Income is the money an individual receives in compensation for their work, services, or investments. For businesses, Income means revenue that a business generates by selling its goods and services. Revenue is the money earned by a company from selling goods or services throughout its operations.
The definition and explanation of income is given 2(24) of the Income Tax Act, 1961. Income under Indian Tax law encompasses every aspect of Gross Income, including all sources of revenue, and taxable income, which is gross income minus expenses and other adjustments. Income from all sources and in any form, for example, money and property, is derived, adjusted, and lowered by permissible deductions. It’s the amount of money that’s susceptible to income tax.
To make the exhaustive definition of Income under the Income tax act comprehensible. The Income can be divided into a total of five categories.
- Income From Salary
The first category of income is salary, which includes any remuneration an individual receives in exchange for services rendered under a contract of employment. This sum qualifies for income tax consideration only if an employer-employee relationship exists between the payer and the payee. The salary; advance compensation, pension, commission, gratuity, perquisites, and annual bonus should all be included in the salary. Salary is taxable on the due or received basis, whichever is earlier.
The complete amount or gross salary is taxed after making a total aggregate of the total amount of income excluding the exemptions if any are present.
All basic salary, as well as commissions and bonuses, are subject to full taxation.
Under this head salary includes various allowances such as;
Leave travel allowance: When you go on a holiday, the expense required for travel is a leave Travel allowance or LTA. Because this is paid, it is tax-free twice over four years.
Conveyance Allowance: Up to Rs 800 a month is exempt from tax.
House rent allowance: HRA can be claimed to lower taxes by individuals who live in a rented house.
Medical allowance: Medical expenses up to Rs 15000 per annum is tax-free. The medical expense of the individual and the family of the individual is included.
- Income From House Property:
In terms of income tax, a vacant residential property is considered self-occupied. When a taxpayer owns more than one self-occupied house, only one is classified as house property. Rest is regarded as let out.
Taxes are imposed on any commercially owned residence or property.
A few conditions must be met in order for income from housing property to be taxable.
- A house, a building, or any land must be included in the house property
- The taxpayer should be an owner of the property.
- The taxpayer may not use the residential property for any company or professional purposes that he or she is involved in.
- When these conditions are met, the income generated by a home property becomes chargeable and subject to tax deduction.
- Income from business or Profession:
The money earned through the profits of a business or profession will be included to the computation of total income. The difference between the revenue collected and the expenses is charged.
Income derived from the practice of trade or commerce or by services of a professional is also subject to taxation. Profits from the sale of imported goods, incentives, any interest, any wage or bonus, and a commission from a business are all taxed under the Income Tax Act’s head of income.
The income that may be taxed under this heading.
- All the profits earned during an assessment year.
- Profits, salary or bonus received from working as a partner in a firm.
- Profits from an organization’s revenue.
- Profits made from the selling of a specific licence.
- Cash received as a result of an individual’s export under a government scheme.
- Income from Capital Gains:
Profits or gains obtained by an Individual from the sale or transfer of a capital asset are referred to as capital gains. Capital gains are earned on an investment made by an individual for a business or profession. Capital gains includes income earned from investments in mutual funds, equities, real estate, and other assets.
There are total two types of gains short term and long term capital gains. Short-term capital gains are profits earned when an individual sells an asset within 36 months (3 years) of acquiring it. Long Term Capital Gains are the profits made on an asset transfer after 36 months (3 years) from the day of acquiring it.
- Income from other Sources:
This category includes all other type of income that does not fit into the above categories. This category includes income earned through interest on bank deposits, prizes, card games, gambling, and other sports prizes. Money obtained in excess of Rs. 50,000 from a third party who is not a relative, spouse, or if the money was gained by inheritance or will. All these sources are eligible for tax under section 56(2) of the income tax act.
Income under the above heads is considered as Income for tax purposes. The taxation and Income of an individual may vary in each Financial year. Once it’s known under which head the Income falls, it becomes easy to understand and plan taxes.
The author, Sushant Gangurde is a legal analyst @Taxblock India private limited and aims to educate and inform the masses about various tax laws and financial planning.
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