5 Heads of Earnings for Computation of Earnings Tax

As per Part 14 of the Earnings Tax Act, for the aim of charging of tax and computation of complete revenue, all incomes are labeled beneath the next 5 Heads of Earnings:-

  1. Salaries
  2. Home Property
  3. Income and Features of Enterprise or Occupation
  4. Capital Features
  5. Different Sources

The whole revenue beneath all these 5 heads of Earnings is then added and disclosed within the Earnings Tax Return. The tax on the full taxable revenue (after permitting deductions) is then calculated as the Earnings Tax Slab Charges of the taxpayer.

Really useful Learn:

  • Present Earnings Tax Slab Charges
  • Process for submitting Earnings Tax Return

Below these 5 heads of Earnings, there are a number of incomes that are tax free and there are a number of incomes from which deductions are additionally allowed which assist a taxpayer in decreasing his tax legal responsibility considerably.

Really useful Learn:-

  • 8 efficient methods of incomes Tax Free Earnings
  • 8 methods to Save Tax legally by way of Tax Planning

Completely different Heads of Earnings

Though there is just one tax on the revenue calculated beneath numerous heads, however, there are completely different guidelines of computation of revenue beneath every head and revenue needs to be computed beneath that head of revenue after making use of the foundations relevant to that head solely.

The 5 Heads of Earnings have been briefly defined right here beneath

1. Earnings from Salaries

An Earnings might be taxed beneath head Salaries if there’s a relationship of an employer and worker between the payer and the payee. If this relationship doesn’t exist, then the revenue wouldn’t be deemed to be revenue from wage.

If there isn’t any factor of employer-employee relationship, the revenue shall be not assessable beneath this head of revenue.

The strategy of computation of Earnings from Salaries has been defined intimately within the following hyperlink.

  • Really useful Learn: Computation of Earnings Tax on Salaries.

2. Earnings from Home Property

Tax on Earnings from Home Property is the tax on rental revenue which is being earned from the Home Property. Nonetheless, in case the property will not be being rented out, tax could be levied on the anticipated hire that may have been obtained if this property was rented out.

Earnings from Home Property is probably the one revenue that’s charged to tax on a notional foundation. Tax beneath this head doesn’t solely embody Earnings from letting out of Home Property but in addition consists of Earnings from letting out of Business Properties and all varieties of properties. Varied Deductions like Customary Deduction, Deduction for Municipal Taxes paid and Deduction for Curiosity on Residence Mortgage can also be allowed beneath this head of revenue.

TDS on Hire @ 10% can also be to be deducted in case the worth of hire is greater than a specified restrict. Service Tax on Hire can also be to be levied in sure circumstances.

Really useful Learn:-

  • TDS on Hire @ 10% beneath Part 194I
  • Service Tax on Hire

3. Income and Features from Enterprise or Occupation

Any revenue earned from any commerce/commerce/manufacture/occupation shall be chargeable beneath this head of revenue after deducting specified bills.

  • Really useful Learn: Tax on Earnings from any Enterprise or Occupation

4. Earnings from Capital Features

Any income or beneficial properties arising from the switch of a capital asset effected within the monetary 12 months shall be chargeable to Earnings Tax beneath the pinnacle ‘Capital Features’ and shall be deemed to be the revenue of the 12 months during which the switch passed off except such capital achieve is exempt beneath part 54, 54B, 54D, 54EC, 54ED, 54F, 54G or 54GA.

  • Really useful Learn: Earnings Tax on Capital Features

5. Earnings from Different Sources

Any Earnings which isn’t chargeable to tax beneath the above talked about 4 heads of revenue shall be chargeable beneath this head of revenue supplied that revenue will not be exempt from the computation of complete revenue.

  • Really useful Learn: Tax on Earnings from Different Sources

Why are there 5 completely different heads of Earnings?

Though there is just one tax on the revenue calculated beneath numerous heads, however, there are completely different guidelines of computation of revenue beneath every head and revenue needs to be computed beneath that head after making use of such guidelines solely.

Judicial Pronouncements

  1. Earnings beneath every head needs to be decided within the method supplied by the suitable sections talked about towards every head above [CIT v Dr. Ramesh Lal Pahwa (1980) 123 ITR 86 (Cal)].
  2. If there’s an revenue which can’t be dropped at tax by computation beneath the above heads, it might not be included within the complete revenue for the aim of taxability [CIT v Justice R.M. Datta (1989) 180 ITR 86 (Cal)]
  3. The computation of revenue beneath every of the above 5 heads of revenue must be made independently and individually. There are particular guidelines of deduction and allowance beneath every head. No deduction or adjustment on account of any expenditure might be made besides as supplied by the act. [Tuticorin Akali Chemical and Fertilizers Ltd v CIT (1997) 227 ITR 172 (SC)]
  4. The above talked about 5 heads of revenue are mutually unique of one another. Thus, the place an merchandise of revenue falls particularly beneath one head, it needs to be charged beneath that head solely and never beneath some other head. [United Commercial Bank v CIT (1957) 32 ITR 688 (SC)].
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