In India, the Income Tax Act classifies taxable income under five heads of income. This classification helps both taxpayers and the Income Tax Department identify the source of income and apply relevant tax rules and deductions. Whether you’re a salaried individual, a business owner, or a landlord, knowing these five heads makes it easier to file your returns correctly and manage your taxes efficiently.
Let’s break down each of the five heads of income in a simple and clear manner.
- Income from Salary
This head includes all earnings received by an individual from an employer-employee relationship. It covers:
- Basic salary
- Allowances (HRA, travel, dearness allowance, etc.)
- Bonuses and commissions
- Pension (if received by a former employee)
- Perquisites (benefits like rent-free accommodation, company car, etc.)
The total salary is taxable after applying deductions such as standard deduction and professional tax.
📌 Example: If you are working in a company and earning ₹6,00,000 annually, it will be taxed under this head after considering deductions allowed.
- Income from House Property
This section deals with income earned from owning property. Even if the property is not rented out, deemed rental income may be considered for taxation (except for one self-occupied house).
Key points:
- Only the net annual value (after deducting property tax and standard 30% deduction) is taxed.
- If there’s a home loan, you can claim a deduction on the interest paid.
📌 Example: If you own a flat in Mumbai and rent it for ₹20,000/month, the rent income (after deductions) is taxed under this head.
- Profits and Gains from Business or Profession
This head includes income earned from running a business, freelancing, or practicing a profession such as law, medicine, or consulting.
It considers:
- Gross receipts from the business or profession
- Allowable business expenses (rent, salaries, raw materials, etc.)
- Depreciation on business assets
- Income from speculative or non-speculative business activities
📌 Example: A chartered accountant running a private practice will report earnings here, after subtracting office expenses.
- Capital Gains
This head covers income from the sale of capital assets like property, shares, bonds, or gold. Capital gains are classified into:
- Short-term capital gains (STCG): If assets are held for a shorter period (up to 36 months for property, 12 months for listed shares).
- Long-term capital gains (LTCG): If assets are held beyond the short-term period.
Indexation benefits and exemptions under sections like 54, 54F, and 10(38) may apply.
📌 Example: Selling a plot of land and earning profit over the purchase cost is considered capital gain and taxed accordingly.
- Income from Other Sources
This is a general category for income not covered under the other four heads. Common examples include:
- Interest from savings accounts or fixed deposits
- Dividend income
- Gifts received above a certain limit (except from specified relatives)
- Winnings from lotteries, game shows, or gambling
- Rental income from machinery, furniture, etc.
📌 Example: If you earn ₹50,000 interest from a fixed deposit, it will be taxed under this head.
Why These Categories Matter
Understanding the five heads of income tax helps you:
- File your income tax return (ITR) accurately
- Avail correct deductions and exemptions
- Avoid penalties for incorrect reporting
- Keep your finances organized based on income sources
Each head has its own rules, tax rates, and allowed deductions, so identifying the correct category for your income is crucial.
Final Thoughts
Income in India is taxed based on its source, and the five heads of income help simplify the process for both taxpayers and authorities. Whether you’re earning a salary, running a business, or earning interest on deposits, classifying your income correctly ensures smooth and compliant tax filing.
Always keep proper records of your income and consult a tax advisor if you’re unsure about how to report or plan your taxes.
