3. Different types of income for an individual
According to Section 14, income tax act 1961, the income for an individual is classified under 5 different heads or 5 different types. The tax slabs and the tax is computed accordingly.
At the end of each year, you need to sit down with your accountant and understand under which category you belong and calculate your payable tax accordingly.
Number 1: Income from salary
Salary is the amount you receive for the service you're doing for an employer upon certain contract terms between you and the employer. Salary also should include the basic wages or basic salary, pension, provident fund, gratuity, annual bonus, HRA, LTA, other allowances, and so on. Combining all these amounts is your gross salary or the total salary. This gross salary is the amount that is going to be taxed.
Number 2: Income from house property
According to the Income Tax Act 1961, Sections 22 to 27 define the definition of incomes of a person from the house property, or land that he or she owns. It is interesting to know that the tax here is derived from the land or property and not from how much rent you earn from the same unless the property is rented out to a business.
TDS on Rent @ 10% is deducted in case the value of rent is more than a specified limit. Service Tax on Rent is also to be levied in certain cases.
Number 3: Income from the profit of business
This is the total income earned from the profits of a business or profession. What profession here means here is, think about athletes, musicians, singers, it's their profession but still earn money. Thus, their income comes under this category. The difference between the expenses and revenue earned, is obviously the profit will be taxed. some examples under this will be:
Profits on income by an organization
Profits on sale of a certain license, like the song, album, brand name, etc.
Profit, salary, or bonus received as a result of a partnership in a firm
Benefits received in a business
Number 4: Income from capital gains
Any gains or profits that you earn by transferring or selling capital assets that were held as investments are considered capital gains.
This includes your investments in stocks, mutual funds, property, and many other types of investments.
So whenever you sell a capital asset and earn a profit, this is considered your income which will be taxable under this category.
Number 5: Income from Other Sources
To make it easy, whatever is not listed above falls under this category. Winning a Lottery, horse racing, card games, gambling, gifts received, dividend income, and interest from government bonds and securities fall under this category. These incomes are attributed in Section 56(2) of the Income Tax Act and the same is charged for income tax.
Well, now that you are aware of the five heads of income, take out a piece of paper, and write down all the sources of income that you receive. This is the first step to identifying your incomes in your respective heads. and will help you to plan your taxes well. If you need more help, get in touch with your financial advisor.