Assets Taxable Under Wealth Tax in India

 What are the Heads of Income under Income Tax Act?

Income tax is a direct tax that the government levies on the income of individuals and entities. The Income Tax Act of 1961 is the law that governs the income tax in India. This act divides the income of a person into five categories, or heads, based on the source and nature of the income.

Each type of income has its own rules and regulations for computing the taxable income and the applicable tax rates. The Income Tax Act also provides various exemptions and deductions for reducing the tax liability of the taxpayers.

 

What are the 5 Types of Income Under the Income Tax Act?

These are the 5 heads of income under income tax:

 

Income from Salary

 Income from House Property

 Income from PGBP

 Income from Capital Gains

 Income from Other Sources

 Now that you know what they are, let's understand the various heads of income in detail.

 Income from Salary

This is the first head of income, and sections 15 to 17 of the Income Tax Act deal with salary income.

These sections define the scope, chargeability, and computation of income from salary. They also specify the various allowances, perquisites, and profits in lieu of wages included or excluded from income from salary.

What Constitutes Salary?

Salary is defined as the remuneration the employer pays to the employee for the services rendered by the employee under a contract of employment. Salary includes both monetary and non-monetary benefits received by the employee from the employer.

According to section 17 of the Income Tax Act 1961, salary includes the following components:

 

Tax Treatment of Key Components of Salary a Type of Income

 House Rent Allowance (HRA)

This is the allowance paid by your employer to help you pay your rent if you live in a rented accommodation. HRA is partially taxable, and you can claim an exemption for the least of the following three amounts:

50% of basic salary (if living in a metro city) or 40% of basic salary (if living in a non-metro city)

 

Actual HRA received

Rent paid minus 10% of the basic salary

Leave Travel Allowance (LTA)

Your employer pays this allowance to cover your travel expenses when on vacation with your family once in a block of two calendar years. LTA is fully exempt, subject to the following conditions:

 You must have travelled within India and have proof of travel, such as tickets and invoices.

 The exemption is limited to the amount spent on the shortest route by the cheapest mode of transport available, such as air, rail, or road.

The exemption is available for your travel expenses and those of your family members who depend on and live with you, such as your spouse, children, parents, siblings, etc.

 Standard Deductions

 This is a flat deduction of ₹50,000 from your gross salary, irrespective of the amount of your salary or the actual expenses incurred by you. The standard deduction was introduced in Budget 2018 to replace the earlier deductions for transport allowance and medical reimbursement, which were ₹19,200 and ₹15,000, respectively.

 Other Allowances

 You may also get various other allowances from your employer, such as allowance for children’s education, hostel expenses, travel, uniforms, etc.

 The tax treatment of these allowances depends on their nature and purpose. Some are fully taxable, and some are partly or fully exempt, up to certain limits and conditions.

 You can check Section 10 of the Income Tax Act 1961 for the full list and details of the allowances and their tax treatment.