As per Section 14 of the Income Tax Act, for the purpose of charging of tax and computation

of total income, all incomes are classified under the following 5 Heads of Income:-

Salaries

House Property

Profits and Gains of Business or Profession

Capital Gains

Other Sources

1. Income from Salaries

An Income can be taxed under head Salaries if there is a relationship of an employer and
employee between the payer and the payee. If this relationship does not exist, then the
income would not be deemed to be income from salary.

If there is no element of employer-employee relationship, the income shall be not

assessable under this head of income.

Illustration: Mrs. Angelina works in SGP Company Ltd. Owned by her Uncle. Despite being a
close relation, she is getting paid 50,000 as a monthly salary. Here, her monthly earnings
are chargeable under income from the salary head since she has an employer-employee
relationship with her Uncle.

As per Section 15(a) of the Income Tax Act, any salary from the employer or former
employer to the assessee (previous year) is taxable under this head regardless of the fact
that it has been paid or not.

According to the Indian taxation Law, an employer could be remunerated by the mean of
the following terminologies,

Fees

Basic Wages

Advance salary

Allowances

Pension

Gratuity
Retirement benefits and

Annual bonus as well.

2. Income from House Property

Sections 22 to 27 of the Act of 1961 elucidate the computation of the total income from the
properties inclusive of land and building, which the concerned person owns. The revenue
under this head is chargeable only when the property has let out or rent i.e. only the rental
income is taxable.

Section 22 of the Act provides that the annual value of property consisting of any buildings
or lands appurtenant thereto of which the assessee is the owner, other than such portions
of such property as he may occupy for the purposes of any business or profession carried
on by him the profits of which are chargeable to income-tax, shall be chargeable to
income-tax under the head “income from house property.

Hence, the chargeable cess could be levied on the gains from the building or the land
appurtenant to the property comprises buildings rented for residential, businesses,
professional, and entertainment purposes. In general, the income from the house property
is calculated as, earning – expenditure = profit.

3. Profits and Gains from Business or Profession

Any income earned from any trade/commerce/manufacture/profession shall be chargeable

under this head of income after deducting specified expenses.

The computation procedures of this head are explicated under Sections 28 to 44D of the
Income Tax Act, 1961. But, it is quintessential to comprehend the meaning of the terms
‘businesses and ‘profession’ pursuant to the Act. The term business is defined as an
activity performed for the purpose of earning a profit, while Section 2(36) defines the latter
as an occupation. Notwithstanding, both are similar in all respects that they are driven in
pursuit of income/ profit.

Under this head, the following incomes are chargeable,

Benefit reaped from the business

Profit on the income by an organisation or as a result of being in a partnership,

Profit earned by the assessee

Cash received on export by the operation of the governmental scheme

4. Income from Capital Gains

Any profits or gains arising from the transfer of a capital asset effected in the financial year
shall be chargeable to Income Tax under the head ‘Capital Gains’ and shall be deemed to
be the income of the year in which the transfer took place unless such capital gain is
exempt under Section 54, 54B, 54D, 54EC, 54ED, 54F, 54G or 54GA.

LTCG- holding assets for more than 36 months and gaining profit by selling them.

STCG- holding assets for less than 36 months and deriving profit by selling the same.

5. Income from Other Sources

Any Income which is not chargeable to tax under the above mentioned 4 heads of income
shall be chargeable under this head of income provided that income is not exempt from the
computation of total income. Incomes, which are being left by the aforementioned
clauses, can be charged under this head. Section 56 (2) of the Income Tax Act attributes
the following types of income sources as ‘other income’,

Interest income from bank deposit

Dividend earnings

Gifts

Insurance policy

Income from the lottery, card games, gambling, and many more

The total income of an individual plays a pivotal role in income tax computation. That is
why it is significant to figure out the underlying structure of income tax. The
aforementioned is the brief outline of the existing five heads of income under the
Income Tax Act, 1961.

Conclusion

These are the 5 heads of income under the Income Tax Act of 196. These detail and
specify the different incomes and monetary functions that are liable for taxation by the
Government. Knowing the details of these 5 heads of income will allow proper
management of tax. The taxpayer can be clear as to the nature of the tax they are paying
to the Government, and the collection of said tax becomes much smoother and overall
convenient. All citizens who are eligible for taxpayers must abide by these heads of
income. If any taxpayer is caught not abiding by the clauses mentioned in the Income
Tax Act and makes an effort to withhold from paying the due tax amounts, they are
punishable by the law’s full extent.