You may earn income from various sources throughout the year such as your salary, rental income, interest on investments, or gains from selling assets like stocks or property.
For the ease of reporting these incomes in the Income Tax Return (ITR) and calculating taxes on them, the Income Tax Act classifies them into five distinct income heads:
- Income from salary
- Income from house property
- Income from capital gains
- Income from profits and gain of business or profession
- Income from other sources
Let’s see what incomes fall under which category.
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Income from salary: This head would include any compensation, salary, wages, or allowances received by you as an employee. For example, if you are a salaried individual, your basic pay, HRA, bonuses, perquisites and even retirement benefits like pension & gratuity would fall under this head.
Income from salary is taxable as per the regular slab rates. The employer is liable to deduct TDS from the salary and deposit the same to the government.
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Income from house property: We often own properties that we lease out and the rental income that you earn from such properties or even land would fall under this income head.
Income from house property is taxable at slab rates.
Moreover, there is a 30% standard deduction available on such income. So, if you generate a rental income of say ₹2 lakhs in a year, you can claim a standard deduction of ₹60,000 (30% of ₹2 lakhs). Hence, you’d have to pay taxes on only ₹1.4 lakhs.
You can even claim a deduction for any interest that you pay on your home loans (u/s 24b).
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Income from capital gains: Whenever you sell a capital asset, be it movable (shares, securities, gold, etc.) or immovable (land, building, etc.), the gains that you make are taxable and fall under this income head.
Now capital gains are taxed at a special rate and this rate varies for each asset class and even the holding period. Below is a table that will summarise it for you:
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Income from business or profession
If you’re doing a business, running professional services (CA, lawyer, doctor, etc.) or freelancing, income from such sources falls under this head.
Income under this head is chargeable at slab rates.
However, carrying out a business/profession also comes with various expenses which you can deduct from the total income in order to determine your actual profits. And then you’ll have to pay taxes on these net profits.
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Income from other sources (IFOS)
Any income that does not fall in the above four heads, would classify as income from other sources. This would include your interest and dividend income, any gifts that you receive and even winnings from online gaming, lotteries, gambling, etc.
Most other source incomes are taxed at the slab rate. However, winnings from lotteries, online games, gambling, betting, etc. are taxed at a flat rate of 30%.
