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As per the Income Tax Act, your income gets categorised into different heads, no matter the amount you earn. But ‘how many heads of income are there?’ is the question here.
The IT Act clearly outlines five heads of income, which classify earnings based on their sources. 

All citizens liable to pay tax must abide by the rules of taxation based on their income categorisation. Given this, knowing the different heads of income under the IT Act is crucial. It helps ensure that you file taxes correctly. Read on for insights into these heads and to understand what they entail. 

What are the 5 Heads of Income?

Here is an explanation of all heads of income for your understanding. 

• Salary Head: Income earned through employment is known as Salary Head. This can include all types of wages, bonuses or advances received from an employer by the employee. It also accounts for the wages from pension. 

• House Property Head: It refers to all the income received from the rental income of the house or property. Self-occupied property is when you have more than one property, even if it is not used for rent purposes. 

• Profits and Gains from Business Head: The income received from profits or gains from being self-employed or owning a business. If you are gaining profit from partnerships with other businesses, you fall under this category.

• Capital Gains Head: If you have recently sold any property, land, mutual funds, bonds, gold, etc., you have gained capital. This is also known as investment head, as you are owning and selling the asset. 

• Other Sources Head: If the income you have is not included in all the above categories, it is a part of other categories. It can include interests gained from a savings account or a lottery win. 

Income From Salary

The salary head of income tax is one of the 5 heads, which is income received as a contractual agreement between you and your employer. As per the agreement, you will receive a certain amount of remuneration for your services. The gross income includes the following components:

• Basic wage
• Annuity
• Pension
• Annual bonus 
• Gratuity
• Commission 
• Leave encashment 

This total amount is taxable under the tax head on income from salary. Under this tax head, you can claim the following tax deductions. 

• House Rent Allowance (HRA): If you live in a rented house, you can claim HRA, 50% of your basic salary, or monthly rent. It will be minus 10% of the annual salary, whichever is lower
• Conveyance Allowance: This is the compensation for the cost of travelling, captured as ₹1,600 per month
• Medical Allowance: You can claim tax exemption of up to ₹15,000 for covering medical expenses for yourself and your family 

Also Read : How to pay income tax online

Income From House Property

When an individual earns income for income from their property, it is taxable under the tax head of income from house property. Sections 22 to 27 of the IT Act, 1961 provide the required details on what classifies as property, computation and calculation of rental income. 

However, this tax head has certain conditions. The taxpayer must own the property that must be used for residency purposes. 

Income From Profits and Gain of Business or Profession

Any income generated from business or profession falls under this tax head, which includes:

• Income generated from the sale of a certain licence
• Total gains of an individual during the particular assessment year
• Profit of an organisation 
• Grant received as a part of a government scheme
• Gains, bonuses or salary revives under a partnership 

Income From Capital Gains

If you earn income from the transfer or sale of a capital asset held as an investment, this is capital gain. An asset can be any asset class, such as stock, bonds, mutual funds, gold, and property, among others, held for 36 months or more. 

They are further divided into short-term capital gains and long-term capital gains, having variable tax rates. To claim deductions, you can refer to sections 54, 54B, 54D, 54EC, 54ED, 54F, 54G, or 54GA of the Income Tax Act. 

Income From Other Sources

This is the last of the income tax heads, and it includes all the other types of income that are not mentioned in the other categories. Section 56 of the Income Tax Act outlines the specifics. This tax head income earnings from: 

• Gifts
• Lottery
• Bank deposits
• Card games
• Gambling
• Bank deposits

Also Read: Tax Free Income in India

This list isn’t exhaustive, and other sources fall under this income head.  

Knowing how many heads of income are there under the Income Tax Act of 1961 is important information for tax planning. It helps calculate your tax liabilities accurately and avoid mistakes when claiming deductions. Thankfully, you can rely on a digital calculator to estimate your tax outgo with ease. 

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FAQs on Heads of Income

How many heads of income tax are classified?

There are five heads of income under the Income Tax Act of 1961: 

• Income from salary
• Income from house property
• Income from profits and gain of business or profession
• Income from capital gains
• Income from other sources

What is the difference between heads of income and sources of income?

The heads are classifications of earnings or gains of an individual within a year, such as:

• Income
• Rental Income
• Capital gains
• Profits from investments
• Profits from the profession 

On the other hand, sources of income are monetary sources that differ for an individual or business. Thus, salary, commission, interest, etc., can be a source of income for an individual. However, profits, return on Investments, and grants from the government are examples of a source of income for a business. 

What type of income is commission classified as?

Commission or brokerage is the sum of an individual or agent receiver when acting on behalf of another individual or entity. Simply put, it’s part of the payment for non-professional services or the sale or purchase of any goods. 

Can I claim a deduction of expenses incurred to earn Income from Other Sources?

Yes. A deduction is claimed on any other expense incurred to earn Income from other sources that has been only spent for gaining income in previous financial year.

How many heads of income tax are classified?

As per the classification, a total of 5 heads of income are there. This includes salary head, house property, capital gains, gains from business, and other gains.

Do I have to pay tax on gifts (income from other sources) if received on the occasion?

Yes, if you receive any gift in a financial year, it will be included in your income from other source heads. However, the inclusion has a limit of ₹50,000.

The taxable income slabs divide the taxpayers into different categories and assign them different tax rates. These categories depend on the age of the taxpayers, as mentioned below:

• Individuals under 60 years and all the non-residents 
• Resident senior citizens, which includes taxpayers over 60 years to up to 80 years
• Resident super senior citizens consisting of taxpayers over 80 years of age

These slabs also vary depending on the regime you opt for. By knowing these slabs and the applicable rates, you can plan your finances and taxes accordingly. 

Read on to know the tax slabs for income tax under the old and new regimes, tax rates and more. 

Tax Slabs for FY 2024-25

You can opt for the old regime or the new regime based on your income and investments. As per the Union Budget 2024, the government announced the revised taxable income slabs for the new tax regime. The rates for the old and new tax slab of income tax are as follows. 

Tax Rates for the Old Tax Regime 

The traditional system for tax filing allows for various deductions and exemptions. Check out the tax structure and applicable rates under the old tax regime below-

Income Slabs	Rates for Taxpayers up to 60 Years & NRIs	Rates for Taxpayers over 60 Years and up to 80 Years	Rates for Taxpayers Above 80 Years
Up to ₹2.5 lakhs	Nil	Nil	Nil
Between ₹2.5 lakhs and ₹3 lakhs	5%	Nil	Nil
Above ₹3 lakhs and less than ₹5 lakhs	5%	5%	Nil
Between ₹5 lakhs and ₹10 lakhs	20%	20%	20%
₹10 lakhs and above	30%	30%	30%

Also Read: Calculation Of Tax

For taxpayers with income exceeding a certain threshold, other tax rates known as surcharges will also apply under the old tax regime. The applicable rates are as follows-

Range of Income	Surcharge rate
Up to ₹50 lakhs	Zero
Between ₹50 lakhs and ₹1 crore	10%
Between ₹1 crore and ₹2 crores	15%
Between ₹2 crores and ₹5 crores	25%
Above ₹5 crores	37%

Tax Rates for the New Tax Regime 

The Union Budget 2024-25 proposed a revision of tax rates under the new taxation system. Check out the revised tax structure and slab rates below-

Income Slabs	Rate for All Taxpayers
Up to ₹3 lakhs	Nil
Between ₹3 lakhs and ₹7 lakhs	5%
Between ₹7 lakhs and ₹10 lakhs	10%
Between ₹10 lakhs and ₹12 lakhs	15%
Between ₹12 lakhs and ₹15 lakhs	20%
₹15 lakhs and above	30%

The following are the surcharge rates applicable under the New Tax Regime-

Income Slab	Tax Rates
Above ₹50 lakhs and less than ₹1 crore	10% of the net income
Above ₹1 crore and below ₹2 crores	15% of the net income
₹2 crores and above	25% of the net income

Who Can Opt for the Old and New Tax Regime? 

The slab of income tax in India also depends on the nature of your income. Here’s how taxpayers can choose between the old and new tax regimes. 

Nature of Income	Regime Applicable
Salary Income or Any Other Income Attracting TDS	Employees have the option to choose the regime at the beginning of the financial yearIf they don’t have a preference, the new regime appliesTaxpayers cannot change the regime in the middle of the financial yearThey have the option to shift to the old regime at the beginning of the next financial year
Income from Business and Profession	Taxpayers with business or professional income can only choose the regime once

Knowing these tax slabs and rates helps you choose the right regime and optimise your tax payable to save more. You can invest in tax-saving avenues and make the most of deductions available under various sections in both regimes. 

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FAQs on Income Tax Slabs

What is the new income tax slab for FY 2024-25?

As per the Union Budget 2024, you are not liable to pay tax under the old tax regime if your net annual income is below ₹2.5 lakhs. It is extended to ₹3 lakhs in case of individuals between 60 – 80 years and to ₹5 lakhs for individuals above 80 years. The basic exemption limit from taxation under the new tax regime is ₹3 lakhs. 

Here are the tax slabs and rates for both regimes:

Old Tax Regime		New Tax Regime
Tax Slab	Tax Rate	Tax Slab	Tax Rate
Up to ₹2.5 lakhs	Nil	Up to ₹3 lakhs	Nil
Between ₹2.5 lakhs and ₹3 lakhs	5%	Between ₹3 lakhs and ₹7 lakhs	5%
Above ₹3 lakhs and less than ₹5 lakhs	5%	Between ₹7 lakhs and ₹10 lakhs	10%
Between ₹5 lakhs and ₹10 lakhs	20%	Between ₹10 lakhs and ₹12 lakhs	15%
₹10 lakhs and above	30%	Between ₹12 lakhs and ₹15 lakhs	20%
		₹15 lakhs and above	30%

Is filing income tax returns compulsory?

Yes, all individuals above 18 years with taxable income must file their returns and pay taxes, if applicable. 

Is there any standard deduction for FY 2024-25?

All individuals can claim standard deductions up to ₹50,000 under the old regime and ₹75,000 under the new tax regime for FY 2024-25. 

Every taxpayer who falls under the tax bracket is required to pay income tax as per the law. Once you file your returns, the Income Tax Department reviews your details to verify if everything is accurate. This process is known as assessment in income tax.

The assessment procedure of income tax helps the department ensure that your income, deductions and tax payments match what’s reported. To carry this out, different assessment types are followed based on your case.

Read on to know what is assessment in income tax and explore the key types of assessment in income tax you should be aware of.

Meaning of Income Tax Assessment

After every assessment year in income tax, eligible individuals and entities need to file income tax returns (ITR). Based on that, you will pay tax on the net taxable income earned during the year. Once you file the ITR, the income tax department assesses and verifies the submission. This process is known as income tax assessment.

Your ITR can be selected for a specific assessment year based on the criteria set by the Central Board of Direct Taxes (CBDT). 

Types of Income Tax Assessment Under the Income Tax Act

The Income Tax Act defines different ways in which your tax details can be reviewed. These help the department check your income, deductions and payments for accuracy. Here are the main types of assessment in income tax you should know:

• Self-Assessment under Section 140A

Self-assessment is the first step in the income tax process. Here, the taxpayer calculates their own tax based on total income from all sources. 

After adjusting for deductions, exemptions or any losses, the final tax amount is calculated as per the applicable slab. TDS and advance tax already paid are subtracted from this amount. If there’s any balance due, it must be paid before filing the income tax return. This ensures that the return is complete and accurate when submitted.

• Summary Assessment under Section 143(1)

Summary assessment is an automatic check carried out by the Income Tax Department’s system. The data in your return is compared with the records available to the department. It checks for common issues like arithmetic errors, incorrect claims or missing information. 

If there’s a mismatch, you will receive an intimation under Section 143(1). This process does not involve any officer and helps in quick verification of returns filed.

• Scrutiny Assessment under Section 143(3)

Scrutiny assessment involves a detailed examination of your return by an Assessing Officer. You will first receive a notice under Section 143(2). The officer may then ask for documents such as books of accounts, bank statements or other supporting details. 

The goal is to confirm that you haven’t understated income, overstated deductions or underpaid tax. After review, the officer may accept your return or adjust it. If there is any dispute, you can request a rectification under Section 154. You can even file an appeal with higher authorities.

• Regular Assessment

Regular assessments are conducted by authorised Income Tax Officers. This is required when a return is selected for deeper scrutiny. This is done to verify whether the reported income and tax calculations are accurate. 

The Central Board of Direct Taxes (CBDT) lays out specific criteria to flag such cases. A notice is issued within six months from the end of the financial year in which the return was filed. The taxpayer must submit the necessary documents for verification. Based on the review, the officer may accept the return or demand additional tax if discrepancies are found.

• Income Escaping Assessment under Section 147

This assessment type applies when the department believes taxable income has not been reported. It allows the reopening of an assessment within four years from the end of the relevant assessment year. 

A notice is sent if the taxpayer has taxable income but didn’t file a return. It also applies if a taxpayer underreports income or claims extra deductions. In some cases, the missed reporting of international transactions can also trigger this. This assessment helps the department recover unpaid tax.

• Best Judgment Assessment under Section 144

Best judgment assessment is used when a taxpayer does not respond to notices or fails to file a return. In such cases, the Assessing Officer uses available data to estimate the tax liability fairly. 

This can also apply when the taxpayers don’t maintain or share the books of account. It also applies if the taxpayer ignores a special audit or doesn’t follow the summary assessment terms. The officer then reviews all available details and passes an order based on best judgment.

Now that you know the types and meaning of assessment in income tax, you can comply with the rules of the Income Tax Act and avoid penalties for non-compliance. If you need financial assistance, getting a Fibe Instant Personal Loan of up to ₹5 lakhs can be a smart option.

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FAQs on Income Tax Assessment 

What is the assessment of tax under the Income Tax Act?

Tax assessments under the Income Tax Act refer to the verification or evaluation of the ITRs filed by an individual or an entity.

What is regular assessment in income tax?

This is when an assessing officer conducts the assessment to check and ensure that you haven’t:

• Understated your income
• Overstated deductions, expenses or losses
• Underpaid your tax

Here’s how the procedure of assessment in income tax works:

• For scrutiny assessment, the department sends a notice 6 months from the end of the FY in which you file the return.
• You need to provide evidence for the reported income, after which the assessing officer confirms or adjusts the return, which may lead to tax demands.

What do you mean by scrutiny assessment?

It is when the Income Tax Department assigns an assessment officer to assess the return you file. You will receive a notice u/s 143 (2) from the Assessing Officer.

What is a ‘faceless’ tax assessment?

This is a scheme to revamp the taxation process and make it more efficient. This eliminates the need for face-to-face meetings for assessing officers or any other person for tax authorities. This ensures efficient tax payment through electronic portals.

Understanding the rules for gratuity tax exemption is crucial for employees who may receive it. Any person who works in an establishment with more than 10 workers for 5 continuous years is liable to receive this sum on termination of employment or as a post-retirement benefit. 

In case of an employee’s disability due to a disease or accident, or demise, the condition for 5 years of continuous employment is not applicable. 

To know the gratuity exemption limit, taxation rules, exemptions available on such receipts and more, read on. 

When Can I Receive the Gratuity?

A gratuity is a monetary benefit that employees receive from their employers over and above their regular salary. The Payment of Gratuity Act of 1972 governs the provisions relating to gratuity, which can be given in the following circumstances:

• Superannuation
• Retirement or resignation
• In case of death or disablement of the employee

Tax Liability on Gratuity 

As per the Income Tax Act of 1961, you need to pay tax on gratuity if they exceed a certain threshold. However, you can avail of tax exemption if the total gratuity receipts remain under this amount. The earlier limit of gratuity tax exemption was ₹10 lakhs, which has been increased to ₹20 lakhs.   

Gratuity Tax Rules

Here are some rules and regulations you need to be aware of regarding taxation of gratuity:

• In cases of death, retirement, resignation, and certain other situations, gratuity may be exempt from tax under Section 10(10) of the Income Tax Act of 1961.
• Gratuity received by an employee is considered income under the ‘Salaries’ head.
• In the case of the unfortunate demise of the employee, the gratuity is paid to the nominee or legal heir.
• This amount received by the nominee or legal heir is classified as income under ‘Income from Other Sources. ’

Also Read: Guide on Income Tax Deductions in India

Is Gratuity Taxable on Resignation?

Unlike superannuation (retirement), where government employees get full tax exemption on gratuity, resignation comes with tax implications. Private-sector employees, whether they retire or resign, get a tax exemption of up to ₹20 lakhs under Section 10(10) of the IT Act.

If the total gratuity received goes beyond ₹20 lakhs, the extra amount is added to your taxable income and taxed as per your income slab. This ₹20 lakhs limit applies across all employers. So even if you receive gratuity multiple times during your career, the total tax-free amount is capped at ₹20 lakhs.

What is Gratuity Exemption?

A gratuity exemption is a tax benefit that helps employees reduce their tax burden on the amount they receive. 

Under Section 10(10) of the Income Tax Act, gratuity exemption is available for:

• Government employees, who get full tax exemption on their gratuity
• Private sector employees covered under the Gratuity Act, who can claim up to ₹20 lakhs tax-free

Knowing how gratuity exemption works can help you plan better for retirement or job changes. It ensures you make the most of your hard-earned money.

Income Tax Exemptions Available on Gratuity

The following categories of employees can claim gratuity tax exemption:

Exemptions for Government Employees

As per the Income Tax rules, employees working in government institutions can get a full exemption from paying taxes. This is applicable in the case of termination, retirement, superannuation, or disablement. You can claim this exemption if you work in any of the following government services:

• Central Government
• State Governments
• Defence Sector
• Civil Services
• Local Municipal Authorities

Also Read: Direct Tax Vs Indirect Tax

Exemption for Private Employees

If you are an employee involved in the private sector, you can claim exemption from tax on gratuity if you are covered under the Gratuity Act, 1972. You need to keep the following things in mind when computing tax liability and eligible gratuity tax exemption:

• In absolute terms, the aggregate gratuity received must not exceed ₹20 lakhs to claim exemptions
• It means that the exemption limit needs to be applied cumulatively to the gratuities received from all employers
• The additional gratuity received for more than 15 days of each completed year will be liable for taxation
• The salary for the purpose of computation of gratuity includes the basic salary and the dearness allowance (DA)

Note that you can also compute the income tax on gratuity using a gratuity calculator. This makes the calculations simpler and instant. 

By familiarising yourself with the income tax on gratuity and the available exemptions, you can significantly reduce your total tax liability. This will help you boost your savings and build a stronger financial future. 

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FAQs on Taxability of Gratuity

Is the gratuity taxable or non-taxable?

Yes, gratuity is taxable under the Income Tax Act of 1961. However, you can claim an income tax exemption on gratuity receipts up to ₹20 lakhs. 

How is the gratuity calculated as per income tax?

You can compute the gratuity using the following formula:

Gratuity=Last salary drawn by the employee x (15/26) x Number of years of service

How many times can the gratuity exemption be claimed?

As per the IT Act, there is no limit for availing of a gratuity exemption. You can claim the exemption until it reaches the gratuity exemption limit i.e. ₹20 lakhs.

Is gratuity taxable for government employees upon retirement?

Gratuity provided to employees working in the government sector upon termination, retirement, or superannuation is completely exempt from tax.

What is the gratuity exemption section in the Income Tax Act?

Section 10(10) of the IT Act mentioned that gratuity up to ₹20 lakhs is exempt from taxes.

Is gratuity a part of CTC taxable?

Yes, gratuity is usually a part of your Cost to Company (CTC) but it’s not taxed right away. It only becomes taxable when you receive it. The taxation also depends on the total gratuity amount. If it stays within the ₹20 lakhs exemption limit, you don’t have to pay tax. However, any amount beyond this is added to your income and taxed as per your slab.