Types of Income Under the Income Tax Act – Explained Simply
Under the Income Tax Act in India, all taxpayers must classify their earnings into specific categories. Accurate classification helps determine your tax liability and ensures proper filing of your income tax return.
Let’s look at the five types of income defined under the Act, with examples for each.
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📌 What Are the Types of Income Under the Income Tax Act?
The Income Tax Act, 1961, divides a person’s earnings into five heads of income:
1️⃣ Income from Salary
The first type of income under the Income Tax Act is salary income. This includes wages, bonuses, commissions, pensions, and other employment-related payments.
📘 Example: If you earn ₹60,000/month as a salary, it falls under this head.
2️⃣ Income from House Property
This refers to rental income from residential or commercial property. Even if the property is vacant, tax may still apply under certain conditions.
📘 Example: Rental income of ₹20,000/month from a flat you own is taxed under this head.
3️⃣ Profits and Gains from Business or Profession
Income from self-employment, freelancing, or running a business is classified here. It includes profits, professional fees, and business income.
📘 Example: A shopkeeper earning ₹1,00,000 per month from business falls under this category.
4️⃣ Capital Gains
Profits earned from selling a capital asset like land, stocks, or mutual funds are treated as capital gains. This income is divided into:
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Short-term Capital Gains (STCG)
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Long-term Capital Gains (LTCG)
📘 Example: Selling shares held for 2 years may result in LTCG.
5️⃣ Income from Other Sources
Any income that doesn’t fall into the above four heads is classified here. This includes:
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Interest from FDs or savings
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Lottery winnings
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Gifts exceeding ₹50,000
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Dividends
📘 Example: ₹15,000 earned from interest on a fixed deposit is taxed here.
🎯 Why Knowing the Types of Income Matters
Classifying your income correctly under these five heads:
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Ensures accurate tax filing
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Helps claim appropriate deductions
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Prevents penalties and legal issues
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Allows efficient tax planning
📌 Conclusion
The types of income under the Income Tax Act form the basis of income tax calculation in India. Understanding these categories helps individuals and businesses stay compliant and optimize tax savings.