Understanding Income Tax in India Part III

Aayush Kedia

Heads of Income

We have seen that normally income is often charged in the basis of Income that has been accrues and in certain places where it has accrued. However, based on the social structure we have in India, and the historic taxation structure, the way the government taxes individuals is based on the Source of Income of the person, like is the person earning money through interest on their fixed deposit, or a salary from the job they are doing. Hence, there is a strata that has been created for Charging Income under Appropriate Heads.

The broad category and the kind of income that can be charged under them are as follows:

  1. Income from Salaries:

This head is used for a person who derives his earning by way of receipt of salary. Hence, for individuals employed, receiving a salary, their income is taxed under this head. This also includes the salary drawn by a partner from their partnership firm. In the case salary is paid, the employer would issue you a certificate under Form 16, which would have the salary deducted under Section 192 of the Act.

Income under salaries are charged under Section 15 of the Act. 

  1. Income from House Property:

This head of Income is used to Charge income that a person derives from his Rental Income. Therefore, in the case you have a property which you have put up for rent, then the rental income that you earn, would be chargeable under this section. Income under this head is charged under Section 22 of the Act.  On the rental income a person earns for the year, a deduction of the Municipal Tax actually paid by them is allowed to be deducted. On the remaining earning amount, the government allows a Standard Deduction of 30% under Section 24 of the Act. 

For Example, If a person has an income of 108,000/-, have municipal taxes paid of Rs. 8000/-, their amount before the deduction is at Rs. 100,000/-.  The standard deduction allowed will be 30% of 100,000/- i.e. 30,000/-. Hence the Income chargeable under normal circumstances is Rs. 70,000/- which can be further reduced by certain amount of interest on an home-loan one has taken on that house property.

  1. Profits/Gains from Business or Profession:

When a person conducts any business or a profession, their income gets taxed under this head. If a person opts for this head of Income, automatically, they would be required to submit their Business Financials like their Balance Sheet and Profit& Loss Account. Section 28 of the Act is the section which is considered the Charging Section. A pre-condition here is that the money earned must be through a source which is legal and legitimate under the Laws in India. If a professional like a Lawyer or an Architect, is associated with a firm, they could charge their income to this head provided they receive income under the tag of Professional Services and  not Salary

  1. Capital Gains:

Whenever a person has a capital asset, held in their name,  they are expected to pay a tax on the increase in their value over a period of time. For example, a person in the year 2000 purchased a house for Rs. 1,00,000/-, today the value of the same is not the same. Due to the nature of the asset, the same has increased to maybe Rs. 1,50,000/. Hence the gain of Rs. 50,000/- is chargeable to tax. Now normally, these assets grow over a period of time, hence in order to determine their taxation, their holding period needs to be seen. 

For Shares and Stocks- Holding period to be considered a Long Term Asset, their holding is to be more than 1 year

For Land, Building, Property (Basically fixed assets)- Holding period of 3 years is required. 

Often, the property is purchased a very long time ago, hence in order to bring the cost of the property to par as per today, there is a concept of Indexation of the price of the asset which would be done. 

This discrepancy is based solely on the nature of these assets. Income under Section is Charged under Section 45 of the Act

  1. Income from Other Sources:

This is a residuary head. Any form of income which does not form part of the above 4 parts, would be taxed here. Hence, in the case a person has won a lottery, it wouldn’t fit into the above heads, which is why that receipt would be taxed under this head. Taxation under this Head is Charged under Section 56 of the Act.

Hence, these are the 5 broad heads for the taxation of your income. It may seem very easy and insignificant, however, it becomes necessary to choose the right head, since your taxation is based on the same. Thus, making it an important concept to be aware of.

** Act above refers to the Income Tax Act of 1961, (as updated by the Finance Act) unless otherwise mentioned.

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