The tax amount depends on the income slab of the assessee. According to Section 14 of the Income Tax Act, an individual’s income is categorised under five main heads.
- Income from salary: The salary earned by a person under a formal arrangement of employment is taxed under the salary head. Income sources such as a pension, annuity, gratuity, leave encashment, annual bonus and wages are known as the salary heads. The various taxed and tax-exempted allowances are a part of the income from salary head. Allowances are a predefined amount of money paid to an employee by an employer for office-related expenses. There are several kinds of allowances such as conveyance allowance, medical allowance and house rent allowance. Allowance is generally included in the salary and taxed unless it is specifically exempted.
- Income from house property: The income from properties owned by the taxpayer apart from the ones being used by him/her is charged under this head. If a property is rented out, the calculation of the income under the head is simple. However, if a property is not rented out, the owner has to pay the tax based on the estimated rent that would have grown if the house would have been rented out. It is the only head under which a tax is levied on an estimated income.
- Income from profits of business: Any income earned from commercial activities like trade, commerce, manufacturing or profession is taxed under this head. The tax-paying individual can deduct the expenses before computing the taxable income.
- Income from capital gains: Any income generated through investments in capital assets such as stocks, bonds or other instruments is charged under the capital gains head. Income from capital gains includes short-term and long-term capital gains depending on the holding period of the asset.
- Income from other sources: An individual may earn an income from a variety of sources other than salary, rentals, capital gains and more. All other sources of income that are not explicitly mentioned in the income heads above are included in income from other sources. It includes earnings from a lottery, gambling and interest income from bank deposits. Then the income maybe absolutely anything.
- Conclusion: It is essential to classify the taxable income correctly under the prescribed heads to ensure you calculate tax liability accurately.