MODULE 2 TAX LAW

• Income not included in the Total Income (Exemption S 10)

• Residential status,

• Clubbing of Income,

• Rate of Income Tax, (Tax slab)

• Heads of Income, Salaries, Income from House Property, Income from Business or Profession,
Capital Gains, Income from Other sources,

• Deductions under the Income Tax Act, 1961

Income not included in the Total Income

Rate of Income Tax

What are the 5 Heads of Income?

As per Section 14 of ‘Heads of Income’ of the Income Tax Act, 1961, all income for the
purpose of charging it under the Income Tax and for computing the total income, should be
classified under the following 5 heads:
 Income from Salaries
 Income from House Property
 Income from Profits and Gains from Business and Profession
 Income from Capital Gains
 Income from Other Sources
Income from Salaries
Amongst the 5 heads of income, the first head is 'Income from Salaries'. Where an income is
received by the employee from the employer, it is categorized under the head ‘Income from
Salaries’. Section 15 to Section 17 of the Income Tax Act, 1961, deals with the provisions of
computing income under the head salaries. The components of salaries include
compensation, wages, allowances, and annual bonus received by the employee while on
employment. Moreover, perquisites, gratuity, profit in lieu of salary, allowances,
commissions, and other benefits also form a part of the salary. The deductions from salaries
usually include professional tax, TDS, and contribution to the Public Provident Fund (PPF).
Few important exemptions allowed under the head salaries include:
 House Rent Allowance (HRA): Employees can claim exemption from HRA after
meeting the conditions related to: rent paid, salary, and the location of the residence
whether metro or non-metro cities.
 Standard Deduction: A flat deduction of INR 50000/ 75k is allowed from gross salary.
  Leave Travel Allowance (LTA): Employees can claim exemption from travel expenses
incurred while on leave. The maximum deduction can be allowed for two trips within
a four-year period.
 Conveyance Allowance: An exemption can be claimed towards the conveyance
allowance up to INR 19,200 per annum or INR 1,600 per month.
 Education Allowance: Employees can claim exemption from education allowance
subject to limits specified per child for a maximum of two children.

Income from House Property

Section 22 to Section 27 of the Income Tax Act, 1961, deals with the Income from House
Property. The income derived from renting out properties whether for residential or
commercial purposes are categorized under the head ‘Income from House Property’. The
property should be owned by the individual other than for business purposes. The tax on
such income is determined based on components such as: standard rent, municipal
valuation, and actual rent received.
In case an individual has more than one self-occupied house, only one house will be treated
as self-occupied for computing ‘Income from House Property’. The remaining houses will be
treated as deemed to be let out and accordingly deemed rent will be determined on the
same.

Income from Profits and Gains from Business and Profession

The ‘Income from Profits and Gains from Business and Profession’ includes income from
trade, commerce, business, profession or vocation conducted by individuals, partnerships, or
corporations. Section 28 to Section 44DB of the Income Tax deals with the computation of
profits and gains from business and profession. Moreover, income from manufacturing,
trading, self-employment, freelancing, consultancy, and professional services, are considered
under the head income from business and profession. The profits and gains from business
and profession is determined by subtracting business expenses, depreciation, and other
allowable deductions from gross income.
The following types of income are chargeable under the head ‘Income from Profits and
Gains from Business and Profession’:
 Profits from operating a business or trade.
 Income from the sale of goods or provision of services.
 Profits on sale of import license or duty entitlement.
 Cash assistance received under the Scheme of the Government of India by an
exporter.
 Benefits or bonuses received in the course of business.
  Interest, salary, bonus, commission, or remuneration received by the partners from
the partnership firm or LLP will be taxed in the hands of the partners under this
head.
 Gains from speculative business activities or transactions.
 Any amount received under the Keyman Insurance Policy including the bonus on
such policy.
Income from Capital Gains
The ‘Income from Capital Gains’ represents the gains from sale or transfer of capital assets
like property, shares, mutual funds, bonds, and so on. Section 45 to Section 55A of the
Income Tax deals with the determination of ‘Income from Capital Gains’. The types of capital
gains depend on the period of holding of capital assets. Thereby, the tax treatment of each
type of gain differs.
A long-term capital gain occurs when a capital asset is sold after 36 months from the date of
purchase and is taxed at the rate of 20%. If the capital assets are held for less than 36
months, the gains are said to be short-term and are taxed at 15%. However, in case of
securities, the holding period is 12 months for classifying the same under short-term and
long-term. Thus, if securities are held for less than 12 months, the capital gains will be
treated as short-term while those held for more than 12 months are considered as long-
term.
Income from Other Sources
Section 56 to Section 59 of the Income Tax deals with the determination of ‘Income from
Other Sources’. Incomes that do not fall under any of the above types, are included under
the head ‘incomes from other sources’. The examples of incomes from other sources include:
interest income from fixed deposits or savings accounts, gifts, dividends, royalty income,
dividends, winning from lotteries and gambling, and so on. These incomes are added to the
total income of the assessee and taxed at the applicable rates of taxes.