Five Heads of Income

The Income Tax Act, 1961 classifies all assessable income into five distinct heads. This classification simplifies tax computation and ensures that specific deductions or exemptions are applied consistently.

Each head captures a broad category of receipts: Salary, House Property, Business/Profession, Capital Gains, and Other Sources. The Act mandates that an individual’s total taxable income is the sum of income computed under each head after permitted deductions.

For the NISM exam, you will often be asked to identify the correct head for a given receipt or to compute taxable income when multiple heads are involved. Remember that the same receipt cannot be taxed under two heads – the principle of “no double taxation” is a frequent exam point.

Salary includes basic wages, allowances, perquisites, bonuses and any other remuneration received from an employer. The term also covers commissions, gratuities, and arrears of salary.

Taxability is determined on the gross salary after permissible deductions such as standard deduction (₹50,000 from FY 2023‑24), professional tax, and contributions to recognised provident funds. Perquisites like rent‑free accommodation are valued as per the rules in Section 17(2) and added to salary.

Exam tip: Questions may present a component (e.g., medical allowance) and ask whether it is taxable. Recall that only the portion exceeding the exempt limit (₹15,000 per annum) is taxable.

Income from house property arises when a taxpayer owns a building that is rented out or deemed to be let out. The taxable amount is derived from the Gross Annual Value (GAV), which is the higher of the actual rent received and the municipal valuation.

Two mandatory deductions are allowed: a standard deduction of 30% of GAV (to cover repairs & maintenance) and interest paid on a housing loan under Section 24(b). For a self‑occupied property, GAV is deemed zero, but the interest deduction up to ₹2 lakh is still claimable.

In the exam, you may be required to compute Net Taxable Income from house property using the standard deduction and interest components. Remember that the 30% deduction is a flat percentage, not a variable amount.

Income from Business or Profession covers profits and gains of any trade, commerce, manufacturing, or vocation. It includes earnings of freelancers, consultants, and partnership firms (as per their share of profit).

Tax computation follows the profit and loss account: Gross receipts minus allowable business expenses (rent, salaries, depreciation, etc.). Depreciation is claimed under the Income Tax Rules, not the Companies Act.

Exam relevance: Candidates often need to differentiate between business income and professional income when the source is ambiguous. The key is the nature of the activity – if it is a trade or commercial activity, it falls under Business; if it is a personal skill or service, it is Profession.

Capital gains arise from the transfer of a capital asset such as equity shares, mutual fund units, real estate, or gold. The gain is the difference between the sale consideration and the indexed cost of acquisition (plus improvement costs).

Two categories exist: Short‑Term Capital Gains (STCG) – assets held for ≤ 36 months (≤ 12 months for listed securities) – taxed at the individual's slab rate or a flat 15% for securities. Long‑Term Capital Gains (LTCG) – assets held longer – taxed at 10% (above ₹1 lakh) for securities and 20% with indexation for immovable property.

Typical exam question: Identify the correct tax rate for a gain on listed equity held for 18 months. Remember the 12‑month holding period rule for securities.

All receipts that do not fall under the previous four heads are taxed under Other Sources. Common examples include interest on savings accounts, fixed deposits, dividends (subject to dividend distribution tax), winnings from lotteries, and gifts exceeding ₹50,000.

Specific exemptions exist: interest on savings account up to ₹10,000 (as per current law), and certain agricultural income. However, most other receipts are fully taxable.

Exam tip: When a question lists “interest from a fixed deposit”, it belongs to Other Sources, not Business income, even if the deposit is part of a trading strategy.