As per Section 14 of the Income Tax Act, for the purpose of charging of tax and computation of total income, all incomes are classified under the following 5 Heads of Income:-

1. Salaries
2. House Property
3. Profits and Gains of Business or Profession
4. Capital Gains
5. Other Sources

1. Income from Salaries

An Income can be taxed under head Salaries if there is a relationship of an employer and employee between the payer and the payee. If this relationship does not exist, then the income would not be deemed to be income from salary.

If there is no element of employer-employee relationship, the income shall be not assessable under this head of income.

Illustration: Mrs. Angelina works in SGP Company Ltd. Owned by her Uncle. Despite being a close relation, she is getting paid 50,000 as a monthly salary. Here, her monthly earnings are chargeable under income from the salary head since she has an employer-employee relationship with her Uncle.

As per Section 15(a) of the Income Tax Act, any salary from the employer or former employer to the assessee (previous year) is taxable under this head regardless of the fact that it has been paid or not.

According to the Indian taxation Law, an employer could be remunerated by the mean of the following terminologies,

• Fees
• Basic Wages
• Advance salary
• Allowances
• Pension
• Gratuity
• retirement benefits and
• Annual bonus as well.

2. Income from House Property

Sections 22 to 27 of the Act of 1961 elucidate the computation of the total income from the properties inclusive of land and building, which the concerned person owns. The revenue under this head is chargeable only when the property has let out or rent i.e. only the rental income is taxable.

Section 22 of the Act provides that the annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income-tax, shall be chargeable to income-tax under the head “income from house property.

Hence, the chargeable cess could be levied on the gains from the building or the land appurtenant to the property comprises buildings rented for residential, businesses, professional, and entertainment purposes. In general, the income from the house property is calculated as, earning – expenditure = profit.

3. Profits and Gains from Business or Profession

Any income earned from any trade/commerce/manufacture/profession shall be chargeable under this head of income after deducting specified expenses.

The computation procedures of this head are explicated under Sections 28 to 44D of the Income Tax Act, 1961. But, it is quintessential to comprehend the meaning of the terms ‘businesses and ‘profession’ pursuant to the Act. The term business  is defined as an activity performed for the purpose of earning a profit, while Section 2(36) defines the latter as an occupation. Notwithstanding, both are similar in all respects that they are driven in pursuit of income/ profit.

Under this head, the following incomes are chargeable,

• Benefit reaped from the business
• Profit on the income by an organisation or as a result of being in a partnership,
• Profit earned by the assessee
• Cash received on export by the operation of the governmental scheme

4. Income from Capital Gains

Any profits or gains arising from the transfer of a capital asset effected in the financial year shall be chargeable to Income Tax under the head ‘Capital Gains’ and shall be deemed to be the income of the year in which the transfer took place unless such capital gain is exempt under  Section 54, 54B, 54D, 54EC, 54ED, 54F, 54G or 54GA.

• LTCG- holding assets for more than 36 months and gaining profit by selling them.
• STCG- holding assets for less than 36 months and deriving profit by selling the same.

5. Income from Other Sources

Any Income which is not chargeable to tax under the above mentioned 4 heads of income shall be chargeable under this head of income provided that income is not exempt from the computation of total income. Incomes, which are being left by the aforementioned clauses, can be charged under this head. Section 56 (2) of the Income Tax Act attributes the following types of income sources as ‘other income’,

• Interest income from bank deposit
• Dividend earnings
• Gifts
• Insurance policy
• Income from the lottery, card games, gambling, and many more

The total income of an individual plays a pivotal role in income tax computation. That is why it is significant to figure out the underlying structure of income tax. The aforementioned is the brief outline of the existing five heads of income under the Income Tax Act, 1961.