Unit 4: Heads of Income

Heads of Income (as per Income Tax Act, 1961)

The Income Tax Act divides a taxpayer’s total income into five heads of income for the purpose of taxation. Here we’ll focus on three of them:

Income from Salaries

This head includes all income received by an employee from an employer as a part of employment.

Examples

• Basic salary
• Allowances (HRA, DA, etc.)
• Bonus
• Commission
• Pension (except family pension)
• Gratuity
• Leave encashment

Key Points

• Employer-employee relationship must exist.
• Tax is levied on due or received basis, whichever is earlier.
• Standard deduction of ₹50,000 is allowed.

Income from House Property

Definition: Any income earned by the owner of a house property by letting it out (renting it) is taxed under this head.

Examples

• Rent received from tenants
• Deemed rent (if property is vacant but not self-occupied)

Key Points

• Only Net Annual Value is taxable (after standard deduction and municipal taxes).
• Standard deduction of 30% allowed for repairs and maintenance (irrespective of actual expense).
• Interest on home loan is deductible under Section 24(b).

Profits and Gains of Business or Profession

Definition: Income earned by a person from any business or professional activity carried out by them.

Examples

• Profit from shop, factory, or consultancy
• Income of doctors, lawyers, CA, freelancers
• Commission or brokerage

Key Points

• Income = Revenue – Business Expenses
• Includes both speculative and non-speculative business.
• Maintenance of books of accounts and audit may be mandatory under some conditions.

Deductions are allowed for

• Rent
• Salary to staff
• Depreciation
• Interest on capital

Income from Capital Gains

Definition: Profit or gain earned from the sale of capital assets is taxed under this head.

Capital Assets Include

• Land, building, house
• Shares, bonds, mutual funds
• Gold, jewellery, etc.

Types of Capital Gains

Income from Other Sources

Definition: Any income that doesn’t fit under the above four heads is taxed here.

Examples

• Interest on savings/fixed deposits
• Lottery winnings, betting
• Gifts above ₹50,000 (exceptions apply)
• Dividend income
• Family pension

Taxability:

• Mostly taxed at normal slab rates.
• Lottery, betting, etc., taxed at a flat 30% rate.

Clubbing of Incomes

Definition: Clubbing means including someone else’s income (usually family) in the taxpayer’s total income under certain conditions.

When it applies:

• Minor child’s income (except if earned by own skill)
• Spouse’s income if invested from assets transferred without adequate consideration
• Income from assets transferred to HUF or relative indirectly

Objective: Prevent tax evasion through transferring income to others.

Calculation of Taxable Income

Steps:

Compute income under each head:

• Salaries
• House Property
• Business or Profession
• Capital Gains

Other Sources

• Add Clubbed Income, if applicable.
• Add total income = Gross Total Income (GTI)
• Deduct deductions under Chapter VI-A (e.g., Section 80C, 80D, 80G)
• Taxable Income = Gross Total Income – Deductions
• Apply Income Tax Slab Rates to compute tax liability.
• Add cess (4%) and reduce TDS or advance tax paid

TAX CALCULATION (Step-by-Step)

Calculate Gross Total Income (GTI)

Add income from all 5 heads:

• Salary
• House Property
• Business/Profession
• Capital Gains

Other Sources

• Clubbed income (if any)

Deduct Chapter VI-A Deductions (Section 80C to 80U)

Apply Income Tax Slab Rates

Example: Old Regime Slabs for FY 2024–25 (for Individuals < 60 yrs)

Rebate under Section 87A

Surcharge

Extra tax on rich people if income exceeds a certain limit.

Marginal Relief

To ensure that the tax + surcharge does not exceed income beyond the limit. Example: If income is just ₹50,10,000 → Tax + surcharge must not be more than what would be paid on ₹50,00,000 plus extra income of ₹10,000.

Health and Education Cess

Add 4% on the final tax amount (after surcharge, if any).

Relief under Section 89(1) & 90/91

• Section 89(1): Relief for salary received in arrears or advance → helps in tax saving by spreading income over relevant years.
• Section 90/91: Relief for double taxation (when same income is taxed in India and abroad).

Final Tax Payable = (Tax as per slabs + Surcharge if applicable + Cess) – (Rebate + Relief)

Set Off & Carry Forward of Losses (As per Income Tax Act)

Set-off means adjusting losses against gains/income from other sources in the same year, to reduce the total taxable income.

Types of Set-Off

A. Intra-head Set-Off (Within same head)

Definition: Loss from one source is adjusted against income from another source within the same head.

Example

• Loss from one house property (say ₹50,000)
• can be set off against rent income from another property (say ₹70,000).
• Loss in stock market (business) can be adjusted against profit from another business.

Exception

• Speculative loss ≠ Non-speculative business profit
• Loss from lottery, race income, horse racing, etc., cannot be set off

B. Inter-head Set-Off (Across different heads)

Definition: If loss remains after intra-head set-off, then it can be adjusted against another head’s income (in same year).

Example: House property loss (₹2,00,000) can be set off against salary or business income.

Restrictions:

• Business loss cannot be set off against salary.
• Capital loss cannot be set off against other heads except capital gains.
• Speculative loss, lottery loss, horse race loss → strictly no inter-head set off.

Carry Forward of Losses

If losses cannot be fully set off in the current year, they can be carried forward to future years, but subject to condition

Important Principles

• Set-off first → then carry forward
• Intra-head before inter-head
• Filing return on time is mandatory to carry forward most losses (except House Property loss)

Quick Summary Table