What are the various types of income under Section 14 of income tax law?

Income in India is divided into different parts for simplification of taxation. Section 14 of the Income Tax Act clarifies the types of income in India.

 

Types of income under Section 14 of income tax law

The income of a person is classified into five categories:

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

 

Income from salary

According to the income tax department, ‘salary is a fixed and regular remuneration made by an employer to an employee on a periodic basis’. The department states that the existence of the employer-employee relationship is crucial for taxing a particular receipt under ‘salaries’. The term salary includes monetary payments by the employer, such as basic salary, dearness allowance, bonus, commission and other allowances. Salary also covers non-monetary facilities, such as housing accommodation, medical facilities and interest-free loans.

Apart from these, the term ‘salaries’ covers:

• Wages
• Annuity or pension
• Gratuity
• Fees, commission, perquisites or profits in place of salary
• Advance of salary
• Amount transferred from unrecognised provident fund to recognised provident fund
• Contribution of an employer to a recognised Provident Fund above the prescribed limit
• Leave encashment
• Compensation as a result of variation in service contract
• Contribution made by the central government to the account of an employee under a notified pension scheme

 

Income from house property

For those who own property, its rental income is charged to tax under the head ‘income from house property’. However, the rental income received by a tenant from sub-letting cannot be charged to tax under this head. Such income is taxable under ‘Income from other sources’ or ‘profits and gains from business or profession’.

 

Profits and gains of business or profession

1. The profits and gains of any business or profession that was carried on by the assessee at any time during the previous year
2. Any compensation or payment due to or received by
   • any person managing the whole or substantially the whole of the affairs of an Indian company at, or in connection with, the termination of his management or the modification of the terms and conditions
   • any person managing the whole or substantially the whole of the affairs in India of any other company at, or in connection with, the termination of his office or the modification of the terms and conditions
   • any person holding an agency in India for any part of the activities relating to the business of any other person at, or in connection with, the termination of the agency or the modification of the terms and conditions
3. Income derived by a trade, professional or similar association from specific services performed for its members
4. The value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession

 

Capital gains

Capital gain is an income generated by earning a profit from the sale of an asset. The liability to pay capital gains tax does not arise till the sale is complete. This is because capital gains tax is paid on ‘realised gains’. Therefore, even if the value of your asset increases multifold, you are not liable to pay capital gains tax on the appreciation as long as you do not make a sale and ‘realise’ the profit.

 

Income from other sources

Income from other sources is the amount that does not fall under the four other income categories. According to Section 56, sub-section(2) of the I-T Act, income from other sources may include income from lottery, gambling, card games, sports rewards, or bank deposits. However, if these incomes are earned as a part of your business or profession, they will be taxed under profits and gains from your business or profession. For individual taxpayers in India, income from other sources often includes interest earned on savings and investments from bank accounts, fixed deposits, recurring deposits, and dividends earned from investments made in India.

 

FAQs

What is Section 14 of the Income Tax Act?

Section 14 describes the five heads of income on which tax is levied under the Income Tax Act.

What are the different heads of income under Section 14?

The five heads of income under Section 14 are: Salary Income from house property Profits and gains of business or profession Capital gains Income from other sources

What is included under the head of salaries?

Salary includes monetary payments, like basic salary, DA, bonus, commission, and allowances, and non-monetary facilities provided by an employer.

What is included under the head of income from house property?

Rent received from a house property is considered the income from the house property.

What is included under the head of capital gains?

Profits made as part of the sale of an asset are known as capital gains.

Which income qualifies to be income from other sources?

According to the income tax department, any income that is not chargeable to tax under any other heads of income and which is not to be excluded from the total income shall be chargeable to tax as residuary income under the head ‘Income from Other Sources’.

Which expenses are allowed as deductions on tax on income from other sources?

The following expenses are allowed as a deduction on tax on income from other sources under Section 57: Dividend or interest earned on tradable financial assets (securities) Deduction in the form of employee’s contribution towards welfare schemes Deduction in the form of expenditure incurred on rental income Standard deduction out of family pension Any other expenditure (not a capital expenditure or personal expense) Deduction related to interest on compensation or enhanced compensation

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