As per IT act, total income of a person is to be classified under five different heads for the purpose of charging tax. Although there is only one tax, rules for calculating it are different based on these heads of income.
One person can get taxed under all these heads if he is incurring those types of income as specified in IT act. To compute it under each of these heads, one needs to apply rules that are specifically applicable to these heads of income.
As per section 14 of IT act, to get charge for tax one has to first classify their incomes under following heads;
- House property
- Profits and gains of business or profession
- Capital gain
- Other sources
After classifying it into these heads, you will be calculating gross total income and then taxable income to charge tax on it. Let us discuss these heads in detail;
All employees working under a payroll of an employer will be charged under this head for the amount that they obtained from the employer. One of the criteria to get taxed under this head is that the payer and payee should have employer and employee relationship. Once your income is taxed under this head, you will be eligible for various exemptions for the allowances that you have obtained from your employer.
For the purpose of tax, salary includes your basic salary or wages, dearness allowances, annuity or pension, gratuity, advance of salary, leave encashment, commission, perquisites in lieu of or in addition to salary and retirement benefits. In addition to various allowances, your employer may provide you perquisite for your contribution to the company. This will also be included in to taxable salary.
After taking out the exemption, tax as applicable to you, the total amount will be called gross salary which is to be charged to tax after allowing the deductions out of it.
Every month your employer based on the tax rate will be deducting tax from your monthly salary. At the end of the year your employer will hand over a TDS certificate in form 16 for the amount that is deducted and deposited with IT department on your behalf.
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Being an owner of residential or commercial property, if you are getting rent out of it then such amount will be liable to tax every year under the head house property. Based on the provisions of income tax you need to calculate your tax liability and pay it to IT department.
Also Read: how to calculate income from house property
Business or profession
Profit received from your business or profession will be taxed under this head of income. If you have a higher revenue or profit then you may be required to prepare profit and loss account and balance sheet for your business. You are also required to get your accounts audited if turnover of your business exceed Rs. 1 crore during the previous year.
Also read: Tax audit under section 44AB
Capital gain will be charged to tax if during the year you have transferred your capital asset for a consideration. For different assets income tax provisions has provided different benefits to claim exemption. One can avail these by investing in those specified assets before the due date as specified in the relevant section.
Also Read: Capital gain on sale of house property
Being a residual head, all incomes that are not taxed under any of these above heads will be taxable under this head. In addition to it certain specified incomes like interest from bank, wining from lotteries and crossword puzzles are also taxable under this head.
Tax payers have to consider all these incomes that they have incurred during the year and include it under those heads that specify the most and calculated gross total income. From the calculated gross total income, you will be deducting your tax deductions based on your investment to arrive at taxable income on which tax will be calculated.
Also read: IT slab rates applicable to an individual