Income Tax 2025

Appearance

CHAPTER IV COMPUTATION OF TOTAL INCOME

A.—Heads of income

Heads of income. ​

13(1) ​

Save as otherwise provided in this Act, all incomes shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income:—

  • (a) Salaries;
  • (b) Income from house property;
  • (c) Profits and gains of business or profession;
  • (d) Capital gains; and
  • (e) Income from other sources.
Explanation

Section Summary: ​

Section 13(1) of the Income Tax Act outlines the classification of income into five distinct heads for the purpose of calculating total income and determining tax liability. This classification ensures that different types of income are taxed appropriately under their respective categories.

Key Changes: ​

This section is a foundational provision and has remained largely unchanged over time. It continues to categorize income into the same five heads as in the previous Income Tax Act. No significant amendments have been made to this specific section in the new law.

Practical Implications: ​

  • Taxpayers: Individuals and businesses must categorize their income under the appropriate head to ensure accurate tax computation. Misclassification can lead to errors in tax liability.
  • Compliance: Proper documentation and reporting are required to align income with the correct head. For example, rental income must be reported under "Income from house property," while business profits fall under "Profits and gains of business or profession."
  • Tax Planning: Understanding these heads helps taxpayers optimize their tax liabilities by leveraging deductions, exemptions, or tax treatments specific to each head.

Critical Concepts: ​

  • Heads of Income: These are the five categories under which all taxable income is classified. Each head has specific rules for computation, deductions, and tax rates.
    • Salaries: Income earned from employment.
    • Income from House Property: Rental income from property.
    • Profits and Gains of Business or Profession: Income from business activities or professional services.
    • Capital Gains: Profits from the sale of capital assets like property or stocks.
    • Income from Other Sources: Residual category for income not covered under the other heads (e.g., interest, dividends).
  • Interaction with Other Laws: This section works in conjunction with other provisions of the Income Tax Act, such as deductions under Sections 80C to 80U, which apply differently based on the head of income.

Compliance Steps: ​

  1. Identify Income Sources: Determine all sources of income for the financial year.
  2. Classify Income: Assign each income source to the appropriate head (e.g., salary to "Salaries," rental income to "Income from house property").
  3. Compute Income: Calculate income under each head separately, applying relevant deductions and exemptions.
  4. Report Accurately: Ensure proper reporting in the income tax return (ITR) under the correct head.

Examples: ​

  • Scenario 1: An individual earns a salary of ₹10 lakh, rental income of ₹2 lakh, and interest income of ₹50,000. The salary is classified under "Salaries," rental income under "Income from house property," and interest income under "Income from other sources."
  • Scenario 2: A business owner earns ₹15 lakh from their business and ₹3 lakh from selling a property. The business income falls under "Profits and gains of business or profession," while the property sale profit is classified as "Capital gains."

This section ensures a systematic approach to income classification, which is critical for accurate tax computation and compliance.