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What is Income as per Income Tax Act?

Updated on: 23 Nov, 2023 01:22 AM

We hear a lot around us about Income Tax, Income Tax Return, Income Tax Department and so on. But have you ever given it a pause and thought form where this cycle starts?? Well, we'll tell you, all this starts with the term Income!! Yes, if there is no income there won’t ever be any income tax or ITR or compliances under the Income Tax Act. Now let us understand what is income. Income is anything and everything a person earns. You might be getting your income as salary for doing some job or as profits from your business or in any other manner. It is possible that a person might earn income through one or more ways such as salary, business, share trading, consultancy fees, interests, gifts, stipends, and various other sources.To ease the process of reporting and taxation, the Income Tax Act 1961, categorizes all types of income under these five (5) heads, namely Income From-

  • Salary
  • House Property
  • Business and Profession
  • Capital Gains
  • Other Sources

Heads of Income under Income Tax

Heads of Income under Income Tax The amount received or accrued to an employee for the job he is doing or he has done or about to do. This includes,
  • Basic Salary
  • Dearness Allowance (DA)
  • Wages
  • Commission
  • Annuity
  • Gratuity
  • Perquisites
  • Arrears of Salary
  • Salary received in Advance
  • Retirement Benefits
  • Allowances like HRA, LTA etc
Rental income Rental income received by a landlord (whether on residential or commercial property) is taxed under this head of income. Also, if you have taken any housing loan the interest benefit of the same is also given under the same head of income
carried forward Any person carrying on a business whether incurring profits or loss is required to make disclosures in Income Tax Return under this head of income. The profits are taxed and losses can be set off or carried forward.
capital assets When you sell any of your capital assets may it financial assets like shares, mutual funds other securities etc or sell your other capital assets like house, valuable items etc or in case of business the capital assets then in this case the details of profit or loss resulting from the transaction needs to be disclosed under the head of Income from Capital Gains. Long term capital gains and short term capital gains are taxed differently but losses can be carried forward or set off.
residual head The income which cannot be classified in any of the above heads is categorized in this head of income. This is also called as residual head of income under the income tax law. Some common examples of income From Other sources are – Gifts received, dividends, Interest income etc.

But, an important point to note here is that not all incomes are taxable. Income can further be bifurcated as

  • Exempt Incomes and
  • Taxable Incomes

Exempt Incomes

are those amount of money which a person has received during the year but are not chargeable to tax under Income Tax Act 1961 like, agriculture income, dividend income etc. Whereas,

Taxable Incomes

are all other incomes like salary, profits, income from house property which are charged at the rates of tax prescribed by the Income Tax Department.

Also, the tax filer shall wisely choose the ITR form to be filed for the year depending upon its source of income. As CBDT issues income tax forms every year which differ on the criteria of the source from which you are earning income, type of assessee and the quantum of it.

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CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.