Calculating Taxable Income

The Income Tax Department taxes you based on your income from the categories given below.¹ The total income calculated from these heads is called the gross total income. 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 tax 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 tax 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 tax 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 gains² is charged only in the following conditions:

• There should be a capital asset.³ In other words, any property held by a taxpayer.
• It should be transferred by the taxpayer during the tax year. 
• 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 assets⁴ in a company to the shareholders at the time of liquidation. 
• Distribution of capital assets⁵ 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 including property you own. Income from house property shall be taxable if following conditions are satisfied:⁶

• The house property should consist of any building or land attached with it.
• The taxpayer should be the owner of the property.
• The house property should not be used for the purpose of business or profession carried on by the taxpayer. 

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’.⁷

Tax is charged on the following from a business or profession:⁷ 

• Any compensation or other payment due to or received by any specified person
• Income derived by 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 the exercise of a profession.
• Interest, salary, bonus, commission or remuneration due to or received by a partner from partnership firm

These are just a few examples of the incomes on which tax is charged. Read more 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”.⁸

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 are charged under the head of income from other sources, only if it has not already been taxed under the head of ‘Profits and Gains from Business or Profession’.

• 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)

1. Section 13, Income-tax Act, 2025. [↩]
2. Capital Gains, Income Tax Department, available at https://www.incometaxindia.gov.in/Tutorials/15-%20LTCG.pdf. [↩]
3. Section 2(22), Income-tax Act, 2025. [↩]
4. Section 68(1), Income-tax Act, 2025. [↩]
5. Section 70(1), Income-tax Act, 2025. [↩]
6. Section 20, Income-tax Act, 2025. [↩]
7. Section 26, Income-tax Act, 2025. [↩] [↩]
8. Section 92, Income-tax Act, 2025. [↩]