Key Highlights
- The Income Tax Act, 2025 maintains the same 5 heads of income as the old Act — but with cleaner, reorganised provisions
- Head 1: Salaries (Sections 15–19, ITA 2025)
- Head 2: Income from House Property (Sections 20–25, ITA 2025)
- Head 3: Profits and Gains of Business or Profession (Sections 26–66, ITA 2025)
- Head 4: Capital Gains (Sections 67–93, ITA 2025)
- Head 5: Income from Other Sources (Sections 94–96, ITA 2025)
- Total Income = Sum of income under all 5 heads minus eligible set-offs and deductions
- Income must be reported correctly under the right head — wrong classification leads to penalties
1. Overview
India's income tax system operates on a "schedular" basis — meaning income from different sources is classified into separate categories (called "heads") and taxed according to specific rules for each category. This is different from a "global" system where all income is pooled and taxed uniformly.
The Income Tax Act, 2025 continues with the five heads of income that have been part of Indian tax law since 1961. Each head has its own computation rules, deductions, and loss set-off provisions. The key innovation of the new Act is that all these provisions are now better organised — for example, Chapter IV (Sections 13–96) covers the entire computation of total income, with each head clearly delineated within sub-chapters.
2. Overview of the 5 Heads of Income
| Head | ITA 2025 Sections | ITA 1961 Sections | Examples |
|---|---|---|---|
| Salaries | 15–19 | 15–17 | Basic salary, HRA, bonus, perquisites, pension |
| House Property | 20–25 | 22–27 | Rent from flat/shop, deemed rent, home loan interest |
| Business / Profession | 26–66 | 28–44 | Shop profit, freelance income, professional fees, trading |
| Capital Gains | 67–93 | 45–55 | Sale of shares, mutual funds, property, gold, jewellery |
| Other Sources | 94–96 | 56–59 | Interest on FD, dividend, lottery, gifts, family pension |
3. Head 1: Salaries (Sections 15–19, ITA 2025)
Any amount received from an employer as compensation for employment falls under the salary head. This includes:
- Basic salary and dearness allowance
- HRA (House Rent Allowance): Partially or fully exempt under Schedule II (old regime)
- Bonus, commission, fees: Fully taxable
- Perquisites: Company car, rent-free accommodation, ESOPs — valued and taxed as per rules
- Leave encashment: Exempt for government employees; partially exempt for private sector at retirement
- Gratuity: Exempt up to ₹20 lakh for private sector employees; fully exempt for government employees
- Pension: Taxable as salary; commuted pension partially or fully exempt
Key deduction: Standard Deduction of ₹75,000 (new regime) or ₹50,000 (old regime) under Section 16.
Deduction not available in new regime: HRA, LTA, entertainment allowance for government employees.
4. Head 2: Income from House Property (Sections 20–25, ITA 2025)
Any income from a building, land appurtenant to a building, or ownership of property falls here. Three types of house property:
- Let-out Property: Rent received is the Gross Annual Value. Deduct municipal taxes paid, then 30% standard deduction on Net Annual Value (Section 23), then home loan interest — balance is taxable income
- Self-Occupied Property (SOP): Deemed Annual Value = NIL. Only home loan interest deductible up to ₹2,00,000 per year (Section 24) — but this deduction is NOT available in new regime
- Deemed Let-Out: If you own more than 2 properties and none are let out, the third is deemed let out and taxed on notional rent
Important change under ITA 2025: Maximum 2 properties can be treated as self-occupied (increased from 1 under old law).
5. Head 3: Profits and Gains of Business or Profession (Sections 26–66)
All income from running a business or practising a profession falls here. This is the most complex head with the largest number of provisions.
- Business income: Net profit from manufacturing, trading, e-commerce, services, and all other business activities
- Professional income: Doctors, lawyers, CAs, architects, engineers in practice
- Presumptive Income Scheme: Under Sections 44AD, 44ADA, 44AE equivalents — small businesses and professionals can declare income at a fixed percentage of turnover without maintaining detailed accounts
- Speculative business: Intraday trading in shares is a speculative business — losses can only be set off against speculative gains
Key deductions allowed: Depreciation (Schedule XIII), rent, salaries, business expenses, bad debts written off, professional fees — all expenses wholly and exclusively for business.
Not allowed: Personal expenses, capital expenditure (except as depreciation), income tax payments, settlement of violations.
6. Head 4: Capital Gains (Sections 67–93, ITA 2025)
When you sell a "capital asset" (property, shares, mutual funds, gold, jewellery, bonds, art, etc.), any profit is a capital gain. The tax rate depends on how long you held the asset:
| Asset Type | Long-Term if held > | LTCG Rate | STCG Rate |
|---|---|---|---|
| Listed equity shares / equity MF | 12 months | 12.5% (above ₹1.25L, Section 195) | 20% (Section 196) |
| Debt Mutual Funds / Bonds | 24 months | Slab rates (after Finance Act 2023) | Slab rates |
| Immovable property (land/building) | 24 months | 12.5% without indexation | Slab rates |
| Unlisted shares | 24 months | 12.5% without indexation | Slab rates |
| Gold / Jewellery | 24 months | 12.5% without indexation | Slab rates |
Important: Indexation benefit for computing LTCG on property was removed from 23 July 2024. LTCG rate reduced to 12.5% (from 20% with indexation) for assets sold after that date. ITA 2025 carries this forward.
7. Head 5: Income from Other Sources (Sections 94–96)
This is the residual head — any income that doesn't fit into the first four heads goes here. Common examples:
- Interest income: Fixed deposits, savings account, bonds, NSC, PPF (interest on PPF is exempt)
- Dividend: From shares and mutual funds — taxable at slab rates since April 2020
- Family pension: Received after employee's death — 1/3rd or ₹25,000 deductible (Section 57)
- Lottery/game show/horse race winnings: Taxed at flat 30%
- Online gaming winnings: Taxed at 30% (Section 102 — VDA and online gaming)
- Gifts: Cash/property gifts above ₹50,000 from non-relatives are taxable
- Arrears of rent: Taxable under this head (30% deduction allowed)
8. Computation of Total Income
| Step | Action |
|---|---|
| 1 | Compute income under each of the 5 heads separately |
| 2 | Apply head-specific deductions (e.g., 30% on house property, depreciation for business) |
| 3 | Set off losses (intra-head and inter-head as per Chapter VII rules) |
| 4 | Aggregate net income from all heads = Gross Total Income |
| 5 | Apply Chapter VIII deductions (Section 123/80C, 126/80D etc.) if under old regime |
| 6 | Result = Total Income (on which tax is computed at applicable slab rates) |
9. Set-Off and Carry Forward of Losses
Losses under one head can often be set off against income under another head (inter-head set-off) or carried forward to future years. Key rules under Chapter VII of ITA 2025:
- House property loss: Can be set off against any other head up to ₹2 lakh per year; excess carried forward for 8 years against house property income only
- Business loss (non-speculative): Can be set off against all heads except salary; carried forward for 8 years against business income
- Speculative business loss: Set off only against speculative income; carried forward for 4 years
- Capital loss: LTCL set off only against LTCG; STCL set off against STCG and LTCG; carried forward for 8 years
- To carry forward losses, ITR must be filed before due date
10. Wrong Classification Consequences
Reporting income under the wrong head can lead to:
- Incorrect deduction claims being disallowed
- Loss set-offs being reversed
- Tax demand + interest under Section 416 of ITA 2025
- Penalty for under-reporting under Section 439 of ITA 2025
11. Latest Updates Under ITA 2025
- Virtual Digital Assets (VDA/Crypto): Specifically codified under Sections 102–106 — 30% flat tax, no deduction except cost of acquisition, losses cannot be set off against other income
- Online gaming: Winnings now specifically in Section 102 — TDS under Section 393
- House Property: Maximum 2 self-occupied properties now allowed (was 1 under old law)
- Debt Mutual Funds: LTCG taxed at slab rates (Finance Act 2023) — confirmed in ITA 2025
- Capital Gains on Property: No indexation, 12.5% rate (Finance Act 2024 amendment) — reflected in ITA 2025
12. Why TaxClue
Correct classification of income under the right head is the foundation of accurate ITR filing. TaxClue's experts ensure your salary, house property, capital gains, and other incomes are all correctly categorised, deductions are maximised, and losses are set off optimally. Contact us for complete ITR preparation and filing under ITA 2025.
13. Resources & Checklist
- ☐ List all income sources and classify under the correct head
- ☐ Salary: Check Form 16 for perquisites, allowances, and HRA details
- ☐ House Property: Determine let-out / SOP status; compute annual value
- ☐ Business/Profession: Check if presumptive scheme applies
- ☐ Capital Gains: Compute separately for equity, property, gold — different rates apply
- ☐ Other Sources: Include FD interest, dividend, and any gifts received
- ☐ Check set-off rules before filing to optimise loss adjustment
14. Contact Us
Every Indian taxpayer's income falls under one or more of these five heads. Accurate classification, correct deduction claims, and optimal loss set-off are what TaxClue does best. Contact us for expert ITR filing for Tax Year 2026-27.