Income tax in India is classified into five distinct heads of income to streamline the assessment of income and ensure proper taxation: Income from Salary, Income from House Property, Profits and Gains from Business or Profession, Income from Capital Gains and Income from Other Sources. These heads of income encompass a variety of sources, each with its own taxation rules. For instance, salary earned from employment falls under Income from Salary, while rental income is taxed under Income from House Property. Business earnings and income from futures and options are taxed under Profits and Gains from Business or Profession, while returns from mutual funds and other investments are classified under income from Capital Gains and Income from Other Sources, depending on the type of investment. Understanding the distinction between “heads of income” and “sources of income” is crucial for accurate tax filing, as each head has specific features, such as allowances, deductions, and exemptions, to ensure fair taxation. Whether you’re a salaried individual, investor, or entrepreneur, knowing which head your income falls under is essential for compliance and tax efficiency.
What are the 5 Heads of Income?
The Indian Income Tax Act, 1961, categorizes income into five distinct heads to facilitate systematic assessment and taxation. These heads help classify diverse sources of income and determine the applicable tax rules for each. Here’s a breakdown:
Profits and Gains from Business or Profession
Income from Capital Gains
What are the Five Features of Tax?
Taxes have specific features that define their nature, purpose, and implementation. Here are five key features of tax:
Compulsory Payment:
Tax is a mandatory financial obligation imposed by the government on individuals and entities. Failure to pay taxes may result in penalties or legal consequences.No Direct Benefit:
Taxpayers do not receive a direct or proportional benefit for the taxes they pay. Instead, taxes are used to fund public infrastructure, social welfare, and government operations that indirectly benefit society.Based on Law:
Taxes are levied under the authority of legislation, such as the Income Tax Act, 1961. These laws define tax rates, collection mechanisms, and penalties, ensuring transparency and uniformity.Varied Types:
Taxes are broadly classified into direct taxes (like income tax, where the burden is directly on the taxpayer) and indirect taxes (like GST, where the burden is shifted to the end consumer).Economic and Social Purpose:
Taxes are used not only to generate revenue for the government but also to achieve economic goals, such as reducing income inequality, promoting specific industries through exemptions, and discouraging undesirable activities (e.g., sin taxes on tobacco and alcohol).
By understanding these features, taxpayers can better appreciate the role taxes play in nation-building and comply with their legal obligations effectively.
Income from Salary
Income from Salary refers to any remuneration or compensation received by an individual in return for services provided under an employer-employee relationship. This category includes not just the basic salary but also various allowances, perquisites, and bonuses. The key features of this head of income are:
- Allowances: Payments like House Rent Allowance (HRA), Dearness Allowance (DA), and Travel Allowance, some of which may be partially or fully exempt from tax.
- Perquisites: Benefits such as rent-free accommodation, company-provided vehicles, or medical benefits are taxed based on their value.
- Deductions: A standard deduction of ₹50,000 or 75000 depending on tax regime opted is available for salaried individuals, along with exemptions for certain components like HRA and leave encashment.
- Taxability: Income is taxable on a receipt basis, and tax is typically deducted at source (TDS) by the employer.
Income from House Property
This head covers income earned from owning a property, whether rented or deemed to be rented (if it’s a second property). Key highlights include:
- Self-Occupied Property: For a self-occupied house, the taxable income is treated as NIL. If it is a second property, a notional rent is added to taxable income.
- Let-Out Property: For rented properties, actual rent received (or receivable) is considered.
- Deductions: Taxpayers can deduct municipal taxes paid and claim a standard deduction of 30% on the net annual value (NAV). Interest on a home loan (up to ₹2 lakh for self-occupied properties) is also deductible.
- Loss from House Property: If deductions exceed the income, a loss from house property can be set off against other incomes or carried forward for future years.
Profits and Gains from Business or Profession
This head covers income from any trade, commerce, manufacturing, or profession. It includes both small businesses and professions such as freelancing, legal practice, or medical services. Key points are:
- Net Income: Net profit, determined after deducting all expenses incurred exclusively for the business or profession, is taxable.
- Expenses Allowed: Rent, salaries, depreciation, and other business-related expenses can be claimed as deductions.
- Presumptive Taxation: Small businesses and professionals with turnover under specified limits can opt for simplified presumptive taxation schemes.
- Special Cases: Income from futures and options, or speculative activities is also taxed under this head.
Income from Capital Gains
Capital Gains arise from the transfer of capital assets like property, stocks, mutual funds, or gold. This head is categorized based on the holding period of the asset:
- Short-Term Capital Gains (STCG): Gains from assets held for a shorter period (e.g., less than 12 months for equities) are taxed at standard rates or special rates (e.g., 15% for equity STCG).
- Long-Term Capital Gains (LTCG): Gains from assets held longer are taxed at reduced rates (e.g., 10% for equity LTCG above ₹1 lakh).
- Exemptions: Investments in certain bonds or residential properties under sections like 54 or 54EC can help save taxes.
- Indexed Cost of Acquisition: For long-term assets, the cost is adjusted for inflation using the Cost Inflation Index (CII), reducing tax liability.
Income from Other Sources
This is a residual category that includes income not covered under other heads. Common examples are:
- Interest Income: From savings accounts, fixed deposits, or bonds.
- Dividend Income: Dividends from shares or mutual funds.
- Gifts Received: Gifts exceeding ₹50,000 in a financial year, unless exempt under specific conditions.
- Lottery, Gambling, or Betting: Such income is taxable at a flat rate of 30% without any deductions.
- Unexplained Income: Any unexplained credits or deposits may also be taxed under this head.
Since this head acts as a catch-all, taxpayers must carefully classify income that doesn’t fit under other heads to avoid misreporting.
Heads of Income vs Sources of Income
The terms Heads of Income and Sources of Income are often used interchangeably, but they have distinct meanings in the context of taxation. Understanding the difference is crucial for accurate tax filing and compliance.
Heads of Income
The heads of income are the broad categories defined under the Income Tax Act, 1961, to classify income into specific groups based on its nature. There are five heads of income, as explained earlier:
- Income from Salary
- Income from House Property
- Profits and Gains from Business or Profession
- Income from Capital Gains
- Income from Other Sources
These heads serve as the foundation for calculating taxable income. Each head has its own set of rules, exemptions, and deductions, which help determine the net taxable amount under that category.
Sources of Income
The source of income refers to the origin or activity that generates the income. It identifies where the income is coming from, regardless of its classification under a specific head. For example:
- A person’s salary from employment is the source of income, which falls under the head “Income from Salary.”
- Rental earnings from a property are a source of income classified under “Income from House Property.”
- Trading in cryptocurrency, mutual funds, or stock markets are sources of income that may fall under “Profits and Gains from Business or Profession” or “Capital Gains,” depending on the nature of the transactions.
Key Differences Between Heads of income and Sources of Income

Example
- If you earn rental income from a property, the source of income is the rent from that property, while the head of income under which it is taxed is “Income from House Property.” If a person is in the business of renting of property then the source of income is still the rent from that property, while the head of income under which it is taxed is “Income from Profits and Gains from Business or Profession.”
- If you trade in stocks, the source of income is stock trading, which is taxed under the head of Profits and Gains from Business or Profession. But if you invest in stocks with the intention of investment, the source of income is still stock trading, which is taxed under the head of Income from Capital Gains
All Services across Bharat
- Income tax
- GST
- Business registration
- Accounting
- Audit
- ROC filings
- Certificates
- Project report or CMA data