Income under the Income tax Act

In my earlier article I had mentioned that filing returns is easy. I had also mentioned that we need to identify all our sources of Income. What are the sources of Income that are taxable under the Income Tax Act? Income Tax Act defines the term Income as an inclusive definition i.e. it includes almost everything. Also it is not necessary that it has to be in cash. It can be in kind or notional as well. If excluded it would be specifically given. As per the Act the term Income includes:

a. Profits and gains of Business or Profession: This includes income from carrying on a business or income earned by doing any profession.

b. Dividend:

c. Profit in lieu of Salary (perquisite): This includes any amount received by an employee from his employer other then the salary amount.

d. Allowances granted to an employee to meet expenses incurred for performance of his duties: This includes allowances such as HRA, Medical allowance, etc given by the employer.

e. Any capital gains: This means any profit on sale of asset.

f. Winning from lotteries, crossword puzzles, races, card game, T.V. Game shows, etc.

Gifts are not treated as income (click here for details).

An interesting part of all this is income includes loss as well, as per the Income Tax Act loss is nothing but negative income.

Now that we have some idea on what can be income let us see the Heads of Income under which our income would be taxed.

Heads of Income

As per the Income Tax any income earned is broadly categorized into five heads of income. The five heads of income are:

1. Income under Head Salaries: This head taxes the income earned by an individual as salary from any firm or organization.

2. Income from House Property: This head taxes rental income received by any person from way of renting of any immoveable property. In case you have 2 houses and have not been given on rent, then one would be treated as rented (you can decide which one) at notional rent.

3. Profits and Gains of Business or Profession: This head of income broadly covers income earned by a person as a result of some business or professional set-up by him. As the head defines Profits and Gains not gross but net and if the net is a loss i.e. negative income would be taken.

4. Capital Gains: This head of income taxes the income earned on sale of any investment in form of gold, precious ornaments, shares, etc or immoveable property. Here you have to segregate between short term and long term.

5. Income from other Sources: This head of income covers any income which is not chargeable to tax under any of the above heads of income. Any income including gambling or profit/loss on running of race horses, camels, interest income , etc are chargeable to tax under this head of income.