Income tax in India is calculated based on the income earned under five different heads of income. These heads of income include:
- Income from salary: This head of income includes all income earned by an individual as a result of their employment, including wages, salaries, bonuses, and commissions.
- Income from house property: This head of income includes any rental income received from a property that is owned by an individual. The calculation of income under this head involves determining the Gross Annual Value (GAV) and Net Annual Value (NAV) of the property, and subtracting any eligible deductions such as the interest paid on a home loan.
- Income from business or profession: This head of income includes any income earned by an individual from a business or profession that they are engaged in. This includes income from self-employment, partnership, or as a director of a company.
- Income from capital gains: This head of income includes any profit or gain earned from the sale of a capital asset such as property, shares, or bonds. The calculation of income under this head involves determining the cost of acquisition, cost of improvement, and the sale price of the asset and then applying the appropriate tax rate.
- Income from other sources: This head of income includes any income earned from sources other than those mentioned above. Examples include interest on savings accounts, fixed deposits, and bonds, as well as lottery winnings and gifts received.
Each of these heads of income is subject to different tax rates and rules. It is important for individuals to understand these heads of income and how they apply to their specific situation, in order to correctly calculate their tax liability and ensure compliance with tax laws. It is also important to consult with a tax professional or consult the latest tax laws to ensure that you are calculating your income tax correctly.
Differences Between Heads Of Income And Sources Of Income
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Heads of income and sources of income are related but distinct concepts in the context of income tax.
Heads of income refer to the different categories of income that are subject to tax. The five heads of income in India are income from salary, income from house property, income from business or profession, income from capital gains, and income from other sources. Each head of income is subject to different tax rates and rules. For example, income from salary is taxed at the progressive tax rate, while income from capital gains is taxed at a flat rate.
Sources of income, on the other hand, refer to the origin or the place from where the income is generated. For example, salary income can be generated from employment with a company, business income can be generated from a small retail shop or a large manufacturing unit, and capital gains can be generated from the sale of shares, mutual funds, real estate, etc.
The main difference between heads of income and sources of income is that heads of income classify income based on the type of income, while sources of income classify income based on where it came from. Understanding the difference between these two concepts is important to correctly calculate your tax liability and ensure compliance with tax laws. It is also important to consult with a tax professional or consult the latest tax laws to ensure that you are calculating your income tax correctly.
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