5 Heads of Income Tax

As per the Section 14 Income Tax Act,1961, there are five main income tax heads for an individual. The computation of
income tax is an important part and has to be calculated according to the income of a person. For a hassle-free calculation,
the income has to be classified properly so that there is no confusion regarding the same. The government has classified the
sources of income under separate heads and then the income tax is computed accordingly. The provisions and rules are
according to the details mentioned in the Income Tax Act

Five main Income tax heads

 Income from Salary

 Income from House Property
 Income from Profits and Gains of Profession or Business
 Income from Capital Gains
 Income from Other Sources

Income from Salary

The first head of Income Tax heads is income from salary whichThis clause essentially assimilates any remuneration, which
is received by an individual in terms of services provided by him based on a contract of employment. This amount qualifies
to be considered for income tax only if there is an employer-employee relationship between the payer and the payee
respectively. Salary also should include the basic wages or salary, advance salary, pension, commission, gratuity,
perquisites as well as the annual bonus.

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.

Specific tax exemptions are allowances allowed by employers as part of the salary. Some of them are.

 Conveyance Allowance: Up to Rs 800/- a month is exempt from tax.

 House Rent Allowance (HRA): Salaried individuals can claim House Rent Allowance or HRA to lower taxes who
live in a rented house. This can be partially or completely exempt from taxes.

The deduction available is the minimum of the following amounts:

1. Actual HRA received

2. 50% of [Basic salary + DA] for those living in metro cities (40% for non-metros)
3. Actual rent paid less 10% of salary

 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: Section 17 of Income Tax Act deals with perquisites which are basically 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

Income from House Property

House Property Income of the assessee is addressed as Income from house property. Also, amount of money that is
received by the landlord from tenant(s) for using the property is called rental income. Here, property refers to any building
including house, office building, warehouse etc. And any land attached to the building like compound, garage, car parking
space etc.Different types of house property (like rental or self occupied property) are taxed differently.
For individuals, the safest option is to consider rent as an income received from house property. Classification of income has
a significant impact on your tax while filing ITR. Classifications as follows:

 Income from house property;

 Income from other sources; or
 Even classified as ‘business income’ if the owner’s primary business is letting out property.

Computation of house property income

Format

Example
Let us assume that, you have a property and monthly rental is Rs. 20,000. Municipal taxes paid is Rs.10,000 per year and
Rs. 50,000 as a interest on borrowed capital. Calculate income from house property?
Income from Self Occupied Property (SOP)
 The annual value can be considered ‘nil’, if the owner is residing in the property(Self-occupied property or
SOP) and does not any financial benefit from the same property.
 It will also be ‘nil’, if the owner of the property has to move out of the city and the property is in another city. Owner
neither can subtract the municipal taxes not deduct any standard deduction. But, can still deduct the interest paid
on the loan availed to a certain limit.

Example
Mr. Rahul, bought a house in Bangalore and moved to pune in a rented house because of job. The annual income value on
Rahul’s Bangalore property is ‘nil’. Still Rahul will get a tax deduction for interest paid on borrowed capital.

 If a person owns more than one property, it is suggested that designate one property as SOP and pay tax on the
other. It is advisable to choose the property wisely, where owner has to pay minimum municipal tax or can claim
for high tax deductions on the SOP. SOP can be changed every year.

Reasons of Loss from house property

Solely, there are two main reasons behind the loss:

 Self Occupied Property: In SOP, Gross Annual Income (GVA) will be ‘nil’. But, from GAV municipal taxes and
interest on loan will be subtracted. Ultimately, this would result in a loss.
 Other type of property: Gross Annual Income is not ‘nil’ as that of SOP but if the deductions claimed is more than
the GVA, this would again result in loss.

Steps taken to cover these losses

 Setting off Loss under House Property: The loss from house property is allowed to set off against any other
income in same year. Other income includes salary, business or profession, capital gains and other sources. After
computing the net income by setting off the loss is taxable under income tax slabs.
 Carry forward of loss: If the loss is not adjusted in the same year, such losses will be carried forward to next year
and only allows to set off against the same income head i.e., Income from House Property. It is allowed to be
carrying forward the loss for maximum 8 years in ITR.

Note
  A new sub-section (3A) is inserted to section 71 which has now put a restriction, earlier it was not restricted. This
restriction is of Rs. 2lakhs i.e. loss from House Property of only Rs. 2lakhs p.a. allowed to be set off with incomes
under different heads.
 Taxpayer cannot keep carrying forward the loss from House Property for years as per their own wish. Taxpayer is
required to adjust the loss in that year itself; in which income is under house property head. If the taxpayer does
not set off the loss against the income, such losses will not be allowed to be set-off at a future date.

Tax Saving on house property income

 Joint Home Loan: If a person jointly owns a property with someone then they should apply for a joint home This
will make then eligible for tax deductions on interest up to Rs. 1, 50,000 each towards repayment of principal u/s
80C. Therefore, as a family you are able to make a larger tax benefit against the interest paid on the home loan
and interest is more than Rs 2,00,000 per year.

Note: Benefit on tax (u/s 80C) is claimed, only if the construction of the property is complete. Benefits cannot be availed
for an under construction property.

 Second home: If you already have one self-occupied property (SOP) registered on your name, and then you
should register the second property on the name of spouse/relatives to avoid excess taxation.
 Ownership of more than one property (u/s 24): For SOP, if the property is acquired/constructed after 1st April,
1999 (within 3 years) then owner is allowed to claim deduction of interest up to Rs. 1.5lakhs u/s 24.Loans taken to
re-construct the house (prior to April, 1999), the limit is only Rs. 30,000. SOP can be changed every year.
 Empty houses: Your empty house will be taxed on the fair rental value, so it is advisable to let empty properties
out or rent them. This will generate income no loss because of taxation on empty house.

Income from Profits and Gains of Profession or Business

The third head of Income Tax heads isIncome from Profits of Business in which the computation of the total income will be
attributed from the income earned from the profits of business or profession. The difference between the expenses and
revenue earned will be chargeable. Here is a list of the income chargeable under the head:

 Profits earned by the assessee during the assessment year

 Profits on income by an organization
 Profits on sale of a certain license
 Cash received by an individual on export under a government scheme
 Profit, salary or bonus received as a result of a partnership in a firm
 Benefits received in a business

Income from Capital Gains

Introduction
Capital gains refer to any profit or gain that arises from the sale of a capital asset. This gain or profit is charged to tax in the
year in which the transfer of the capital asset takes place.

When there is a transfer (sale, exchange, relinquishment, extinguishment, compulsory acquisition, conversion, maturity,
redemption, etc) of a capital asset then capital gains are charged to income tax. Also, if an inherited asset is sold by the
person who inherits it, capital gains tax will be applicable. Assets received as gifts are conditionally exempted from the
Income Tax Act.

Capital Asset
Capital asset means any property even if held for the purpose of business or profession and includes any securities held by
an FII.

Examples of capital assets: land, building, house property, vehicles, patents, trademarks, leasehold rights, machinery,
and jewellery.

This also includes having rights in or in relation to an Indian company. It also includes rights of management or control or
any other legal right.

The following are not considered capital assets:

 Any stock, consumables or raw material held for the purpose of business or profession.
 Personal goods such as clothes and furniture held for personal use (excluding jewellery, archaeological
collections, drawings, paintings, sculptures).
 Agricultural land in rural area in India.
 Gold deposit bonds issued under the Gold Deposit Scheme (1999) or deposit certificates issued under the Gold
Monetisation Scheme, 2015.

Long-Term and Short-Term Capital Assets

Short-term Capital Asset

An asset which is held for not more than 36 months or less is a short-term capital asset.

Long-term Capital Asset

An asset that is held for more than 36 months is a long-term capital asset.

From F.Y. 2017-18 onwards – The criteria of 36 months has been reduced to 24 months in the case of Fixed assets being
land, building, and house property.

Securities are short term capital assets if held for 12 months or less.

The assets are:

 Equity or preference shares in a company listed on a recognized stock exchange in India

 Securities (like debentures, bonds, government securities etc.) listed on a recognized stock exchange in India
 Units of UTI, whether quoted or not
 Units of equity oriented mutual fund, whether quoted or not
 Zero coupon bonds, whether quoted or not

Income from Other Sources

Any other form of income, which is not categorized in the above-mentioned clauses, can be sorted in this category. Interest
income from bank deposits, lottery awards, card games, gambling or other sports awards are included in this category.
These incomes are attributed in Section 56(2) of the Income Tax Act and are chargeable for income tax.

For any help on ITR Filing feel free to consult the tax experts at LegalRaasta. You can file ITR yourself via our ITR
software or get CA’s help on filing income tax return. You can also use the option of Business Return, Bulk Return or
Revised Return Filing.