Types of Income – What are the 5 heads of income?
Everyone who earns or gets an income in India is subject to income tax.(Yes, be it a resident or a non-resident of India ). For simpler classification, the Income tax department breaks down income into five main heads:
| Head of Income | Nature of Income covered |
| Income from Other Sources | Income from savings bank account interest, fixed deposits, winning in lotteries is taxable under this head |
| Income from House Property | Income earned from renting a house property is taxable under this head of income |
| Income from Capital Gains | Surplus Income from sale of a capital asset such as mutual funds, shares, house property etc is taxable under this head of Income. |
| Income from Business and Profession | Profits earned by self employed individuals, businesses , freelancers or contractors & income earned by professionals like life insurance agents, chartered accountants, doctors and lawyers who have their own practice, tuition teachers are taxable under this head. |
| Income from Salary | Income earned from salary and pension is taxable under this head of income |
Taxpayers and Tax Slabs
Each of these taxpayers is taxed differently under the Indian income tax laws. While firms and Indian companies have a fixed rate of tax calculated on their tax profits, the individual,HUF, AOP and BOI taxpayers are taxed based on the income slab they fall under. People’s incomes are grouped into blocks called tax brackets or tax slabs. And each tax slab has a different tax rate. Rate at which income is charged to tax increases with increase in income. Budget 2020 introduced a ‘New tax regime’ for the Individuals and HUF taxpayers :
What is the Existing / Old Income Tax Regime?
The old tax regime provides 3 slab rates for levy of income tax which are 5%, 20% tax rate and 30% for different brackets of income. The individuals have been given the option to continue with this Old tax regime and they can claim deductions of allowances like Leave Travel Concession (LTC), House Rent Allowance (HRA), and certain other allowances. Additionally, deductions for tax saving investments as per section 80C (LIC, PPF ,NPS etc) to 80U can be claimed. Standard deduction of Rs 50,000, deduction for interest paid on home loan.
Tax slab rates applicable for Individual taxpayer below 60 years for Old tax regime is as below:
Income Range | Tax rate | Tax to be paid |
Up to Rs.2,50,000 | No tax | |
Rs 2.5 lakhs - Rs 5 lakhs | 5% | 5% of your taxable income |
Rs 5 lakhs - Rs 10 lakhs | 20% | Rs 12,500+20% on income above Rs 5 lakh |
Above 10 lakhs | 30% | Rs 1,12,500+30% on income above Rs 10 lakh |
There are two other tax slabs for two other age groups: those who are 60 and older and those who are above 80.A word of note: People often misunderstand that if they earn let’s say Rs.12 lakhs, they will be paying a 30% tax on Rs.12 lakhs i.e Rs.3,60,000. That’s incorrect. A person earning 12 lakhs in the progressive tax system, will pay Rs.1,12,500+ Rs.60,000 = Rs. 1,72,500. Check out the income tax slabs for previous years and other age brackets.
From the FY 2020-21, a new tax regime is available for individuals and HUFs with lower tax rates and zero deductions/exemptions. Individuals and HUF have the option to choose the new regime or continue with the old regime. The new tax regime is optional and the choice should be made at the time of filing the ITR. If the old regime is continued than all the deductions/exemptions as available can be availed by the taxpayer.
In Budget 2023, the income tax slabs under the new tax regime for FY 2023-24 (AY 2024-25) are revised as follows:
Most of the deductions like deductions and exemptions are not allowed if the taxpayers opts for the New Tax regime. However he exemptions and deductions available under the new regime are:
One must bear in mind that not all income can be taxed on slab basis. Capital gains income is an exception to this rule. Capital gains are taxed depending on the asset you own and how long you’ve had it. The holding period would determine if an asset is long term or short term. The holding period to determine nature of asset also differs for different assets. A quick glance of holding periods, nature of asset and the rate of tax for each of them is given below.
Financial year
The financial year is a one-year period that the taxpayers use for accounting and financial reporting purposes. It is the year in which the income is earned. According to the Income Tax Act, such a period begins from 1st April of the calendar year to 31st March of the next calendar year. It is abbreviated as “FY”. For example, for the financial year starting from 1st April 2022 and ending on 31st March 2023, it can be written as FY 2022-23.
Assessment year
The one year period from 1st April to 31st March starting immediately after the financial year is termed as assessment year. This period is called the assessment year because all the taxpayers have to evaluate their income earned in the financial year and pay taxes in this year. For example, for incomes earned during the FY 2022-23, the assessment year will be AY 2023-24.
Assessee
The assessee is a person or a group who assesses his/her income and pays tax as per the Income Tax Act. The assessee can be an individual, a partnership firm, a company, an Association of Persons (AOP), trust, etc.
What is PAN?
PAN is an abbreviation for the Permanent Account Number. It is a unique 10-digit alphanumeric digit issued by the Income Tax Department to Indian taxpayers. All the tax-related transactions and information of a person are recorded against their unique permanent account number. When the person has to pay advance tax or self assessment tax, he/she needs to mention the PAN number. Also, where the person submits his PAN to certain entities like banks, mutual fund companies, etc. The financial information from such entities goes to the income tax department via PAN. This allows the taxman to link all tax-related activities with the department. Hence, just by putting a permanent account number the taxman can identify all your financial transactions.
What is TAN?
TAN is an abbreviation for Tax Deduction and Collection Account Number. It is a unique 10 digit alpha numeric digit allotted by the Income Tax Department of India. All persons responsible for deduction (TDS) or collection of tax (TCS) are reresponsible for obtaining TAN. It is compulsory to quote the TAN in TDS/TCS return, any TDS/TCS payment challan, and TDS/TCS certificates.
Residents and non residents
Levy of income tax in India is dependent on the residential status of a taxpayer. Individuals who qualify as a resident in India must pay tax on their global income in India i.e. income earned in India and abroad. Whereas, those who qualify as Non-residents need to pay taxes only on their Indian income. The residential status has to be determined separately for every financial year for which income and taxes are computed.
Income Tax Payment
Tax Deducted at Source (TDS)
For specified payments, tax is deducted at source by the payer when making payment to the recipient of income. The recipient of income can claim the credit of the TDS amount by adjusting it with the final tax liability.
Advance Tax
The taxpayer must pay tax in advance when his estimated income tax liability for the year exceeds Rs 10,000. The government has specified due dates for payment of advance tax installments.
Self-Assessment Tax
It is the balance tax that the taxpayer has to pay on the assessed income. The self-assessment tax is calculated after reducing the advance tax and TDS from the total income tax calculated on the assessed income.
e-Payment of Taxes
The taxpayers can pay advance tax, self-assessment tax online from the NSDL website. However, the taxpayer should have a net banking facility with an authorised bank.
Filing your ITR
Filing of income tax return online has been made mandatory for all classes of taxpayers barring few exceptions :
- Taxpayers aged 80 and above need not filed return online
- Taxpayers having an income less than Rs 5 lakhs and not claiming a refund need not file return online
For the rest, online filing is mandatory. Do note that deadlines for filing of returns have also been prescribed. For most individual taxpayers, the due date for filing return of income is 31 July immediately following the concerned financial year. If you do not file on time, here are some disadvantage:
- You will be denied carry forward of losses (except house property loss) to future years
- Delay processing of refund claims if any
- Difficulty on getting home loans
- Levy of late filing fee upto Rs 10,000 under Section 234F
- Levy of interest under 234A if there are taxes due as on 31 July.
E-filing online is a more complete and better alternative to filing on the income tax website. Also it is for more than just e-filing your income tax return. Clear helps you claim all the deductions you’re eligible for and helps you invest. Once you file your return online, you either e-verify the same or take a print of the ITR V and send it to CPC, Bengaluru for processing of your return.
Read our detailed article on e-verification of return of income.
Here’s a guide to e-filing your first tax return on Clear.
Income Tax Return
The taxpayer shall file an income tax return every year via ITR forms prescribed by the income tax department. The government has prescribed seven ITR forms through which the taxpayer can file his income tax return. The taxpayer has to choose the appropriate ITR forms and file his income tax return.
Income Tax Forms List
The seven ITR forms are:
- ITR-1: Individuals (residents) having income from salary, one house property, other sources, agricultural income less than Rs 5,000 and with a total income of up to Rs 50 lakh
- ITR-2: Individuals/HUFs not having any business or profession under any proprietorship
- ITR-3: Individuals/HUFs having income from a proprietary business or profession
- ITR-4: Individuals/HUFs having presumptive income from business or profession
- ITR-5: Partnership firms or LLPs
- ITR-6: Companies
- ITR-7: Trusts
Documents Required for ITR Filing
Form 16, Form 26AS, Form 16A, proof of tax saving investments made, bank account details etc are some of the crucial details / documents that you need to be ready with before filing your return. Further the documents you are going to need to file your tax return are largely going to depend on your source of income. Here is our detailed article on documents you need for filing of your return of income.
How can I calculate my income tax?
Individuals should calculate income tax depending on the nature of income. The salaried individual can take the eligible exemptions available for various allowances received. Individuals/HUF can take a deduction under Sections 80C to 80U, deduct it from the gross total income, and calculate the income tax liability. Also, the total income tax liability should be adjusted by the taxes paid, such as advance tax, TDS, etc. Also, the taxpayer should apply the effect of rebate under Section 87A and relief under Section 89, Section 90, and Section 91 to arrive at the net amount of income tax payable.
Every income that your receive should form part of your income tax return. Of course, the law does provide for exemption of certain incomes eg. dividend income from an Indian company, LTCG on listed equity shares upto Rs 1 lakh in any financial year etc. Therefore, here is a quick guideline you can probably follow to compute taxes due on your income:
- List down all your income – be it salary, rental income, capital gains, interest income or profits from your business or profession
- Remove incomes that are exempt under law
- Claim all applicable deductions available under every source of income . eg claim standard deduction of Rs 50,000 from salary income, claim municipal taxes from rental income, claim business related expenses from your business turnover etc
- Claim all applicable exemptions under every head of income eg. amount reinvested in another house property can be claimed as exemption from capital gains income etc
- Claim applicable deductions from your total income eg the 80 deductions like 80C, 80D, 80TTA, 80TTB etc
- You will now arrive at your taxable income. Check the tax slab you fall under and accordingly arrive at your income tax payable.
The government keeps introducing and altering tax slabs, schemes and tax benefits, so it’s a good idea to keep up with the Budget.
What is computation of income?
The process of calculating taxable income after taking into account the income from all the five heads (salary, house property, capital gains, business or profession, and other sources), exemptions, deductions, rebate, set off of losses, etc., is called computation of income. After computation of income, the taxpayer can compute the income tax liability as per the Income Tax Act.
Rebate u/s 87A
Rebate under Section 87A allows taxpayers reduce their income tax liability. If you are a resident individual and the amount of your total income after reducing Chapter VI-A deductions (Section 80C, 80D, 80U, etc) does not exceed Rs 5 lakh in a financial year, you can claim a tax rebate up to Rs 12,500. This means, if your total tax payable is less than Rs 12,500, then you will not have to pay any tax.
In Budget 2023, a tax rebate on income of Rs 7 lakhs has been introduced under the new tax regime. Therefore, you do not have to pay tax if your taxable income is below 7 lakhs under the new tax regime.
e-File Returns
The taxpayer shall electronically file the income tax return through the e-filing platform of the IT department. To file the income tax return, the taxpayer should first register himself at www.incometax.gov.in. Thereafter, the taxpayer can log in to the website and file his ITR. Also, there is no need to manually send the acknowledgement of the return to the income tax department. The income tax department now allows e-verification of the ITR in different ways, which completes the income tax return process.
What is ITR –V?
Form ITR-V is an income tax return verification form generated after the taxpayer submits files income tax return and submits it to the income tax department. The ITR-V should be e-verified or must be sent to CPC Bangalore at “Income Tax Department – CPC, Post Box No – 1, Electronic City Post Office, Bangalore – 560100, Karnataka” for verification. The ITR processing takes plae only if its verification is completed.
Did you e-file your Tax return for this year?
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Income Tax Saving Instruments
The taxpayer can save tax by tax planning. A taxpayer can do tax planning by investing in tax-saving instruments. It helps in reducing the income tax liability. Section 80C to 80U of the Income Tax Act allows a deduction for certain expenditures and investments from the total computed income. Some of the popular Section 80C investments are:
Popular Section 80C Investments | |||||
Particulars | ELSS | PPF | NSC | 5-Year Tax Saving FD | SCSS |
Section 80C Benefit | Yes | Yes | Yes | Yes | Yes |
Type of Investment | Equity | Fixed Income | Fixed Income | Fixed Income | Fixed Income |
Lock-in Period | 3 Years | 15 Years | 5 Years | 5 Years | 5 Years |
Maximum Investment | No Max Limit | Rs 1.5 lakh | No Max Limit | Rs 1.5 lakh | Rs 15 lakh |
*ELSS and NSC have no upper investment limit. However, you get tax benefits under Section 80C only up to Rs 1.5 lakh per financial year.
Health Insurance and Medical Expense Deduction
Apart from the 80C deduction, a taxpayer can also take a tax benefit under Section 80D for health insurance premium and medical expenditure incurred for self, family and parents.
| Person insured | Maximum deduction Below 60 years | Maximum deduction 60 years or older |
|---|---|---|
| You, your spouse, your children | Rs. 25,000 | Rs. 50,000 |
| Your parents | Rs. 25,000 | Rs. 50,000 |
| Preventative health checkup | Rs. 5,000 | Rs. 5,000 |
| Maximum deduction (includes preventive health checkup) | Rs. 50,000 | Rs. 1,00,000 |
Education Loan Deduction
Under Section 80E, the taxpayer can claim a deduction for the interest paid on a loan taken for higher education. There is no limit to claim such a deduction in the income tax return.
Home Loan Deduction
Under Section 24, the taxpayer can claim a deduction for interest paid on a housing loan during the relevant financial year. The amount of deduction will depend upon whether the house is self-occupied or let out. The taxpayer can also claim a deduction of the principal amount of loan under Section 80C up to Rs 1.5 lakh.
| Deduction on | Maximum allowed (for self-occupied house property) | Maximum allowed (for property on rent) |
|---|---|---|
| Stamp duty and registration + principal | Rs. 1,50,000 within the overall limit of Section 80C | Rs. 1,50,000 within the overall limit of Section 80C |
| Deduction on home loan interest under Section 24 | Rs. 2,00,000 | No cap (but rental income must be shown in the income tax return) Further, maximum loss from house property capped at Rs 2 lakhs |
| Deduction for first-time homeowners under Section 80EE *certain conditions apply | Rs. 50,000 | – |
Deduction for Interest Income
The taxpayer can also claim a deduction for interest on deposits from banks under Section 80TTA of the Income Tax Act. The individuals can claim up to Rs 10,000 deduction under the said section.
As a tax expert with in-depth knowledge and expertise in Indian income tax laws, I can provide valuable insights into the concepts discussed in the article.
Income Classification: The article introduces the concept of classifying income into five main heads for taxation purposes. These heads include:
- Income from Other Sources: Taxable income from sources such as savings bank account interest, fixed deposits, and lottery winnings.
- Income from House Property: Taxable income earned from renting a house property.
- Income from Capital Gains: Taxable income generated from the sale of capital assets like mutual funds, shares, and house property.
- Income from Business and Profession: Taxable profits earned by self-employed individuals, businesses, freelancers, contractors, and professionals like doctors and lawyers.
- Income from Salary: Taxable income earned from salary and pension.
Taxpayers and Tax Slabs: The article explains that taxpayers are categorized into different groups, such as individuals, Hindu Undivided Families (HUFs), Association of Persons (AOP), and Body of Individuals (BOI). Each category is taxed differently based on income slabs, and there are different tax rates for different income ranges.
Old and New Tax Regime: The article outlines the existing (old) tax regime with three slab rates (5%, 20%, and 30%) and introduces the new tax regime with lower tax rates and zero deductions/exemptions. Taxpayers have the option to choose between the old and new regimes based on their preferences and financial situations.
Financial Year and Assessment Year: The article explains the concepts of the financial year (FY) and assessment year (AY), providing a clear understanding of the one-year period used for accounting and tax reporting purposes.
PAN and TAN: The article defines PAN (Permanent Account Number) as a unique 10-digit alphanumeric identifier for Indian taxpayers and TAN (Tax Deduction and Collection Account Number) as a unique 10-digit alphanumeric identifier for entities responsible for TDS or TCS.
Residential Status: The article highlights the importance of determining the residential status of a taxpayer, as the levy of income tax in India depends on whether an individual qualifies as a resident or non-resident.
Tax Deduction Mechanisms: The article covers various mechanisms for tax deduction, including Tax Deducted at Source (TDS), Advance Tax, and Self-Assessment Tax. It emphasizes the need for taxpayers to pay taxes in advance when their estimated tax liability exceeds a specified threshold.
Filing of Income Tax Return (ITR): The article explains the mandatory e-filing of income tax returns for most taxpayers and the consequences of not filing on time. It mentions the advantages of e-filing through platforms like ClearTax.
Income Tax Return (ITR) Forms: The article provides information about the seven different ITR forms prescribed by the income tax department for filing returns based on the taxpayer's profile.
Tax Planning and Deductions: The article introduces the concept of tax planning and deductions under Sections 80C to 80U. It mentions popular Section 80C investments, health insurance premium deductions under Section 80D, education loan deductions under Section 80E, and home loan deductions under Section 24.
Rebate under Section 87A: The article explains the rebate under Section 87A, allowing taxpayers to reduce their income tax liability if their total income does not exceed a specified limit.
E-filing and ITR-V: The article discusses the e-filing process through the income tax department's platform and the generation of Form ITR-V, which needs to be e-verified or sent to CPC Bangalore for verification.
Tax Saving Instruments: The article emphasizes tax-saving instruments under Sections 80C to 80U, including ELSS, PPF, NSC, health insurance, education loan interest, and home loan interest.
In summary, the article comprehensively covers various aspects of income tax in India, from income classification to tax deductions and the filing of income tax returns. The information provided reflects a deep understanding of the subject matter and is presented in a manner accessible to individuals seeking clarity on Indian income tax laws.
