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SUBJECT: Law of Taxation

Rough Draft for Project
TOPIC: Classification of Taxable Income under various heads and
Computation of Taxable Income

Anil Sain Tusharika Dubey

Income Tax & Taxable Income
Income-tax is charged on the Total Income of a Previous Year at the rates prescribed for
the Assessment Year. 'Assessment Year' means the period of 12 months commencing on
April 1, every year. 'Previous Year' is the financial year immediately preceding the
assessment year.
A 'resident' tax payer is charged income tax on his global income, subject to a double
taxation relief in respect of foreign incomes taxed abroad.
In the case of a non-resident, income-tax is charged only on incomes received, accruing or
arising in India or which are deemed to be received, accrued or arisen in India.
For the purpose of computing total income and charging tax thereon, income from various
sources is classified under the following heads:
A. Salaries
B. Income from House Property
C. Profits and Gains of business or profession
D. Capital Gains
E. Income from Other Sources
These five heads of income are mutually exclusive. If any income falls under one head, it
cannot be considered under any other head. Income under each head has to be computed
as per the provisions under that head. Then, subject to provisions of set off of losses
between the heads of income, the income under various heads has to be added to arrive at
a gross total income. From this gross total income, deductions under Chapter VIA are to be
allowed to arrive at the total income.
On this total income tax is calculated at the rates specified in the relevant Finance Act or the
rates given in the Income Tax Act itself {as in the case of long term capital gains]. From this
tax, rebates and reliefs, if any, allowable under Chapter VIII are allowed to arrive at the total
tax payable by the assessee. The above procedure is summarized below:
Gross Total Income=A+B+C+D+E
Total Taxable Income=Gross Total Income - Deductions allowable from Income.
Total Tax Payable=Tax on Total Income - Rebates and relief allowable from Income
Income from salary
Income can be charged under this head only if there is an employer employee relationship
between the payer and payee. Salary includes basic salary or wages, any annuity or pension,
gratuity, advance of salary, leave encashment, commission, perquisites in lieu of or in
addition to salary and retirement benefits.
The aggregate of the above incomes, after exemptions available, is known as Gross Salary
and this is charged under the head income from salary.
Basic salary along with commissions and bonuses is fully taxable.
Allowances : An allowance is a fixed monetary amount paid by the employer to the
employee for expenses related to office work. Allowances are generally included in the salary
and taxed unless there are exemptions available.
The following allowances are fully taxable : dearness allowance, city compensatory
allowance, overtime allowance, servant allowance and lunch allowance.
Specific exemptions are available for some allowances as shown below.
Conveyance Allowance : Upto Rs 800/- a month is exempt from tax.
House Rent Allowance (HRA) : Hop over the House Rent Allowance article to check on
calculation and exemptions available.
Leave Travel Allowance (LTA) : LTA accounts for expenses for travel when you and your
family go on leave. While this is paid to you, it is tax free twice in a block of 4 years.
Medical Allowance : Medical expenses to the extent of Rs 15,000/- per annum is tax free.
The bills can be incurred by you or your family.
Perquisites : Perquisites (or personal advantage) are benefits in addition to normal salary
to which an employee has a right by way of his employment. Examples of these are rent free
accommodation or car loan. There are some perquisites that are taxable in the hands of all
categories of employees, some which are taxable when the employee belongs to a specific
group and some that are tax free.
Your employer will give you Form 16 which will contain all the earnings, deductions and
exemptions available.

Income from house property
Any residential or commercial property that you own will be taxed as well. Even if your
piece of real estate is not let out, it will be considered earning rental income and you will
need to pay tax on it.
The income tax blokes are a bit easy going on this – they tax you on the capacity of the real
estate to earn income and not the actual rent. This is called the property’s Annual Value and
is the higher of the fair rental value, rent received or municipal rent.
The Annual Value can go through a standard deduction of 30% and if you reduce the
interest on borrowed capital, then you get the value which is charged under the head income
from house property.
Profits and gains of business or profession
Income earned through your profession or business is charged under the head “profits and
gains of business or profession”. The income chargeable to tax is the difference between the
credits received on running the business and expenses incurred.
The deductions allowed are depreciation of assets used for business; rent for premises;
insurance and repairs for machinery and furniture; advertisements; traveling and many
Capital gains
Any profit or gain arising from transfer of capital asset held as investments are chargeable
to tax under the head “capital gains”.
Hop over to the Long Term and Short Term capital gains article to read more about this.
Might be worth reading to see how indexation is used in long term capital gains scenario to
reduce tax outgo.
Income from other sources
Any income that does not fall under the four heads above is taxed under the head “income
from other sources”. An example is interest income from bank deposits, winning from
lottery, any sum of money exceeding Rs. 50,000 received from a person (other than from
relative, on marriage, under a will or inheritance).