Calculating Taxable Income

The Income Tax Department taxes you based on your income from the categories given below^{(( Section 14, Income Tax Act, 1961))}. Gross total income is the total income calculated based on these categories. It is from this amount that deductions are made.

Income from Salary 

Income from salary is taxable in India. Salaried income which is taxable consists of:

• Salary due from the employer (including a former employer) to the taxpayer during the previous year. The salary will be taxed even if it has not yet been paid.
• Salary paid by the employer (including the former employer) to the taxpayer during the previous year, before it became due. For example, if the employer pays the salary for a project in advance.
• Any arrears or pending salary paid by the employer (including the former employer) to the taxpayer during the previous year. This happens only if tax was not charged to this amount in an earlier year.

The following break-ups within your salary are fully taxable:

Income from Capital Gains

Income from capital gains^{(( Capital Gains, Income Tax Department, available at https://www.incometaxindia.gov.in/Tutorials/15-%20LTCG.pdf. is charged only in the following conditions: There should be a capital asset((Section 2(14),Income Tax Act, 1961))}. In other words, this refers to any property held by a taxpayer.

• During the previous year, the capital asset is transferred by the taxpayer.
• There should be profits or gains as a result of transfer. Read more here to understand which transactions are not considered to be “transferred” by the taxpayer.

Some transactions not taxed are:

• Distribution of assets^{(( Section 46(1), Income Tax Act, 1961))} in a company to the shareholders at the time of liquidation
• Distribution of capital assets ^{(( Section 47(1), Income Tax Act, 1961))}on a partition of a Hindu Undivided Family

Income from House Property 

A house property could be your home, an office, a shop, a building or some land attached to the building like a parking lot. The Income Tax Act does not differentiate between a commercial and residential property. All types of properties are taxed under the head ‘income from house property’ in the income tax return. This includes property you own. Income from house property is taxable if:^{(( Section 22, Income Tax Act, 1961))}

• The house property should consist of any building or land attached with it
• The taxpayer should be the owner of the property
• Business or profession is not carried on by the taxpayer in the house property

Income from Business and Profession 

Remuneration, bonus or commission received by a partner from the firm or anyone working independently in a business or profession, is not taxable as ‘Income from Salaries’. Rather, it would be taxable as ‘Income from a Business or Profession’ ^{(( Section 17, Income Tax Act, 1961))}. Tax is charged  on the following from a business or profession^{(( Section 28, Income Tax Act, 1961;Section 41, Income Tax Act, 1961; Section 43 , Income Tax Act, 1961))}:

• Any compensation or other payment owed to or received by any specified person.
• Income derived from a trade, profession or any specific services performed for its members, like an income made by a contractor.
• Cash assistance (by whatever name it is called) received or receivable by any person against exports under any scheme of Government of India.
• Value of any benefits arising from a business or a profession.
• Interest, salary, bonus, commission or remuneration owed to or received by a partner from partnership firm.

Read more examples on which income is charged here.

Income from Other Sources 

Any income which is not chargeable to tax under any other heads of income, but which is not to be excluded from the total income, is chargeable to tax under the head “Income from Other Sources”.^{(( Section 56, Income Tax Act, 1961))} Some examples of these are:

• Dividends
• Income from winning lotteries, crossword puzzles, races including horse races, card games, gambling or betting of any form or nature.

The following amounts fall under the head “income from other sources”. Amounts not taxed under the head of ‘Profits and Gains from Business or Profession’, fall under this category. This is applicable only if

• Any money received by an employer from his employees as a contribution towards PF (Provident Fund), ESI (Employee State Insurance), Superannuation Fund, etc.
• Interest on securities
• Income from machinery, plant or furniture belonging to taxpayer and let on hire
• Composite rental income from letting of plant, machinery or furniture with buildings
• Any sum received under Keyman Insurance Policy (including bonus)