understand which group your earnings belong to. In order to understand the revenue heads clearly

Five heads of Income :

There are 5types of income tax. They are:

• Income from salary
• Income from house property
• Income from business or profession
• Income from capital gains
• Income from other sources

Income from salary:

This section mostly applies to professionals whose main source of income is their salary. Any money given to you as employee compensation is recorded under this . However, keep in mind that income will only be taken into account under this heading if the payee and the recipient of the salary have an employee-employer connection.

Here are some common allowances for which you can claim tax deductions:

• Conveyance Allowance: Employers typically provide this allowance to cover the expenses associated with commuting between your residence and workplace. According to Section 10(14(ii)) of the Income Tax Act, 1961, you are eligible for a maximum tax exemption of ₹1,600 per month or ₹19,200 per year.

• HRA: HRA is commonly included in a standard salary package, providing employees with financial assistance for their rental expenses. Under Section 10(13A) of the Income Tax Act, 1961, you may be eligible for exemptions on HRA, subject to specific conditions. The applicable tax exemption for HRA will be the least of the following:
• The House Rent Allowance  granted by your employer
• 50% of the basic salary applies if you reside in a metropolitan city, whereas 40% is applicable for non-metropolitan cities.
• Deducting 10% of your annual salary from the actual monthly rent paid.
• LTA: Leave Travel Allowance (LTA) is an integral part of your compensation intended for covering personal travel expenses. It constitutes a component of your cost-to-the-company (CTC) and is typically provided as an annual benefit. It’s important to be aware that, within specific conditions and limits, you are eligible to claim tax benefits on LTA for a maximum of two leisure trips within a block of four calendar years, as per Section 10(5).
• Medical Allowance: This allowance is provided to assist employees in covering their medical expenses. As per Section 17(2) of the Income Tax Act, 1961, you can seek a tax exemption of up to ₹15,000 by submitting relevant medical documents as supporting evidence.

Income from House Property: 

The second head of income, “Income from House Property,” encompasses all rental income earned by a taxpayer and is detailed in Sections 22 to 27 of the Income Tax Act, 1961. If a taxpayer’s house is not rented out, the potential rental amount is treated as taxable income under this head.This category involves tax calculation based on assumptions and encompasses income from both residential and commercial properties. Deductions under this head include standard deduction, home loan interest payment, and municipal tax

In this context, the assessee is obligated to pay a 10% Tax Deducted at Source (TDS) on rent exceeding the specified limit.

Here are a few conditions that must be met for the income to fall under the taxable bracket in this category:

• House property may encompass a building, an associated piece of land, or a bungalow.

• Individuals should restrict the use of their property to residential purposes only.

• The individual filing should be the owner of the house property.

Income from Capital Gains:

Profits or gains arising from the sale or transfer of a capital asset held for investment are taxable under capital gains. Income from various asset classes, including stocks, bonds, mutual funds, gold, and real estate, among others, can fall under this category. It’s important to note that capital gains are typically categorized as short-term and long-term, long- term with a maximum tax rate of 20% for investments held for 3 years or more and short term with 15% for investments held for less than 3 years, depending on the asset class. However, it is crucial to check if the income qualifies for exemption under Sections 54, 54B, 54EC, 54F, 54D, 54ED, 54GA, or 54G.

Income from Business/Profession:

Your income falls under this category if it originates from a business or if you are self-employed. To compute your profit or gross income, deducting your expenses from the total revenue is necessary. Subsequently, taxation will apply under this income category.
This category also encompasses various incomes, including bonuses, salary, and profits generated through partnerships with business organizations. Nevertheless, specific rules apply:

• The business or profession declared under this category must be lawful and legitimate.
• The taxpayer is required to have actively participated in a specific business or profession for the majority of the previous year.
• The taxpayer is required to personally conduct the specified business or profession.
• The taxpayer must exercise control over the operations of this business or profession.
• If taxpayers are engaged in additional professions or businesses, they must ensure to include them.

Income from Other Sources: 

Income not classified under the specified heads mentioned above is categorized under the fifth head known as “Income from Other Sources.” Common examples falling within this category encompass earnings from lotteries, gambling, gift card games, bank deposits, rewards from various sports, and more. Section 56(2) of the Income Tax Act addresses these sources of income.

Conclusion:

Understanding the different heads of income can facilitate a more accurate classification of your earnings by source, enabling you to file your income tax returns with confidence and accuracy. This knowledge also empowers you to project your tax liabilities for the year, aiding in strategic planning for your investments and savings. With this awareness, you can potentially steer clear of penalties associated with non-payment of taxes under specific income heads or inaccuracies in your tax filings.