Sources of Income: Source for People to Earn, Source for Government to Tax


(Last Updated On: June 1, 2017)

Often at the time of filing income tax return, many of us face a common dilemma as to what is the criterion based upon which bifurcation of earnings in different heads is to be done. Whether salary received by a partner from partnership firm is taxed under “Income from salary” head or under “Profits and Gains from Business or Profession” or whether interest earned on saving bank accounts is chargeable to tax or not are some of the common issues faced by all of us. Our today’s article shall try to provide a solution to all such issues and help you bifurcate your income in an easy manner.

Lets look at the heads which makes your total Income.

2

Income from Salary-

If the employer-employee relationship exists between payer and payee, then the amount received from payer to payee is charged under the head salary. Salary includes basic salary or wages, any annuity or pension, gratuity, advance salary, leave encashment, allowances and perquisites.

While salary along with commissions and bonus is fully taxable, certain provisions related to partial exemptions and fully exemptions of income tax have been provided in respect of allowances and perquisites.

Income from House property-

Tax shall be charged on basis of property’s annual value which shall be higher of fair rental value, rent received or municipal rent. Interest paid on home loan taken for construction or purchase of house property shall be deducted from such income along with 30% standard deduction and then income from house property shall be calculated. For more information on provisions related to payment of interest on home loan, click here.

Profits and gains from Buisness/ Profession-

Income earned through business or profession is charged under this head. Such income is derived by calculating gross income earned, then deduct expenses incurred to earn such income from gross income and finally net income arrived is taxed. Losses incurred under the head shall be eligible to be set off or carried forward to next A.Y.

Capital Gains –

You might be having some capital asset during the year held as investments which you have transferred to another person. Profit or gains arising on such transfer shall be taxed under this head. Profits or gains can be of two types – Short term capital gains (STCG) or Long term capital gains (LTCG). If you have held a capital asset for not more than 12 months in case of shares or not more than 36 months in case of any other asset; then the gain arising on transfer of such asset shall be short term otherwise it will be long term capital gain.

Income From Other Source –

It is the residual head of income. So if your income doesn’t fall in any of the above category, then it shall be taxed under this head. Some of the earnings that can be taxed under this head are:

  • Dividends;
  • Interest earned from saving bank account;
  • Interest earned on Fixed Deposits;
  • Gifts etc

So your final computation is ready :

 

Income from salary

XXX

 

Income from House Property

XXX

 

Profits and gains of business or profession

XXX

 

Capital gains

XXX

 

Income from other sources

XXX

 

Income of other person to be included in assessee total income/ Aggregation of income

XXX

 

Adjustments of losses C/F and set off

(XXX)

 

Gross Total Income

XXX

Less:

Deductions

XXX

 

Total Income

XXX

 

Tax liability at applicable tax rate of relevant A.Y.

XXX

Less:

Rebate u/s 87A/ 86/ 90/ 90A/ 91

XXX

 

Balance tax payable

XXX

Less:

TDS/ TCS/ Advance Tax

XXX

Add:

Interest u/s 234A/ 234B/ 234C

XXX

 

Self Assessment tax u/s 140A

XXX

Don’t worry; you concentrate on earning income; we shall take care of sources under which your income falls and will file your return of income.

For more knowledge on issues related to sources of income and other tax related issues, check out our other blogs.

CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.