This article is written by Chalamalasetti Lakshmi Naga Sai of 4th Semester of ICFAI Law School, Hyderabad
ABSTRACT
This research paper starts with introducing the Income tax Act, 1961.Then this research paper explains the reader about section 14 of Income tax act 1961, in which the income of the individual is divided into many types of heads. Then this paper discusses about each head of income in detail i.e.
- Income from salary
- Income from house property
- Income from profits and gain of business or profession
- Income from capital gains
- Income from other sources
Later this paper will be concluded with significance and importance of heads of Income
Keywords-Income tax, income from salary, house property, capital gains.
INTRODUCTION
In 1961, the Income Tax Act was passed. It is the statute that lists and explains every tax-related topic. The Act covers all methods of assessment, management, collection, and income tax recovery. The Act’s primary goal is to harmonise and update the nation’s tax laws in order to promote economic stability and equitable wealth distribution across all spheres of society. The Act is made up of numerous lengthy lists of distinct parts, each of which deals with a different component of the nation’s revenue.[1]
The Income Tax Act categorises a taxpayer’s income into 5 different heads of income. You must accurately categorise your income under these heads of income at the end of each fiscal year in order for your taxes to be calculated appropriately. You must understand which of your earnings fits into which group. Continue reading to learn more about the income heads.
SECTION 14 OF THE INCOME TAX ACT
An individual may generate money in a variety of ways, according to Section 14 of the money Tax Act of 1961. Income tax computation is crucial and needs to be done in accordance with an individual’s income. The Act divides the income into many types of heads for an easy income tax computation. The Income Tax Act makes reference to the rules and requirements. The taxpayer must categorise their income under these heads of income at the end of each fiscal year in order for their taxes to be calculated correctly. Therefore, understanding which belongs under which heading or group is crucial. The article below goes into great detail on the five income streams mentioned in this section.[2]
HEADS OF INCOME TAX
The 5 heads of income are:
- Income from salary
- Income from house property
- Income from profits and gain of business or profession
- Income from capital gains
- Income from other sources
These aforementioned heads of income explain when taxes must be paid and what needs to be done to satisfy tax obligations. For the income derived from these sources to be taxable, specific requirements must be met under each of these heads of income. The Income Tax Act contains references to these circumstances in several sections.
INCOME FROM SALARY[3]
Salary income is the top source of revenue. The income can be charged under this head of income if there is a relationship between payer and payee in a firm or agreement, and the relationship is between employer and employee when the employee is being paid a specific amount of compensation for their services. Any form of financial compensation can be considered a salary. Any basic and typical wage, annuity, pension, gratuity, leave encashment, etc. could fit this description.
The complete amount of gross salary is then taxed under this head of income following the total aggregate of the total amount of income excluding the exemptions, if any, are present.
All basic salary, as well as commissions and incentives, are fully taxable. Certain allowances are, in some circumstances, tax-exempt under this heading of income. Allowances are: In accordance with the Act, a set sum of money is given to an employee in exchange for his labour and services. Unless otherwise specified, the allowance is often paid along with the pay. Every employer is required to deduct TDS from their employees’ salary. It’s vital to remember that the salary is taxed on either the “due basis” or the “receipt basis,” depending on which occurs first. For instance, if a person receives their income for March 2022 in April 2022 but it was due in March 2022, that salary is taxable in the prior year 2021–2022. In a similar vein, if a firm pays employees in advance for April and May 2022 in March 2022, that wage is also taxable in that month.
Leave travel allowance: Also known as LTA, this term refers to the costs associated with travelling when you take a holiday, whether it be by yourself or with friends or family. Due to the payment, this is twice tax-free in four years.
Medical allowance: Up to a maximum of Rs. 15,000 annually, medical allowance is tax-free, and you and your family are responsible for paying the cost.
Conveyance allowance: Up to Rs. 800 in monthly taxes are free.
These are only a few of the several allowance kinds and the tax deduction provisions that apply to them. There are several taxing procedures for other money that an employer gives to their employees.
Conveyance allowance: Up to Rs. 800 in monthly taxes are free.
These are only a few of the several allowance kinds and the tax deduction provisions that apply to them. There are several taxing procedures for other money that an employer gives to their employees.
INCOME FOR HOUSE PROPERTY[4]
Income from ownership of property is a different section of the Income Tax Act. This section clarifies and provides information regarding the tax laws that apply to the home or other real estate that you, as a taxpayer, are occupying. For income tax purposes, vacant residential property is regarded as “self-occupied.” If a taxpayer owns more than one self-occupied home, only one home is treated and taken into account as a single self-occupancy dwelling property. Rest is regarded as being released.
Sections 22 to 27 of the Income Tax Act’s second head are devoted to the computation and calculation of a person’s total standard amount of income in the home or property that they are legally entitled to. The total value of the property or land is used to determine the tax amount, not the amount of rent received. However, the rent-generated income will also be counted as taxable income if the building or property is being used in the regular course of a business. Taxes apply to any residential or commercial properties that are owned by businesses. A few requirements must be met in order for income from residential property to be taxable.
- The house property must include a house, building, or any attached land.
- The owner of the dwelling property ought to be the taxpayer.
- The taxpayer may not conduct any business or engage in any professional activity through the use of the house property. It’s restricted to residential use only.
Once these requirements are completed, the income produced by residential property becomes chargeable and subject to tax deduction in accordance with the Income Tax Act. On a hypothetical basis, tax is applied on income from real estate. Rental income from residential properties, business properties, and other sorts of properties is taxed under this heading of income. Under this category of income, a number of deductions are also permitted, including the standard deduction, the deduction for house loan interest (if any), and the deduction for municipal taxes paid.
INCOME FROM PROFITS OR GAINS FROM BUISINESS OR PROFESSION[5]
According to the Income Tax Act, this is the third head of income. Any type of trade, commerce, manufacturing, or trade of any kind is considered to be a business. After a term of schooling and a validated examination, profession denotes the acquisition of specialised or special knowledge in a certain field. Profits and gains made during the course of a business are subject to entire and total taxation under this heading of income. Under this head of income in the Income Tax Act, profits made from the sale of imports, incentives, any interest or type of salary or bonus, and commission from a company are all taxable. The following criteria must be met for an income to be charged under the heading of income from profits and gains from business or profession.
Section 28 of the Income Tax Act specifies a number of requirements that must be met.
- A business or profession must first be present in order to charge income.
- The taxpayer must operate the business or profession or self-assess it.
- The profession or business that will be charged with income must have been open and running for the majority of the prior year.
- The tax amount is determined by the business’s income and gains from the previous year’s running and operating period.
- Any continuing or active business or profession that the assessee engages in may be subject to the charge.
The income from profits and gains earned can only be taxed under the Income Tax Act if certain conditions are met. It is significant to note that a business or profession need not have been active for the whole prior year to be charged under this head of revenue. It is charged if the assessee engaged in it for a significant portion of the prior year.
- Several different forms of income are charged under this heading of income, including:
- Gains from the sale of a particular licence
- Gains that the company made during the assessment year
- the return an organisation experiences on its revenue
- money earned from the export of a government project
- The advantages that a business enjoys
- gains, bonuses, or pay that a person obtains as a result of a business partnership[6]
INCOME FROM CAPITAL GAINS
Income derived from any capital asset, whether movable or immovable, is regarded as taxable under the fourth head of income under the Income Tax Act. Long-term capital gains and short-term capital gains are the two categories into which capital profits are split. These gains are subject to income taxation under the heading of income from capital gains.
Long-term capital gain applies to assets sold by a person who has owned them for at least 36 months. In the case of LTCG, a 20% tax rate is payable. In contrast, if he sells capital assets in less than 36 months, it would be considered a short-term capital gain, and the tax rate will be 15%. If one sells their securities holdings within a year of the acquisition date, this is relevant.[7]
According to sections 54, 54B, 54D, 54EC, 54ED, 54F, 54G, or 54GA, capital gain is not subject to taxation.
INCOME FROM OTHER SOURCES.
Income from other sources is the fifth and final category of income under the Income Tax Act. This category of revenue includes any money generated from sources other than the four headings described above. Some examples of income from other sources include interest earned on bank deposits, lottery winnings, and even any amount of money exceeding Rs. 50,000 received from a person who is not a relative, spouse, or beneficiary under a will or inheritance. Under Section 56(2) of the Act, all of these sources—including those involving gambling or even card games—are subject to taxation.
The specifics for the computation and income tax calculator derived from other sources are laid forth in Section 145 of the Income Tax Act. According to the Section, whomever the assessee is must determine and calculate revenue from other sources using the standard accounting procedure. A mercantile accounting system or cash can be used for this.
What forms of income are classified as income from other sources?
Certain incomes are listed as taxable under this head of income, known as Income from Other Sources, under Section 56(2) of the Income Tax Act. These earnings include, among others:
- Dividend income
- Interest income
- Family pension income
- Gifts received
- Royalty income
CONCLUSION
Knowing the different types of income today may make it simpler for you to categorise your income based on its source and accurately complete your income tax returns. It could also be simpler for you to anticipate your yearly tax obligations and make investment and savings plans in accordance with those projections. With this information, you might be able to avoid fines for failing to pay tax under a specific head of income or filing your taxes incorrectly.
[1] What are the heads of income under the Income Tax Act? available at: What are the Heads of Income Under Income Tax Act? (policybazaar.com), last visited on June 20,2023
[2] Id at 3
[3] What are the heads of income under the Income Tax Act? available at: What are the Heads of Income Under Income Tax Act? (policybazaar.com), last visited on June 20,2023
[4] What are the heads of income under the Income Tax Act? available at: What are the Heads of Income Under Income Tax Act? (policybazaar.com), last visited on June 20,2023
[5] What are 5 heads of Income Tax, available at: What are the 5 Heads of Income Tax? (cleartax.in) (last visited on June 23,2023)
[6] What are 5 heads of Income Tax, available at: What are the 5 Heads of Income Tax? (cleartax.in) (last visited on June 23,2023)
[7] Id at 5
