🧾Module 2: Understanding the Five Heads of Income
📌 Table of Contents:
- Introduction
- Head 1: Income from Salary
- Head 2: Income from House Property
- Head 3: Profits and Gains of Business or Profession
- Head 4: Capital Gains
- Head 5: Income from Other Sources
- Why Classification Matters?
- Conclusion
- FAQs
✅ Introduction
When you earn income, the government wants to know where it comes from. That’s why the Income Tax Act, 1961 classifies income into five specific heads. Each category has its own set of rules, exemptions, and deductions. Understanding these heads is crucial to accurately calculate your taxable income.
Let’s explore each of the five heads one by one.
💼 1. Income from Salary
This head covers the income received by an individual from an employer-employee relationship.
Examples:
- Basic salary
- Dearness allowance (DA)
- House Rent Allowance (HRA)
- Leave encashment
- Gratuity
- Bonus and commissions
- Perquisites (e.g., company car, rent-free accommodation)
Key Exemptions & Deductions:
- HRA Exemption (u/s 10(13A))
- Standard Deduction of ₹50,000
- Professional Tax Deduction
👉 Pro Tip: If you're a salaried employee, this is likely your primary source of taxable income.
🏠 2. Income from House Property
This head includes income earned from owning property. Even if you don’t rent it out, deemed rent may be taxable in some cases.
Examples:
- Rent received from letting out residential or commercial property
- Annual value of vacant property (deemed income)
Deductions Allowed:
- Standard deduction of 30% on Net Annual Value
- Interest on Home Loan u/s 24(b) up to ₹2,00,000 (for self-occupied)
👉 Note: Only the Net Annual Value is taxed (Gross Rent - Property Tax).
🧾 3. Profits and Gains of Business or Profession
This head applies to self-employed professionals, freelancers, and business owners. It includes all income earned from business activities or practicing a profession.
Examples:
- Business income (e.g., trader, shop owner, e-commerce seller)
- Professional income (e.g., doctor, CA, lawyer, architect)
- Freelancing or consulting fees
Key Concepts:
- Presumptive Taxation under Sections 44AD, 44ADA, and 44AE
- Deductible business expenses (rent, salaries, travel, etc.)
- Maintenance of books of accounts (mandatory in many cases)
👉 Pro Tip: Always separate business and personal expenses to avoid confusion at tax time.
📉 4. Capital Gains
Capital Gains refer to profits earned from the sale of capital assets.
Capital Assets Include:
- Real estate (land/building)
- Stocks and mutual funds
- Gold, jewelry, artwork
Types:
- Short-Term Capital Gain (STCG): Asset held for a short duration
- Long-Term Capital Gain (LTCG): Asset held beyond a specific period (e.g., 1 year for stocks, 2 years for property)
Tax Rates:
- STCG: 15% (on listed shares), taxed as per slab for others
- LTCG: 10% on listed shares (above ₹1 lakh), 20% with indexation for other assets
👉 Note: Indexation helps adjust the purchase price for inflation.
💰 5. Income from Other Sources
This is the residual head, which covers all income that doesn't fit into the other four heads.
Examples:
- Interest from savings and fixed deposits
- Dividend income
- Gifts (above ₹50,000 in a year from non-relatives)
- Lottery winnings, betting, game shows
- Pension received after retirement (not from employer)
👉 Tip: Many people forget to include interest income from savings accounts and FDs. Use Form 26AS or AIS to verify.
📚 Why Classification Matters?
Each head of income:
- Has specific deductions, exemptions, and set-off rules
- Affects your tax liability and refund eligibility
- Requires separate disclosure in the ITR form
For example:
- Deductions under Section 80C to 80U can be claimed only against Gross Total Income, not individual heads.
- Losses from one head (e.g., business) can sometimes be set off against income from another head (e.g., house property).
🧾 Conclusion
Knowing the five heads of income is the foundation of tax planning. It helps you:
- Understand what’s taxable
- Claim the right exemptions
- File your income tax return correctly
In the next module, we’ll deep-dive into the types of income tax returns (ITRs) and how to choose the right one for you.
❓ FAQs
1. Can I have income from multiple heads in the same year?
👉 Yes, most people do! E.g., salary + FD interest + capital gains.
2. Is agricultural income taxable?
👉 No, it's exempt—but it must still be declared if it's above ₹5,000 for certain computations.
3. What if I forgot to report interest income from FDs?
👉 It may lead to a tax notice. Always cross-verify with AIS/Form 26AS.
