In India, taxes are broadly classified into two types: direct and indirect taxes. As the name implies, direct taxes are the taxes paid by an individual (or company) directly to the government. Indirect taxes are those where you pay the tax money to someone else, and the person (or organisation) pays the tax to the government. The GST added to your bill while you eat out or shop at a retail outlet is an example of indirect tax.
Direct taxes are further classified into two types:
Income Tax – This is the tax paid by an individual or a HUF (Hindu Undivided Family) on the income earned in a year. The income tax is determined by various tax slabs, which are set by the government.
Corporate Tax – As the name implies, these are taxes paid by corporates (businesses, organisations and companies) for the profits earned by them. Just like income tax, the government prescribes different tax rates for corporate taxes as well.
In India, all citizens, non-citizens residing in the country and NRIs generating revenues in the country are required to pay income tax. One common question that all taxpayers have is, “Which of my incomes are taxable?”
In this guide, we take a look at the different incomes for which you are required by law to pay income tax.
Additional Reading: Know Your Income Tax Rates: Income Tax Slabs
What are the incomes that are taxable in India?
To calculate income taxes, incomes from different sources are divided into five main income heads. They are:
Income earned from receiving Salaries
All income that an employee receives from an employer falls under this category. Besides salary, the pension received by an employee after retirement is also considered under this category. Details regarding the salary earned are included in Form 16 that must be submitted by the employee while filing income taxes.
Income earned from Capital Gains
Capital gains refer to the revenue generated by the taxpayer from assets held. This includes the resale of properties, debentures, stocks, equities, bonds, land, jewellery, etc. The individual must pay taxes on capital gains when he/she sells the asset in hand.
Income earned from House Property
If an individual lets out his property for rent, then the rent generated from the property is taxable in the hands of the property owner. However, note that income earned from a property used for business or professional purposes will not come under this category.
Income generated via Business/Profession
As per Sections 30 to 43D of the Income Tax Act, gains earned from a profession or a business are taxable under the applicable rates. Freelance earnings also fall under this category. Technically, this income head is referred to as “Profits and Gains from Profession or Business.”
Some professions that earn this income include:
Lawyers, doctors who have their own practice
Life insurance agents
Income from Other Sources
Besides the four income heads listed above, all other revenues earned by an individual fall under this category. It includes:
Profits from horse races, gambling, lottery, etc.
Income generated from dividends
Pension received after the death of the pensioner
Gifts received from friends and family
Interest earned on debentures, bonds, securities, etc.
Interest earned on savings bank accounts, fixed deposits, etc.
Rental income from properties other than house property
Gifts earned by taking part in a game show/TV program
Overview of the Five Taxable Heads of Income
|Head of Income
|Types of Income Covered
|Income earned from salary
|Income derived from House Property
|Income from Capital Gains
|Sale of capital assets like shares, mutual funds, property, etc.
|Income from Business/Profession
|Income earned from self-employed professions, business, freelancing, contracting, consulting, etc.
|Income from Other Sources
|Interest earned, winning lotteries, game shows, gifts received, etc.
Understand the Different Heads of Income
Understanding the various taxable incomes is a must while paying your annual income taxes. To calculate the gross taxable income, you have to include the revenues earned from all these sources.