When it comes to filing income tax returns in India, knowing how your earnings are classified is very important. The Income Tax Act divides your earnings into 5 heads of income to calculate your total taxable income. Each category has specific rules and exemptions. Let’s break them down in a clear and simple way.
1. Income from Salary
This includes the money you receive as part of your job or employment. It covers your basic salary, allowances (like HRA or travel), bonuses, commissions, and any other benefits given by the employer.
Examples:
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Monthly pay from a company
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Dearness allowance
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Gratuity or pension (for retired individuals)
You can also claim deductions like standard deduction, professional tax, and exemptions on allowances if you meet certain conditions.
2. Income from House Property
If you own a building or land (residential or commercial) and earn rental income from it, it falls under this head. Even if you own more than one house, the second one (if not let out) may be considered as deemed to be let out and taxed.
Examples:
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Rent received from a tenant
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Notional rent on a second property (if kept vacant)
You can claim deductions such as:
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30% of rent as standard deduction
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Interest on housing loan under Section 24(b)
3. Profits and Gains from Business or Profession
This head covers income earned through trade, profession, or freelancing. It applies to both small business owners and professionals like doctors, architects, and consultants.
Examples:
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Profit from a shop or business
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Consultancy fees
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Freelance work earnings
You can deduct various expenses like rent, salaries, travel costs, and depreciation related to your business operations.
4. Capital Gains
When you sell a capital asset like land, house, or shares and make a profit, it’s taxed under this category. Capital gains are divided into:
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Short-term capital gains (held for less than a specific period)
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Long-term capital gains (held for a longer period, usually over 1–3 years)
Examples:
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Selling a flat or plot
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Sale of mutual funds or stocks
Certain exemptions are available under Sections 54, 54EC, and 54F if the gains are reinvested as per rules.
5. Income from Other Sources
Any earnings that don’t fall under the first four heads come under this section. It is a broad category and often includes passive income.
Examples:
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Bank interest
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Dividend income
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Winning from lottery or games
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Gifts received (over ₹50,000 in certain cases)
Some items in this head are taxable at special rates, and others may be eligible for deductions.
Final Words
Understanding the five heads of income helps in accurate tax filing and planning. It allows individuals to make better use of deductions and exemptions, ensuring you only pay what is actually due. Whether you’re a salaried employee, a business owner, or an investor, classifying income correctly is key for smooth and compliant tax returns.
