An individual can have multiple sources of income. Therefore, for hassle-free computation of tax, Section 14 of the Income Tax Act 1961 classifies these sources into the following heads of income:
Income from salary
This head includes any form of remuneration that an individual receives against services provided by him/her as an employee. However, this amount qualifies as income only if the payer and payee of this salary have an employer-employee relationship.
Therefore, if you are a salaried individual, your income falls under this head. Additionally, salary includes various types of income, such as basic wages, pension, gratuity, pension, advance salary, commission, annual bonus as well as perquisites. Once the total income of an individual is calculated, his/her gross salary is taxed under this head.
Income from capital gains
Capital gains refer to the profits earned by an individual on the sale or transfer of a capital asset, which was earlier held as an investment. Here, a capital asset can be bonds, stocks, mutual funds, gold, real estate, etc. Therefore, whenever you earn profit by selling a capital asset, this gain is considered as your income, and the same will be taxable under this head.
To offer further clarity on this subject, we must highlight that rental income from a property is taxable under the heading ‘Income from house property,’ but if you sell this property and earn a profit, the same is taxed under ‘Capital gains.
Income from house property
Sections 22 and 27 of the Income Tax Act, 1961 are dedicated to computing taxes on the income of an individual from a property or from land owned by him/her. This head, therefore, includes rental income earned from properties.
A point to note here is that tax is derived from a property or land and not the rent earned from them unless the same is let out for commercial use. Therefore, if you rent out a property to a business, the income received against it is taxable under this head.
Income from gains and profits of profession or business
Any form of income earned by commerce, trade, manufacture, or profession is taxable under this head. It deducts expenses from the revenues in order to compute profits, upon which income tax is then applicable. Additionally, this head includes any sort of profit, bonus, or salary earned from a partnership in a business organisation.
Moreover, taxation on income from profits and gains of business or profession lays down the following criteria:
- The taxpayer must be handling the operations of the business or profession.
- The business or profession must be operational for the majority part of the preceding year.
- In the case of a taxpayer operating any other business or profession, a tax will also be applicable to such an individual.
Income from other sources
As the last head of taxable incomes, this head includes those types of income that are not categorised in the above heads. For instance, income from lottery awards, bank deposits, dividends, interest from government bonds, etc., fall under this head and are chargeable for income tax under Section 56(2) of the Income Tax Act 1961.
We hope this comprehensive guide on income tax returns in India helps you. Now that you are well versed with the procedure, you can conveniently file returns without a hitch.