Making Tax Simple: Explaining the Five Types of Income and How They Affect Your Taxes
In income tax, sources of income are categorized into five heads for the purpose of income tax calculation. They are explained briefly as follows:
1.     Income from Salaries
Income from Salaries encompasses compensation, benefits , whether in monetary form or in kind, received by an individual from their employer in return for services provided. It includes components such as basic salary, dearness allowance (DA), house rent allowance (HRA), bonus, commission, perquisites, and other allowances. Employers usually need to deduct Tax at Source (TDS) from the salary income of employee. This head excludes income from businesses, professions, or self-employment. It includes various form of compensation such as:
i.                Basic Salary
ii.               Dearness Allowance (DA)
iii.              House Rent Allowance (HRA)
iv.              Bonus
v.               Commission
vi.              Perquisites (Non – Monetary benefits from employer)
vii.            Etc
2.     Income from House Property
It refers to the income earned from house property i.e. rental income. The property may either be let out for rent or if not lent out deemed rent is calculated on the property.
The rent is the amount received in exchange of letting out your property from the tenants or lessees (to whom you lent out your property).
House properties generally refereed to residential properties such as houses, apartments or residential land. They are generally used for residential purposes. Income from them is either calculated as rent if lent out on rent or as deemed rent if not rented out.
Self-occupied property which is occupied by the owner himself to reside is not taxable under Income from House Property. Maximum 2 house properties can be declared as self occupied.Â
 Meanwhile those properties which are not used for residential purposes such as buildings, offices, warehouses, factories, industrial units etc are not liable to tax under Income from house property, they are genrally included under Profits and Gains from Businesses and Professions or Income from Other Sources.
3.     Profits and gains from business and Profession
It includes income earned by an individual or organization from their trade, retail business, manufacturing, professional or vocational services. It includes profits from buying and selling goods, providing services, manufacturing goods or any other form of activity.
Profits or gains under this head is generally calculated as
Total turnover (sales) or gross receipts
-Â Â Â Â Â Â Â Allowable Expenses
-Â Â Â Â Â Â Â Depreciation (Charged on fixed assets due to their wear and tear over passage of time)
=Â Â Â Â Profits (Which is then included in Gross Total Income to be taxable).
Since, the assessee can tamper his financial records and show unnecessary expenses to reduce the profits and thus reducing his Income Tax liability, the department allows only some expenses these expenses are called Allowable Expenses.
4.     Capital Gains
It refers to the gain realized from the sale or transfer of capital assets such as stocks, bonds, real estate property or other capital assets. When a capital asset is sold then the difference between the amount of purchase and Sales Consideration represents Capital Gain. Also, Capital Loss is there if the Capital Assets are sold at a lower amount then it was purchased. Capital Loss is subtracted from Capital Gains.
Capital gains are categorized as short-term or long-term based on the duration the asset was held. It depends on the time it was held by its owner. This time period is different for different types of assets. Which will be discussed later.
The very simple way to calculate Capital Gains is –
Sale Consideration (amount for which the capital asset is sold)
-Â Â Â Â Â Â Â Purchase amount (amount for which the asset was purchased)
-Â Â Â Â Â Â Â Incidental Expenses (Any expenses which are incurred on the capital asset)
= Capital Gain (It can be called Short term or long term depending on the time period they were held for)
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Since, the Capital Asset can be purchased a long time ago they are adjusted to the inflation index. The adjusted amount is called Indexed Cost of Acquisition and the same goes for Incidental expenses.
5.     Income from Other Sources
It includes income which are not categorized under any of the previous heads. They include income such as Interest Income, Dividend Income, Winning from lotteries, gifts received etc. It makes sure that all sources of income can be accounted for.
For a salaried person in India, the primary heads of income are Income from Salaries, Income from Other Sources (for Interest or Dividend income). Although they may have income sources that may be categorized into other heads.
DISCLAIMER: The information provided in this blog is intended for general informational purposes only. While efforts have been made to ensure the accuracy and reliability of the information presented, it may not be comprehensive, and it is subject to change without notice. Readers are advised to consult with experts in the relevant field and verify the information for accuracy and currency. The views expressed are those of the author and may not represent the views of others.