In India, the computation of an individual’s total income is based on various sources of income, known as “Heads of Income.” The Income Tax Act, 1961, categorizes income under five different heads, each with its own rules for calculation and taxation. Here are the details of each head of income for the computation of total income:
1. Income from Salary (Section 15 to 17):
- This head includes income received by an individual as salary, wages, pension, or annuity. It covers both monetary and non-monetary components such as house rent allowance (HRA), leave travel allowance (LTA), and perquisites provided by the employer.
2. Income from House Property (Section 22 to 27):
- This head includes income earned from owning a residential or commercial property. The taxable income under this head is generally determined by considering the property’s annual value, which is the notional rental income that the property is expected to fetch in the market.
3. Income from Profits and Gains of Business or Profession (Section 28 to 44DA):
- This head includes income generated from business or profession, whether it is a sole proprietorship, partnership, or any other form of business. It encompasses profits and gains earned from trading, manufacturing, services, or any other commercial activity. The income is computed after allowing for relevant deductions and expenses.
4. Income from Capital Gains (Section 45 to 55):
- This head includes income arising from the sale or transfer of capital assets, such as land, buildings, stocks, bonds, mutual funds, and other investments. The capital gains can be categorized as short-term capital gains (STCG) or long-term capital gains (LTCG) based on the holding period of the asset.
**5. Income from Other Sources (Section 56 to 59):
- This head covers income that does not fall under the other four heads. It includes income from sources such as interest on savings accounts, fixed deposits, dividends, gifts, lottery winnings, rental income from other sources (not covered under house property), etc.
Computation of Total Income:
- Once the income is categorized under the different heads, deductions and exemptions allowed under various sections of the Income Tax Act can be applied to arrive at the taxable income for each head.
- The total income is then calculated by aggregating the taxable income from all heads after taking into account any deductions under Chapter VI-A (e.g., deductions for investments in tax-saving instruments, medical insurance premium, etc.).
- Finally, the income tax payable is calculated based on the applicable income tax slab rates for the relevant assessment year.
Additional Notes:
- Some specific types of income, such as agricultural income and income of certain specified persons, are either partially or fully exempt from income tax.
- The tax treatment of certain income sources, such as agricultural income, is governed by the respective state governments.
- It is essential for taxpayers to maintain proper records, receipts, and documentation to support the computation of income and claim deductions during the tax assessment process.
Proper understanding and accurate computation of income under different heads are essential for complying with tax laws and ensuring timely and accurate filing of income tax returns. Taxpayers should seek professional advice or consult tax experts to ensure proper compliance and optimize tax planning opportunities.