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Classification of Taxable Income Under Various Heads and Computation of Taxable Income
Classification of Taxable Income Under Various Heads and Computation of Taxable Income
Anil Sain
Tusharika Dubey
PROFESSOR
ROLL NO. : 142
RMLNLU, LUCKNOW
B.A. LL.B. (HONS.)
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.
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:
Total Tax Payable=Tax on Total Income - Rebates and relief allowable from Income
Tax.
The aggregate of the above incomes, after exemptions available, is known as Gross Salary
and this is charged under the head income from salary.
The following allowances are fully taxable : dearness allowance, city compensatory
allowance, overtime allowance, servant allowance and lunch allowance.
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.
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 propertys 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.
The deductions allowed are depreciation of assets used for business; rent for premises;
insurance and repairs for machinery and furniture; advertisements; traveling and many
more.
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.