Five Heads of Income Under Income-tax Act 2025 — Complete Guide
Updated: 3 June 2026 | Income-tax Act, 2025 (Chapter IV) | Verified against CBDT notifications
Every rupee of income must fall under one of these five heads — compute each head separately, then sum to Gross Total Income.
Head 1 — Salaries (Sections 15–17)
Income is taxable under the Salaries head only if an employer-employee relationship exists. The existence of a master-servant relationship, the right to control the work, and the fact that remuneration is paid for services rendered are the key tests. This head covers:
Chargeability
Salary is chargeable on due basis or receipt basis, whichever is earlier. Advance salary, arrears, and salary in lieu of notice are all included. Salary from a former employer for past services also falls here.
Deductions from Salary
Standard Deduction of ₹75,000 (increased in Budget 2024, from ₹50,000) is available to all salaried employees and pensioners in both old and new regimes. Entertainment allowance deduction and professional tax paid are also deductible under Section 16.
Salary, Perquisites, and Profits in Lieu of Salary
Section 17 defines what constitutes "salary" (basic pay, dearness allowance, commission, bonus, leave encashment, pension), "perquisites" (rent-free accommodation, company car, ESOPs, club membership, interest-free loans above ₹20,000), and "profits in lieu of salary" (compensation for termination, golden handshake, amounts received from unrecognised provident funds).
Head 2 — Income from House Property (Sections 22–27)
The annual value of any building or land appurtenant to it, owned by the taxpayer, is taxable under this head — provided it is not used by the owner for business or profession purposes charged under PGBP. The Annual Value (AV) is the higher of actual rent received or fair market rent (municipal value or standard rent, whichever is higher).
Annual Value Computation
For let-out property: AV = higher of actual rent or expected rent (municipal/fair rent), reduced by vacancy allowance. For self-occupied property (up to 2 properties): AV = Nil. For a deemed let-out third property: AV = expected market rent even if vacant.
Deductions from House Property Income
Standard deduction: 30% of Net Annual Value (NAV) — available as-is, no proof required.
Section 24(b) — Interest on home loan: Up to ₹2,00,000 for self-occupied property (loan for construction/purchase). Full interest (no cap) for let-out property. Pre-construction interest is deductible in 5 equal instalments starting from the year of completion.
Head 3 — Profits and Gains of Business or Profession (Sections 28–44)
All income derived from carrying on a business or profession is taxable under PGBP. This is the most complex head, covering sole proprietors, partners, professionals (doctors, lawyers, CAs, architects), and companies carrying on trade or commerce. Key inclusions:
What is Chargeable
Profits from any business or profession; any compensation for termination of managing agency; income from speculative transactions; value of any benefit or perquisite arising from business; export incentives; income of a firm charged in partners' hands.
Allowable Deductions
Rent, rates, and repairs for premises (Section 30); plant and machinery repairs (Section 31); depreciation on assets (Section 32, including additional depreciation for manufacturing); scientific research expenditure (Section 35); preliminary expenses amortisation (Section 35D); bad debts (Section 36); general business expenditure — wholly and exclusively for business purposes (Section 37).
Presumptive Taxation
Small businesses (turnover up to ₹3 crore with 95%+ digital receipts) can declare 6–8% of turnover as profit under Section 44AD without maintaining books. Eligible professionals (Section 44ADA) can declare 50% of gross receipts up to ₹75 lakh as profit. Goods carriage operators use Section 44AE.
Head 4 — Capital Gains (Sections 45–55)
Any profit or gain arising from the transfer of a capital asset is chargeable under this head. Capital assets include property, shares, gold, jewellery, bonds, and mutual fund units. They are classified as Short-Term Capital Assets (STCA) or Long-Term Capital Assets (LTCA) based on the holding period.
STCA vs LTCA Thresholds
Listed shares / equity MFs: held < 12 months = STCA; ≥ 12 months = LTCA.
Unlisted shares / immovable property: held < 24 months = STCA; ≥ 24 months = LTCA.
Debt mutual funds / gold: held < 36 months = STCA; ≥ 36 months = LTCA.
STCG and LTCG Tax Rates (Post Budget 2024)
STCG on listed equity and equity MFs (Section 111A): 20% (raised from 15%, effective 23 Jul 2024).
LTCG on listed equity and equity MFs (Section 112A): 12.5% (raised from 10%) on gains above ₹1.25 lakh (raised from ₹1 lakh).
LTCG on other assets (property, gold, unlisted shares — Section 112): 12.5% without indexation (indexation removed in Budget 2024 for new cases, with transition provisions for property).
STCG on other assets: slab rate applicable.
Head 5 — Income from Other Sources (Sections 56–59)
This is the residual head — any income not taxable under the first four heads falls here. Common examples include:
Specifically Chargeable Items
Interest on FDs, savings accounts, bonds, and debentures; dividends from shares and mutual funds; winnings from lotteries, crossword puzzles, horse races, card games (taxed at 30% flat — no deduction allowed); rental income from plant/machinery not used in business; family pension (after standard deduction of 33.33% or ₹25,000, whichever is lower); gifts received above ₹50,000 from non-relatives in a year (taxed as income).
Deductions Allowed
Interest paid on loan taken to earn dividend income; collection charges; repairs and depreciation for machinery/plant given on rent. Expenditure incurred wholly and exclusively for earning the income is deductible, except for lottery/gambling winnings where no deduction is permitted.
Five Heads of Income — Quick Reference Table
| Head | Governing Sections | Key Inclusions | Key Deductions |
|---|---|---|---|
| Salaries | 15–17 | Basic pay, DA, HRA, allowances, perquisites, pension, bonus, leave encashment | Standard Deduction ₹75,000; HRA exemption (Sec 10(13A)); professional tax |
| House Property | 22–27 | Rental income from let-out property; deemed rent on third+ property | 30% standard deduction; Interest on home loan (Sec 24(b)) up to ₹2L for SOP |
| PGBP | 28–44 | Business profits, professional fees, speculative income, export benefits | Actual business expenses (Sec 30–37); depreciation; 80% of qualifying expenses |
| Capital Gains | 45–55 | Sale of property, shares, MFs, gold, bonds; STCG and LTCG | Cost of acquisition and improvement; brokerage; indexation (where applicable) |
| Other Sources | 56–59 | FD/savings interest, dividends, winnings, gifts, family pension | Expenditure for earning income (Sec 57); nil for lottery/gambling |
Gross Total Income (GTI) vs Total Income
Gross Total Income (GTI) = Sum of income computed under all five heads (after permitted intra-head and inter-head set-offs of losses).
Total Income (Taxable Income) = GTI − Deductions under Chapter VI-A (e.g., 80C, 80D, 80G, 80TTA, 80TTB, etc.).
Tax is computed on Total Income at the applicable slab rates or special rates (for capital gains, lottery winnings). Under the new tax regime, most Chapter VI-A deductions are not available (except 80CCD(2)), so GTI and Total Income are largely equal for new-regime taxpayers.
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