Heads of Income under Income Tax Act, 1961

HEADS OF INCOME
Under chapter 4 of Income Tax Act, 1961 (Section 14), income of a person is calculated under
various defined heads of income. The total income is first assessed under heads of income and
then it is charged for Income Tax as under rules of Income Tax Act. According to Section 14 of
Income Tax Act, 1961, there are following heads of income under which total income of a person
is calculated:
1. Income under Head Salaries: This head taxes the income earned by an individual as salary
from any firm or organisation.
2. Income from House Property: This head taxes rental income received by any person from way
of renting of any immoveable property.
3. Profits and Gains of Business or Profession: This head of income broadly covers income
earned by a person as a result of some business or professional set-up by him.

4. Capital Gains: This head of income taxes the income earned on sale of any investment in form
of gold, precious ornaments, shares, etc or immoveable property.
5. Income from other Sources: This head of income covers any income which is not chargeable
to tax under any of the above heads of income. Any income including gambling or profit/loss on
running of race horses, camels, interest income , etc are chargeable to tax under this head of
income.1

Salary Income Tax - Heads of Income

Income under heads of salary is defined as remuneration received by an individual for services
rendered by him to undertake a contract whether it is expressed or implied. According to Income
Tax Act there are following conditions where all such remuneration are chargeable to income
tax:

When due from the former employer or present employer in the previous year, whether

paid or not
When paid or allowed in the previous year, by or on behalf of a former employer or

present employer, though not due or before it becomes due.

When arrears of salary is paid in the previous year by or on behalf of a former employer
or present employer, if not charged to tax in the period to which it relates.

Income Under Head of Salary:

Under section 17 of the Income Tax Act, 1961 there are following incomes which comes under
head of salary:
Salary (including advance salary)

Wages

1 Surf India, August 19, 2014, http://www.surfindia.com/finance/income-tax/incometax.html

Fees

Commissions

Pensions

Annuity

Perquisite

Gratuity

Annual Bonus

Income From Provident Fund

Leave Encashment

Allowance

Awards

Leave Encashment:Leave encashment is the salary received by an individual for leave period. It
is a chargeable income whether he is a government employee or not. Under section 10(10AA) (i)
there is also a provision of exemption in case of leave encashment depending upon whether he is
a government employee or other employees.
Annuity:It is an annual income received by the employee from his employer. It may be paid by
the employer as voluntarily or on account of contractual agreement. It is not taxable until the
right to receive the same arises. Under section 56, Income Tax Act, 1961 other annuities come
under a will or granted by a life insurance company or accruing as a result of contract which
comes as income under from other sources.
Gratuity: It is salary received by an individual paid by the employee at the time of his retirement
or by his legal heir in the case of death of the employee.
Allowance: It is the amount received by an individual paid by his/her employer in addition to
salary. Under section 15 of the Income Tax Act, 1961 these allowance are taxable excluding few
condition where they are entitled of deduction/ exemptions.
Under Income Tax Act following types of allowance are defined

House Rent Allowance:

Under sections 10(13A) of Income Tax Act, 1961 allowance is defined as an amount received by
an employee paid by his/ her employer as a rent of his/her house. It is a taxable income. There is
no exemption in tax if he is living in his own house or house for which he is not paying rent.
There are following amount which are exempt from tax:
Actual house rent paid by that individual
Rent paid for the accommodation over 10% of the salary
50% of the salary if house is placed at Delhi, Mumbai, Kolkata, Chennai or 40% of the salary
in it is placed in any other city
Entertainment Allowance:
It is the amount paid by employer for availing entertainment services. Under section 16(ii) of
Income Tax Act, 1961 it is entitled to deduction in tax from is salary. But in this case deduction is
given to his gross salary which also includes entertainment allowance. Deduction in tax against
this allowance can be divided into two parts :
In case of Government employee entitled to minimum deduction of
Entertainment allowance received
20% of basic salary excluding any other allowance
Rs. 5000 In case of other employee entitled to minimum deduction of
(a) Entertainment allowance received
20% of basic salary excluding any other allowance
Rs. 7500
Entertainment allowance received during 1954-1955
Other Special Allowances
Children Education Allowance
Tribal Area Allowance
Hostel Expenditure Allowance
Remote Area Allowance
Compensatory Field Area Allowance
Counter Insurgency Allowance
Border Area Allowance
Hilly Area Allowance

Allowances for there is a provision of exempt in income tax are:

Allowance given to a citizen of India, who is a government employee, for rendering services
outside India
Allowances given to Judges of High Courts
Allowance given Judges of Supreme Court
Allowances received by an employee of UNO
Perquisite: Under section 17(2) of Income Tax Act, 1961 perquisite is defined as:
Amount paid for the rent-free accommodation provided to the assessee by his employer
Any concession in the matter of rent respecting any accommodation provided to the assessee
by his employer
Any benefit or amenity granted or provided free of cost or at concessional rate in any of the
following cases:
1. By a company to an employee, who is a director thereof
2. By a company to an employee being a person who has a substantial interest in the company
3. By any employer to an employee whose income under the head 'Salaries' exceeds Rs.24000
excluding the value of non monetary benefits or amenities
4. Any sum paid by the employer in respect of any obligation which, but for such payment,
would have been payable by the assessee
5. Any sum payable by the employer whether directly or through a fund, other than a recognised
provident fund or EPF, to effect an assurance on the life of the assessee or to effect a contract for
an annuity
There are following perquisites which are tax free:
Medical facility
Medical reimbursement
Refreshments
Subsidised Luch/ Dinner provided by employer
Facilities For Recreation
Telephone Bills
Products at concessional rate to employee sold by his/ her employer

 Insurance premium paid by employer

Loans to employees by given by employer
Transportation
Training
House without rent
Residence Facility to member of Parliament, judges of High Court/ Supreme Court
Conveyance to member of Parliament, judges of High Court/ Supreme Court
Contribution of employers to employee's pension, annuity schemes and group insurance

Heads of Income: House Property

Income is taxable under the head Income from House Property if the following three
conditions are satisfied:i) The property should consist of any building or land apparent thereto
ii) The assessee should be owner of the property
iii) The property should not be used by the owner for the purpose of any business or
profession carried on by him, the profits of which are chargeable to income tax
Heads of House Property
According to Chapter 4, Section 22 - 27 of Income Tax Act, 1961 there is a provision of income
under head of house property. In every section from 22-27 there are detail specification of house
property income. It is defined as income earned by a person through his house or land.
Income Comes Under Head of House Property:
Annual value of building or land owned by assessee. There is a charge on the potential of
property to generate income not on the rent received. But if property is used for making profit in
business then it will be taxable not under this head but will be taxable under head of profit in
business/ profession.

Annual value of the house property:

The annual value of house property has been defined as the amount for which the property may
reasonably be expected to be let out for a year.
However, if your property is let out for the whole or a part of the financial year, the gross annual
value will be the amount received during the year as a result of the letting out of the house
property. This shall also exclude the rent that the taxpayer is unable to realize in the financial
year.
The following four factors have to be taken into consideration while determining the annual
value:
a.

Rent payable by the tenant.

b.

Municipal valuation of the property.

c.

Fair rental value (market value of a similar property in the same area) of the property.

d.

Standard rent payable under the Rent Control Act.

Gross Annual Value:

In the case of self-occupied property, the annual value is taken to be nil.
In the case of property that is rented out, the gross annual value is the municipal value, the de
facto rent (whether received or receivable) or the fair rental value, whichever is highest. If,
however, the Rent Control Act applies to the property, the gross value cannot exceed the de
facto rent or the standard rent under the Rent Control Act, whichever is higher.
Calculating annual value of property:
According to annual value, house property is calculated as

Annual value of a house is zero if property is in the occupation of the owner for his

residence for the whole year & if no other benefit is availed by owner from his property. There
will be no deductions as given under section 24 except deduction interest on borrowed capital

If the owner lets out the house or a part thereof for any period of time during the previous

year the annual value of the property or part has to be calculated for the whole year and the
proportionate annual value of the period for which the house or any part thereof was in the
occupation of the owner for his own residence shall be deducted from the gross annual value.

The assessee in such cases cannot claim deduction under section 24 in excess of the annual value
so determined

The assessee occupies more than one house for his residence, the above exemption is

applicable only to one such house at the option of the assessee. The annual value of the other
house or houses shall be computed as if the house or houses are let

In case where the assessee has only one residential house but it cannot be occupied by the

owner by reason of that owing to his employment, business or profession carried out on at any
other place, he has to reside at that other place in a building not belonging to him, the annual
value of such house shall be taken to be nil if the house is not actually let and no other benefit is
derived by the owner from such house. The assessee cannot claim any deduction in such case as
allowable under section 24 of the Act.

Heads of Income: Profit in Business/

Profession
Under the Income Tax Act, 'Profits and Gains of Business or Profession' are also subjected to
taxation. The term "business" includes any (a) trade, (b)commerce, (c)manufacture, or (d) any
adventure or concern in the nature of trade, commerce or manufacture. The term "profession"
implies professed attainments in special knowledge as distinguished from mere skill; "special
knowledge" which is "to be acquired only after patient study and application". The words 'profits
and gains' are defined as the surplus by which the receipts from the business or profession exceed
the expenditure necessary for the purpose of earning those receipts. These words should be
understood to include losses also, so that in one sense 'profit and gains' represent plus income
while 'losses' represent minus income.

Under Head of Profit in Business

Profits and gains of assessee from any business or profession during assessment year

Any payment or compensation due or received by a person for his services to

organization as a part of his business

Making profit in trade Income of professional or organization against services provided

by that professional/ organization

Profits on sale of a license granted under the Imports (Control) Order, 1955, (EXIM

control Act, 1947)

Cash received or due by any person against exports under government schemes

Any benefit whether it is not in cash coming from business/ profession

Any profit, salary, bonus or commission received by company partners

The following types of income are chargeable to tax under the heads profits and gains of
business or profession:

Profits and gains of any business or profession

Any compensation or other payments due to or received by any person specified in

section 28 of the Act

Income derived by a trade, profession or similar association from specific services

performed for its members

Profit on sale of import entitlement licences, incentives by way of cash compensatory

support and drawback of duty

The value of any benefit or perquisite, whether converted into money or not, arising from

business
Any interest, salary, bonus, commission, or remuneration received by a partner of a firm,

from such a firm

Any sum whether received or receivable in cash or kind, under an agreement for not
carrying out any activity in relation to any business or not to share any know-how, patent,
copyright, franchise, or any other business or commercial right of similar nature or

technique likely to assist in the manufacture or processing of good

Any sum received under a keyman insurance policy

In the following cases, income from trading or business is not taxable under the head "profits and
gains of business or profession":

Rent of house property is taxable under the head " Income from house property". Even if
the property constitutes stock in trade of recipient of rent or the recipient of rent is

engaged in the business of letting properties on rent.

Deemed dividends on shares are taxable under the head "Income from other sources".
Winnings from lotteries, races etc. are taxable under the head "Income from other

sources".
Profits and gains of any other business are taxable, unless such profits are subjected to
exemption.

General principals governing the computation of taxable income under the head "profits and
gains of business or profession:

Business or profession should be carried on by the assessee. It is not the ownership of

business which is important , but it is the person carrying on a business or profession,

who is chargeable to tax.

Income from business or profession is chargeable to tax under this head only if the
business or profession is carried on by the assessee at any time during the previous year.

This income is taxable during the following assessment year.

Profits and gains of different business or profession carried on by the assessee are not
separately chargeable to tax i.e. tax incidence arises on aggregate income from all
businesses or professions carried on by the assessee. But, profits and loss of a speculative

business are kept separately.

Profits made by an assessee in winding up of a business or profession are not taxable, as
no business is carried on in that case. However, such profits may be taxable as capital
gains or as business income, if the process of winding up is such as to involve the

carrying on of a trade.
Taxable profit is the profit accrued or arising in the accounting year. Anticipated or
potential profits or losses, which may occur in future, are not considered for arriving at
taxable income. Also, the profits, which are taxable, are the real profits and not notional
profits. Real profits from the commercial point of view, mean a gain to the person
carrying on the business and not profits from narrow, technical or legalistic point of view.

The yield of income by a commercial asset is the profit of the business irrespective of the

manner in which that asset is exploited by the owner of the business.

Any sum recovered by the assessee during the previous year, in respect of an amount or
expenditure which was earlier allowed as deduction, is taxable as business income of the
year in which it is recovered.

Heads of Income: Capital Gains

Under the Income Tax Act, any profits or gains arising from the transfer of a capital asset
effected in the previous year, shall be chargeable to income tax under the head 'capital gains' and
shall deemed to be the income of the previous year in which the transfer took place unless such
capital gain is exempted under the prescribed exemptions.
'Capital gains' means any profit or gains arising from transfer of a capital asset. If any Capital
Asset is sold or transferred, the profits arising out of such sale are taxable as capital gains in the
year in which the transfer takes place. Capital gains is the difference between the price at which
the capital asset was acquired and the price at which the same asset was sold. In technical terms,
capital gain is the difference between the cost of acquisition and the fair market value on the date
of sale or transfer of asset.
Under the existing provisions of Section 2(14), a 'capital asset' means, property of any kind held
for personal use by the assessee, whether or not connected with his business or profession,
personal effects held for personal use by the assessee or any number of his family dependent on
him are excluded from the ambit of the definition of capital asset. The only asset that is in the
nature of personal effects, but is included in the definition of capital asset is jewellery and
ornaments. However, with effect from assessment year 2008-09, archeological collections,
drawings, paintings, sculptures or any work of art have also been excluded from the meaning of
personal effects and transfer of such personal effects will also attract capital gains tax. Capital
Assets are of two types i.e., long term and short term. A capital asset held for 36 months or less
before it is sold or transferred.is called as a short-term capital asset and if the period exceeds 36

months, the asset is known as a long-term capital asset. In case of shares, debentures and mutual
fund units the period of holding required is only 12 months. Transfer of a short term capital asset
gives rise to "Short Term Capital Gains" (STCG) and transfer of a long capital asset gives rise to
"Long Term Capital Gains" ( LTCG). Different rates of tax apply for gains on transfer of the long
term and short-term capital assets. Gains on short-term capital asset are taxed as regular income.
Under section 2(14) of the Income Tax Act,1961 Capital Asset is defined as property of any kind
held by assesse including property held for his business or profession. It includes all type real
property as well as all rights in property. It is also defined as gains on transfer of assets in which
there in no cost of acquisition like:

Goodwill of business generated by assessee

Tenacy rights

Stage carriage permits

Loom hours

Right to manufacture

Processing & production of any article or things

Assets Which Don't Come Under Heads of Capital Assets

According to Income Tax Act,1961 there are few assets which don't form a part of Capital
Assets, which are as follows:

Stock of goods and raw materials used by assessee for his business or profession
Those property which are movable like wearing apparel, furniture, automobile, phone,
household goods etc. Held by assessee. But Jewelry which is also an movable assets comes

under heads of Capital Assets

Agricultural property in India. But agriculture land coming under municipal limits (in area
having population ore than 10,000) comes under Capital Assets. Agriculture lands within 8
Km from municipal limit also comes under Capital Assets if it is notified by the central

government of India
Agricultural property in India. But agriculture land coming under municipal limits (in area
having population ore than 10,000) comes under Capital Assets. Agriculture lands within 8

Km from municipal limit also comes under Capital Assets if it is notified by the central

government of India
Few Gold Bonds issued by government
Few special bonds issued by central government like Special Bearer Bonds, 1991
Transfer of Capital Assets

Extinguishment of any rights in capital assets

Acquisition of capital assets or rights
Conversion of capital asset by its owner as stock in trade of his business, it may also be a

term of transfer
Transfer of immovable property under Section 53A of Transfer of Property Act, 1882
Any transaction by which an assessee become enable to act as a member of cooperative

society
Any transaction by which an assessee acquire shares in cooperative society

Heads of Income: Other Sources

So under Section 56(2) of Income Tax Act,1962 all such income comes in this heads of income.
There are following incomes which are taxed under this heads

Income coming as a dividend paid by a company to an assessee

Income coming from winning in lottery, crossword puzzles, races, card games, gambling
or other such sports

Income coming as an amount received by assessee from his employer as a fund for
welfare of employee

Income as an interest on securities

Income coming by letting on hire machinery, plant, furniture, building or other goods
Income coming from insurance policy
Income from Other Sources is residual head. In general, if an income does not fall with the
classification of,
1.

Salaries, or

2.

Income from House Property, or

3.

Profits and Gains of Business or Profession,

4.

Capital Gains, or

then it shall be charged as Other Sources Income.

However, any capital gain/profit is chargeable under this head only if it is specifically made
under this head, or if it has been made taxable under any section of the Income-tax Act, without
mentioning the head under which is taxable.
Here you can find various incomes chargeable under this head & the computation thereof. Once
the taxable income under this head is calculated, it shall be added to your total taxable
income.But, you can't claim deduction u/s 80C to 80U for certain incomes like winnings from
lottery, horse races etc.
Income of every kind which is not excluded from the total income it's not charged to income tax
from other sources. "Income from other sources", namely: -

1. Dividend.
2. Any annuity due or commuted value of any annuity paid.
3. Any winning from lotteries, crossword puzzles, races including horse races, card games and
other games of any sort or from gambling or betting of any form or nature whatsoever.
4. Any sum, received by the assesses from his employees as contributions to any provident fund
or Superannuation fund or any fund.
5. Income from machinery, plant or furniture belonging to the assesses and let on hire.
6. Any sum received under a Key man insurance policy, including the sum allocated by way of
bonus on such policy, if such income is not chargeable to income tax under the heads "Profits
and gains of business and profession" or under the head "Salaries".
So, basically sanction issue notice 12a "income from other sources" is the residuary head of
income, which takes within its ambit any income, which does not specifically fall under any
other head of income. The income chargeable under the 'income from other sources shall be
computed after making the following deductions:In the case 12a registration of interest on securities, any reasonable sum, paid by way of
commission or payment to a banker or to any other person for realizing such dividend or interest
on behalf of the assesses. In the case of income, received by the assesses from his employees as
contributions to any provident fund or Superannuation fund or any fund set up the provisions of
the Employees''. In the case 80g income from machinery, plant or furniture belonging to the
assesses and the income is not chargeable to income-tax under the "Profits and gains of business
or profession. In the case of income in the nature of family pension, a deduction of a sum equal
to thirty-three and one-third per cent of such income or fifteen thousand rupees, whichever is
less. Any other expenditure (not being capital expenditure) lay out or used wholly and
exclusively for making or earning such income.