What are the 5 Heads of Income?

Individuals and businesses often seek ways to increase their income and promote growth. This can include earnings from various sources such as salaries, interest on savings or investments, sales proceeds, income from equity or options trading, cryptocurrency, and many more. However, incorporating each source of income separately into the tax return can be difficult, given the multitude of income sources. Therefore, the income tax department has simplified the process by outlining five major heads of income that encompass all types of earnings.

Heads of Income

The income tax department has categorized income into five distinct heads. Taxpayers must ensure they accurately allocate their incomes to the appropriate heads to prevent any potential consequences while filing ITR.

The 5 heads of income are as below:

1. Income from Salary
2. Income from House Property
3. Income from Capital Gains
4. Income from Business and Profession
5. Income from Other Sources

Income from Salary

Income from salary includes any wages, salary, compensation, or allowances received by an individual as a part of their employment. Moreover, this head also includes advance salary, gratuity, commission, annual bonus, and pension. There must be an employer-employee relationship to report the salary income under this head. If a taxpayer receives arrears of salary or pension after termination or retirement from employment, those amounts will also be included under this head.

Additionally, under this head, certain exemptions are also provided such as standard deduction, house rent allowance (HRA), conveyance allowance, etc.

Income from House Property

Under this category, individuals are required to report rental income received from properties they have rented out such as income earned from property or land rentals. The taxpayers have the option to claim the deduction of the interest amounts paid on a home loan for self-occupied property as well as let out property under the head income from house property.

However, if the individual is holding more than one property as self-occupied, then in such case only one property will be considered as self-occupied and all other properties will be termed as deemed let out.

Income from Capital Gains

When there are profits or losses from selling a capital asset, taxpayers are required to report these amounts under the category of income from capital gains. A capital asset includes assets held for investment purposes, such as land, buildings, shares, jewelry, bonds, mutual funds, and others.

Moreover, this category comprises two subcategories: short-term capital gains and long-term capital gains. The duration of property ownership determines whether the gains are classified as short-term or long-term.

Income from Business and Profession

The income from business and profession includes profits or losses generated from any business or profession. Business comprises trade, commerce, manufacturing, and other similar activities. On the other hand, the term profession refers to specialized knowledge gained after undergoing formal education and examination in a specific field.

Under this head, there are three different sub-categories for business income:

• Speculative Business Income
• Non-Speculative Business Income
• Specified Business Income

Moreover, taxpayers have the option to report their incomes under the presumptive scheme. This scheme allows taxpayers to declare their profits at reduced rates and subsequently pay taxes based on this declaration.

Income from Other Sources

Any income that does not fall under any of the above-mentioned categories will be reported under the head income from other sources. A few examples of income from other sources are interest from savings banks or deposits, dividends from shares or units of mutual funds, winnings from lotteries or games, gifts received, etc.

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