It is almost the time of the year to file your tax returns and pay the applicable tax within the due date. The first step in the process is to make a tally of income from all the sources to calculate the taxable income for the year. The Indian tax laws classify taxable income into various categories and also have specific tax rates assigned to income in certain cases. Keep reading to find out about different types of income considered while filing IT returns as per the Income Tax Act.
Read More: Top mistakes to avoid while filing income tax returns
What are the different income sources as per Income Tax Act?
The Income Tax Act 1961, classifies income into 5 broad categories. The principle for such classification is the source of income which is further crucial to understand the relevant deductions and exemptions on such income under the Act. For example, agricultural income is usually exempt under the tax laws. Therefore, even if the net agricultural income is above the basic exemption limit, it is nevertheless an exempt income and thereby not taxable in the hands of the taxpayers.
On this grounds, let us understand the 5 main categories or heads of income as per the Income Tax Act.
Income from Salaries
This is the first classification of income source and is also most relevant to a majority of the taxpayer section. Income earned from any employment in any company or business organization is classified under this head. As per provisions of the Income Tax Act employees receive their salary net of Tax Deducted at source which is deposited with the government within the due dates.
In general, the core components of salary include the basic salary, any allowances like dearness allowance, conveyance, HRA, etc., perquisites, gratuity, pension, leave encashment, etc. Employees at the end of the financial year receive Form 16 which has a record of all the salary payments for the year and the tax paid along with applicable deductions.
This form can be used to file income tax returns by either uploading the same on the income tax portal or on similar websites that aid in filing tax returns. This category includes income from all the employment sources and whether they are paid even for part of a year. In case of multiple employments in a year, the taxpayer will receive individual Form 16 for every such employment.
Income from House Property
This is the next classification of income as per the Income Tax Act. Income from House Property, as per the Income Tax Act, refers to the rental income by taxpayers (an individual or a business entity) earned from a property. This rental income can be notional or actual rent received from the property owned by them. Deductions such as standard deduction, interest on borrowed capital, and municipal taxes can be claimed by taxpayers on such income as per the provisions of the Income Tax Act.
The Act further provides a maximum deduction for interest on borrowed capital up to Rs. 2,00,000 per year for self-occupied properties. The Income Tax Act also allows for the deduction of home loan interest paid during the construction or acquisition period. This deduction can be claimed in five equal installments, starting from the year when the construction or acquisition of the property was completed. The taxable income from house property is added to the total income and taxed at the applicable slab rates.
Profits and Gains from Business or Profession
The Income Tax Act recognizes “Profits and Gains from Business or Profession” as the income generated from business or professional activities. It is calculated by subtracting allowable expenses like rent, salaries, utilities, raw materials, and depreciation from the net income of any business or profession.
Taxpayers are required to maintain detailed books of accounts and meet the requirements like tax audits if they meet the necessary threshold. The Act also provides for presumptive taxation for certain businesses and professions in a few cases where a percentage of gross receipts is considered taxable income. This presumptive taxation simplifies or eliminates the necessity to maintain the books of accounts, meeting audit requirements and providing necessary supporting documents for the same.
Capital Gains
Capital gains refer to the profits earned from the sale or transfer of capital assets like real estate, shares, bonds, gold, mutual funds, etc. It is calculated as the difference between the sale value or the transfer value of the asset and its cost of acquisition. Taxpayers also get the benefit of indexation in certain cases which is the adjustment of the inflation in the cost of asset.
Capital gains can be categorized into two types: short-term capital gains (STCG) and long-term capital gains (LTCG) depending on the holding period and the asset in question. Taxpayers are also eligible for a few exemptions from the capital gains in certain cases like in the case of capital gains from the sale of residential property being reinvested in eligible assets like specified bonds.
Income from Other Sources
This is the final head of income as per the Income Tax Act. It is also considered as the residual head of income for all other income that cannot be classified in any other head. Some examples of income under this head include interest income from bonds or fixed deposits, dividend income, income from winnings or lottery, royalty, etc. These incomes are added to the taxable income and are usually taxed at the applicable slab rates. However, in certain cases like lottery winnings, such income is taxed at a specific flat rate as per the provisions of the Income Tax Act.
Conclusion
Classifying any income into different heads of income is the starting point for calculating the taxable income and paying the tax thereon. It is important for taxpayers to understand the different heads of income and to classify their income in the correct head to calculate the correct tax liability. If there is an error in the same, taxpayers can file a revised tax return suo moto or they are liable to pay interest and penalty, as the case may be, in case of an adverse assessment by the Income tax Department.
FAQs
There are 7 ITRs available as per the Income Tax Act. ITR 1 is for individual taxpayers with income up to Rs. 50,00,000 and ITR 2 is for taxpayers not eligible under ITR 1. ITR 3 and 4 are for taxpayers having income from business or opting for presumptive taxation respectively. ITR-5 is for partnerships, LLPs, AOPs, and BOIs, ITR-6 is for companies not eligible for section 11 exemption, and ITR-7 is for individuals and companies obligated to file returns under specific sections.
Minimum Alternative Tax (MAT) is a provision that ensures companies pay a minimum amount of tax, even if they claim exemptions and deductions. While individuals and other entities are not affected by MAT, it is important for companies to consider it while calculating their tax liability and filing their Income Tax Returns (ITR) to ensure compliance with the tax laws.
Gross taxable income is the total income of a person after considering all the heads of income under the Income Tax Act.
Dividend income from mutual funds is taxed under the head ‘Income from Other Sources’ and is taxable at the applicable slab rates depending on the net taxable income of the taxpayer.
