Which Kind Of Income Falls Under Which Head of Gross Total Income?

The Income-tax Act, 2025 retains five heads for classifying taxable income: Salaries (Sections 15 to 19), Income from House Property (Sections 20 to 25), Profits and Gains of Business or Profession (Sections 26 to 66), Capital Gains (Sections 67 to 91), and Income from Other Sources (Sections 92 to 95). The article explains the scope of each head and distinguishes Gross Total Income, calculated after relevant adjustments and loss set-offs, from Total Income or Taxable Income after eligible deductions. Focusing on Income from Salaries, the article explains that an employer–employee relationship is essential for remuneration to fall under this head. It distinguishes a contract of employment from a contract for services and discusses why remuneration received by partners or gig workers requires separate consideration. Salary can include wages, pension, gratuity, fees, commissions, perquisites, advance salary, leave encashment, specified provident fund accretions, and certain pension scheme and Agniveer Corpus Fund contributions, subject to applicable rules. The article also addresses deductions from salary income under Section 19, including professional tax, standard deduction and entertainment allowance. It identifies the commonly stated standard deduction amounts of ₹50,000 under the old regime and ₹75,000 under the new regime, while advising verification for the relevant tax year. Finally, it outlines the tax treatment of gratuity, allowances such as HRA and LTA, and employer-provided perquisites including accommodation, motor cars and utilities. Their actual exemption or taxable value depends on statutory conditions, valuation rules and the applicable tax regime. We know that the five heads of income have been retained under the new Income-tax Act, 2025. The following are the five heads of income, together with a brief explanation of the types of income covered under each head.

1. Salaries (Sections 15 to 19)

This head covers income from salary, perquisites, profits in lieu of salary, and deductions allowable from salary income.

2. Income from House Property (Sections 20 to 25)

This head covers income from house property, including the determination of annual value, deductions allowable against such income, and the tax treatment of properties owned by co-owners.

3. Profits and Gains of Business or Profession (Sections 26 to 66)

This head covers income earned from carrying on a business or profession, subject to the provisions of the Act.

4. Capital Gains (Sections 67 to 91)

This head covers profits or gains arising from the transfer of capital assets, whether movable or immovable, after considering the applicable provisions relating to the cost of acquisition, cost of improvement, and allowable transfer expenses. Capital losses, where applicable, are dealt with under the relevant provisions of the Act.

5. Income from Other Sources (Sections 92 to 95)

This is the residual head of income. Income that is chargeable to tax but does not fall under any of the other four heads is generally assessed under this head, subject to the applicable provisions.

Gross Total Income and Taxable Income

The aggregate income computed under the five heads, after applying the relevant provisions relating to adjustments and set-off of losses, is generally referred to as Gross Total Income (GTI).

From the Gross Total Income, eligible deductions are allowed under the applicable provisions of the Act. The balance amount, after considering the relevant adjustments and deductions, is known as Total Income or Taxable Income.

Let us now begin with the first head of income: Income from Salaries.

INCOME FROM SALARIES

Meaning of Salary Income

The essential condition for an amount to be taxable under the head Income from Salaries is the existence of an employer–employee relationship.

In simple terms, salary income arises when remuneration is received by an employee from an employer under a contract of employment. The relationship between the employer and employee, sometimes described as the master–servant relationship, is an essential feature distinguishing a contract of employment from a contract for services.

It does not matter whether the employment is full-time or part-time. What matters is the existence of an employer–employee relationship.

The distinction may be summarised as follows:

• Contract of employment: Remuneration is generally taxable under the head Salaries.
• Contract for services: Fees received by a consultant or independent professional are generally taxable under the head Profits and Gains of Business or Profession, or under Income from Other Sources, depending on the facts and circumstances.

Similarly, remuneration received by a partner from a partnership firm is not ordinarily taxable under the head Salaries, because the required employer–employee relationship does not exist. Likewise, payments received by gig workers from aggregators are not automatically classified as salary income; the nature of the relationship and the applicable legal provisions must be examined.

Ordinarily, salary means periodic remuneration paid by an employer to an employee for services rendered. However, for income-tax purposes, the term has a wider meaning and includes various payments and benefits specified under the Act.

What Does Salary Include?

Salary income may include the following:

1. Wages.

2. Any annuity or pension.

3. Any gratuity.

4. Fees or commission.

5. Perquisites.

6. Profits in lieu of, or in addition to, salary or wages.

7. Advance salary.

8. Payments received in respect of leave not availed of by an employee, subject to the applicable provisions.

9. The taxable annual accretion to the balance in a recognised provident fund, including the portion attributable to the employer’s contribution exceeding the prescribed limit of 12% of salary, subject to the applicable rules.

10. Taxable amounts arising from the transfer of the balance in a recognised provident fund, wherever applicable.

11. Contributions made by the Central Government or another employer to an employee’s account under a notified pension scheme, to the extent chargeable to tax.

12. Contributions made by the Central Government to an individual’s Agniveer Corpus Fund account, to the extent provided under the Act.

Important Note: A lump-sum payment made voluntarily or by way of compensation to the widow or legal heirs of an employee who dies while in service may receive tax-exempt treatment, depending on the nature of the payment and the applicable provisions. The tax treatment should be examined with reference to the relevant law and judicial decisions.

DEDUCTIONS FROM SALARY INCOME

Section 19

Certain deductions and exemptions may be available while computing taxable salary income. Their availability and amount depend on the applicable provisions and the tax regime selected by the taxpayer.

(A) Professional Tax — Tax on Employment

Certain States levy professional tax on salaries and other forms of employment income.

Where the applicable provisions permit a deduction for professional tax actually paid by the employee, the eligible amount may be deducted while computing taxable salary income, subject to the conditions prescribed under the Act.

(B) Standard Deduction

The standard deduction is a fixed deduction available against salary income, subject to the applicable conditions.

The amounts generally applicable under the two tax regimes have been:

• Old tax regime: ₹50,000.
• New tax regime: ₹75,000.

The applicable amount should be verified for the relevant tax year before filing the return or publishing this article.

(C) Entertainment Allowance

The deduction for entertainment allowance is subject to specific statutory conditions. The eligibility and treatment under the Income-tax Act, 2025 should be verified with reference to the applicable provisions and tax regime.

EXEMPTIONS AND TAX TREATMENT OF SALARY COMPONENTS

In addition to deductions, certain salary components may be fully exempt, partly exempt, or taxable subject to prescribed limits and conditions. The applicable tax treatment depends on the nature of the payment, the employee’s category, and the tax regime.

Some important items are discussed below.

1. Gratuity

The tax treatment of gratuity depends on the category of employee and the applicable statutory provisions. The principal categories include:

1. Gratuity received by Government employees and employees of local authorities.
2. Gratuity received by members of the defence services.
3. Gratuity received by employees covered by the Payment of Gratuity Act, 1972.
4. Gratuity received by other employees.

The exemption limits and method of computation may differ between these categories. The relevant conditions and limits must be considered before determining the taxable amount.

2. Allowances

The following allowances may require examination to determine whether they are exempt, partly exempt, or taxable:

• Leave Travel Allowance (LTA).
• House Rent Allowance (HRA).
• Uniform allowance.
• Academic, research and training allowances.
• Travel allowance.
• Transfer allowance.
• Conveyance allowance.
• Children’s education allowance.
• Children’s hostel allowance.

The exemption available for each allowance depends on the applicable statutory provisions, prescribed limits, supporting evidence, and the tax regime selected.

3. Perquisites

Perquisites are benefits or facilities provided by an employer to an employee in addition to monetary salary. Depending on the applicable provisions, their value may be included in taxable salary.

Important examples include:

• Rent-free accommodation.
• Furnished or unfurnished accommodation.
• Hotel accommodation provided by the employer.
• Motor car facilities.
• Gas, electricity or water supplied by the employer.

For each perquisite, its taxable value must be determined according to the prescribed valuation rules. The value chargeable to tax is then included in salary income, wherever applicable.

CONCLUSION

The correct computation of salary income requires more than simply adding up the amounts received by an employee. It is necessary to identify the nature of each payment, determine whether it constitutes salary or a perquisite, examine the deductions and exemptions available, and apply the provisions relevant to the selected tax regime.

A proper understanding of these provisions helps employees, employers, and tax professionals compute taxable salary income correctly under the Income-tax Act, 2025.