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:

» Heads of Income: Salary

» Heads of Income: House Property
» Heads of Income: Profit In Business/ Profession
» Heads of Income: Capital Gains
» Heads of Income: Other Sources

What is Salary: 

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.

What Income Comes 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
• Fees
• Commissions
• Pensions
• Annuity
• Perquisite
• Gratuity
• Annual Bonus
• Income From Provident Fund
• Leave Encashment
• Allowance
• Awards.

What is 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.

What is 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.

What is 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.

What is 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.
What Is 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.

What 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.

How to calculate 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 except for interest on
borrowed capital subject to a maximum of Rs. 15,000/-.
According to Income Tax Act, 1961 income under this head is defined as the income earned
by assessee as a profit or gain in his business or profession. Income under this head must
follow these conditions: 

• There must be a business/ profession

• Business/ profession is being carried by assessee
• Business/ profession have been carried out by assessee in assessment year for which
income tax is filling

What Income Comes 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.

What is Capital Gain:

According to Income Tax Act,1961 heads of capital gain is defined as gains derived on
transfer of capital asset. Capital Gain is the profit or gain of an assessee coming from the
transfer of a capital asset affected during the previous year or assessment year. "Capital
Asset" and transfer are predefined in income tax act. 

What is Capital Asset:

Under section 2(14) of the Income Tax Act,1961 Capital Asset is defined as property of any
kind held by assessee 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
• Tenancy 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 more 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 more 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

Under Section 2(47) of The Income Tax Act, 1961 transfer of capital assets is defined as:
• Sale, exchange and relinquishment of 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
Income from Other Sources.

Every type of income comes under a specified heads. But there are few incomes, which
don't come under any of following heads:

• Salary
• House Property
• Profit In Business/ Profession
• Capital Gains

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.