The Income Tax Act 1961 recognizes five main sources of income for tax purposes. These sources are income from salary, income from house property, income from business or profession, capital gains, and income from other sources. Let's take a closer look at each of these sources of income.
- Income from Salary: Income earned by an individual as a result of their employment is classified as income from salary. This includes basic salary, bonuses, commissions, allowances, and other perks. Employers are required to deduct tax at source (TDS) from an employee's salary and deposit it with the government. Employees can claim various deductions under salaries income, such as standard deduction, transport allowance, medical reimbursement, etc. These deductions help to reduce the taxable income and thereby the tax liability.
- Income from House Property: This includes income earned by an individual from renting out a house or building. The income is calculated as the gross annual rent received, less any allowable deductions such as property taxes, repairs, and maintenance. A standard deduction of 30% is also allowed to account for other expenses such as interest on loans taken for the purchase or repair of the property.
- Income from Business or Profession: This includes income earned by an individual or a business entity from a commercial activity or profession. Business income is calculated as the gross receipts minus any allowable deductions such as rent, salaries, and wages, office expenses, depreciation, etc. Professionals such as doctors, lawyers, and accountants are also considered to be engaged in a business and their income is taxed under this head.
- Capital Gains: This includes income earned from the sale of a capital asset such as a property, stocks or bonds. Capital gains can be classified as long-term or short-term depending on the holding period of the asset. Long-term capital gains are taxed at a lower rate than short-term capital gains. Taxpayers can also claim certain deductions such as the cost of acquisition, cost of improvement, and indexation to reduce the taxable capital gains.
- Income from Other Sources: This includes all other sources of income that are not covered under the previous four categories, such as interest income, dividends, lottery winnings, and so on. Taxpayers are required to pay tax on the gross income received under this head, and they can claim certain deductions such as interest paid on loans taken for investment purposes.
It is important to note that each source of income has its own set of rules and regulations when it comes to tax calculations, deductions, and exemptions. Taxpayers should be aware of these rules and ensure that they comply with them when filing their tax returns.
Understanding the different sources of income and the corresponding tax implications is crucial to minimizing the tax liability and maximizing the take-home income.