Understanding Different Sources of Income for Tax Filing

Tax filing becomes much easier when taxpayers have detailed information about the sources of income. Under the Income Tax Act 1961, there are five heads of income: salary, business and profession, capital gains, house property, and other sources. A taxpayer’s earnings are categorized into these five heads accordingly. Different sections deal with these heads of income, and taxation also varies. It holds immense importance to know how to report the income as it enables you to choose the right income tax return form, ranging from ITR to ITR 7. It is a detailed guide on understanding different sources of income for tax filing purposes. 

What are the Different Sources of Income? 

1. Income from salary
2. Income from house property 
3. Income from profits and gains from business or profession 
4. Income from capital gains 
5. Income from other sources 

Income from Salary 

Individuals receiving remuneration from their employer for performing a task on a contract basis, this remuneration is considered salary under income tax. The salary component includes advance salary, perquisites, gratuity, commission, annual bonus, pension, etc. Section 15 of the Income Tax describes the taxability of income from salary, while Section 16 deals with tax deductions on salary income, and Section 17 explains components like monetary compensation, perquisites, allowances, etc. According to Tax Legislation, these are salary components

• Wages
• Pension 
• Annuity 
• Gratuity 
• Fees, commissions, profits 
• Advance salary
• Leave encashment 
• Employer’s contribution to recognized PF 

Income from House Property 

Income from residential, commercial, and industrial property that a taxpayer owns and has let out or keeps unlet in the hope of future use. Such properties are not used for the owner’s business or professional purposes, then the income coming out of letting is considered income from house property. The following points have to be true regarding house property in reference to the taxpayer

• Property not used for business and professional purposes, in such a case, the income would fall under the head of business or profession

Steps to calculate income from house property 

1. GAV (Gross Annual Value): For let-out properties, GAV is either the actual rent amount received or the expected rent (higher of the two). For self-occupied property, GAV is zero as no rent is received 
2. Deduct municipal taxes paid to the government on the property 
3. Net Annual Value (NAV): GAV- Municipal Taxes Paid 
4. Standard deduction at the rate of 30% of the NAV 
5. Interest on home loan, if applicable 

Income from House Property = (GAV- municipal taxes)- standard deduction, 30% of NAV- interest on home loan 

Income from Profits and Gains from Business and Profession 

Profits and gains made from business and profession come under this head of income tax. The final taxable income turns up after subtracting total expenses. The following kinds of income is chargeable under this 

• Benefits of business 
• Gains, bonuses, or salary received due to a partnership with a firm 
• Cash received on the export of a government scheme 
• Profits because of the sale of a certain license 

Income from Capital Gains 

Any profits made by selling or in exchange offer of an investment fall under the head of income from capital gains. Capital assets like land, building stocks, jewellery, bonds, etc, give capital gains when held for a period. The taxability of capital gains depends on the holding period of capital assets. For example, capital assets like stocks or bonds held for less than 12 months are short-term capital gains, while real estate assets held for more than 24 months, and stocks over a year are long-term capital gains. The types of capital assets are 

• Land, buildings, and property in real estate 
• Investments in stocks, bonds, mutual funds, or ETFs
• Precious metal and jewellery 
• Paintings, art, rare coins, or stamps 
• Machinery, patents, or trademarks 

Income from Other Sources 

All the sources of income that are not covered under the other 4 heads fall under the income from other sources head in the Income Tax Act rules. This head of income is often misunderstood and overlooked, still, it holds immense importance when it comes to filing taxes. Some of the most common components are the following 

• Interest income: savings account, fixed deposit earnings, recurring deposit earnings, bond interest, etc
• Gifts and winnings: monetary or non-monetary gifts exceeding Rs 50,000 from non-relatives and friends 
• Family pension: pensions received by dependents of deceased taxpayers 
• Rental income from subletting: income from subletting of a property not owned by the taxpayer 
• Residuary sources: Residuary sources, like royalty, interest on delayed tax refunds

Filing the income tax returns under the correct head is important, and taxpayers can avoid penalties by doing so. TaxDunia’s tax experts make the filing much easier and expedite the process so that the procedure can be wrapped up earliest possible. Let the professional assist you and do the paperwork for you so you can target the growth of the business. Legal compliance with tax departments ensures that you can focus on financial and business activities without any intervention.