How many heads of income are there to compute gross total income

Gross total income (GTI) section 80B(5) is the aggregate of income under all the five heads of income after adjusting the set-off and carry forward of losses. Deduction under chapter VIA is provided from Gross Total Income (GTI), to arrive at total income or taxable income.

GROSS TOTAL INCOME INCOME TAX | HOW MANY HEADS OF INCOME ARE THERE TO COMPUTE GROSS TOTAL INCOME | INCOME TAX HEADS OF INCOME

Computation of taxable income for the assessment year 2020-21 and relating to the previous year 2019-20:

• Income from Salary

• Income from House Property

• Income from Business or Profession

• Short term Capital Gains other than chargeable w.r.t. STT (STCG 111A)

• Income from Other Source other than Casual income

Gross Total Income (GTI) other than Long Term Capital Gain, Short Term Capital Gain 111A and Casual Income

Add: Short Term Capital Gains chargeable w.r.t. STT (STCG 111A)
Add: Long Term Capital Gain (LTCG)

Add: Casual income

Add: Income referred to section 115A, 115AB, 115AC, 115AC, 115AD, 115BBA and 115D

Less: Adjustment on account of Set-off and Carry forward of losses (Carry forward loss of income)

GROSS TOTAL INCOME

Less: Deduction under section 80C to 80U

TOTAL INCOME / NET TAXABLE INCOME

INCOME FROM SALARY

In ordinary sense, salary means any compensation or consideration received by a person (say employee) for service rendered to another person (say employer). So any amount due to or received by an employee from employer as salary is chargeable to tax under the head salary.

As per section 17(1), salary includes wages; any annuity or pension or gratuity; any fees, commission, perquisites or profit in lieu of or in addition to any salary; any advance of salary; leave encashment; the annual accretion recognised provident fund (RPF) to the extent of the employer's contribution in excess of @12% of salary; or Interest on the balance in the RPF account credited in excess of 9.5% of salary; accumulated transferred balance from unrecognised PF to RPF to the extent it is taxable; the contribution made by the central government in the previous year, to the account of the employee under a pension scheme referred to in section 80CCD.

INCOME FROM HOUSE PROPERTY

As per section 22, annual value of the property consisting of any building or land appurtenant thereto of which the assessee is the owner, other than such portion of such property as he or she may occupy for the purpose of any business or profession (B/P), carried on by him, the profits of which are chargeable to income tax, shall be subject to income tax under the head income from house property (HP).

So, in simple terminology, we can say that, following conditions must be satisfied to taxed income under the head house property.

i. The property should consist of buildings or land adjoining the building.

ii. The assessee should be the owner of such house property.

iii. The owner should not utilise the property for the purpose of any business or profession carried on by him, the profits of which are taxable income income tax act.

INCOME FROM BUSINESS OR PROFESSION 

Business Section 2(13):

Business includes –

• any trade, commerce or manufacture; or 

• any adventure or attention or concern in the nature of trade, commerce or manufacture. 

Generally, business means recurring economic activity, but for income tax purpose an isolated activity may be termed as business depending upon facts and circumstances. Following elements shall be considered to judge a transaction as business transaction:

• Nature of commodity

• Intention of the party

• Efforts applied in transaction

• Periodicity of transaction

• Nature of transaction (whether incidental to a business or not).

Profession Section 2(36):

Profession includes vocation. Profession requires purely intellectual skill or manual skill on the basis of some special  learning and qualification gathered through past training or experience e.g. chartered accountant, doctor, lawyer etc. Professional skill can be acquired only after patient study (in a particular system either a college, university or institute) and application (i.e. experience).

Vocation implies natural ability of a person to do some particular work example- singing, dancing, etc. The term “vocation” is separate from the term “hobby”. Vocation must have the earning feature. It can be treated as an earning means by which a man passes his life. Unlike profession, vocation does not require a degree or special learning.

Notes:

1. Profit Motive: If the motive of an activity is pleasure only, it shall not be treated as business activity.

2. Business vs Profession: An income arising out of trade, commerce, manufacture, profession or vocation shall have the same treatment in Income tax Act. However, a little segregation is required to be made between business and profession while applying section 44AA, section 44AB, section 40AD, section 44ADA, etc.

INCOME FROM CAPITAL GAIN

"Capital gain" in simple terms, is the profit from the sale of a capital asset, including an investment. Since investment particularly in the case of an individual is funded through savings, the tax on capital gain is levy on encashment on savings.

INCOME FROM OTHER SOURCE

As per section 56(1), any income is taxable under the head income from other sources (IOS) if the following conditions are satisfied:

i. There must be income.

ii. Such income is not exempted under section 10 to 13A.

iii. That income is neither salary income, nor yet rental income from house property, nor yet income from business or profession, nor yet capital gain.

SET-OFF CARRY FORWARD OF LOSS

If a loss cannot be set off under the same head of income or under the different heads of income, because of absence or inadequacy of the income of the same year, it may be carried forward and set off against the income of the subsequent year or successive year.

DEDUCTION UNDER SECTION 80C TO 80U

Deduction 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E, 80EE, 80G, 80GG, 80GGA, 80GGB, 80GGC, 80-IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, 80-IC, 80-IE, 80JJA, 80JJAA, 80LA, 80PA, 80QQB, 80RRB, 80TTA, 80TTB, 80U etc.