Five heads of income
Every rupee of taxable income in India falls under one of five heads — salary, house property, business or profession, capital gains, or other sources — and total income is their sum.
In plain language
Indian income tax does not tax "income" as one undifferentiated pile of money. It sorts every rupee into one of exactly five heads, and each head has its own rules for what counts, what can be deducted, and how losses can be used.
The five: Salary, House Property, Profits and Gains from Business or Profession, Capital Gains, and Income from Other Sources.
Total income is simply the sum of whatever is computed under each of these five heads, after clubbing provisions and set-off of losses are applied.
How it works
What sits under each head, briefly:
- Salary — wages, pension, perquisites, and profits in lieu of salary from an employer-employee relationship. Taxed on a due or receipt basis, whichever is earlier (with ESOPs as a specific exception).
- House Property — income from a building or land appurtenant to it, computed after municipal taxes and a standard deduction, split into self-occupied, let-out and deemed let-out categories.
- Profits and Gains from Business or Profession — income from a systematic, continuous trade, commerce, manufacture or profession, split further into speculative and non-speculative business.
- Capital Gains — profit on the transfer of a capital asset, split into short-term and long-term based on the period of holding.
- Income from Other Sources — the residual head: anything not falling under the first four, plus certain items the Act always routes here regardless (such as dividend income, lottery winnings, and interest on securities).
Why the classification matters, beyond naming. The same receipt can be taxed very differently depending on which head it falls under. The workbook's own example: rent from a vacant plot of land with no building on it does not qualify as "house property" income at all — because that head requires a building or land appurtenant to one — so it is instead taxed as business income or income from other sources, under different computation and deduction rules entirely.
Gross Total Income is computed in three steps: compute income under all five heads, club in any income of other persons required by law, then set off current and brought-forward losses within and across heads, subject to the specific set-off rules for each head.
A worked example
Mrs Bhatt's income in a year:
Salary from her employer Rs 18,00,000
Rent from a let-out flat, after standard deduction Rs 2,10,000
Profit from a small consultancy she runs on the side Rs 4,50,000
Long-term capital gain on shares sold, above exemption Rs 75,000
Dividend received from her mutual fund holdings Rs 60,000
Salary Rs 18,00,000
House property Rs 2,10,000
Profits and gains of business/profession Rs 4,50,000
Capital gains Rs 75,000
Other sources (dividend) Rs 60,000
-------------
Total income under the five heads Rs 25,95,000
Each of these five figures is computed under its own head's specific rules before being added together — the dividend, for instance, cannot simply be netted against a business expense, because the two sit under different heads with different computation rules.
Why NISM asks about it
Chapter 7 (Concepts of Taxation), section 7.6, "Five Heads of Income," introduces the classification and works through each head in its own subsection (7.6.1 to 7.6.5), before section 7.12 uses the same five-way split to define Gross Total Income. Expect a classification question — which head does a given receipt fall under — and a computation question building Gross Total Income from a short list of receipts across different heads.
Common exam traps
- Every receipt goes under exactly one head — the classification is not optional and is not left to the taxpayer's convenience.
- Rent from vacant land, with no building, is not house property income — a frequently tested exception, since the head requires a building or land appurtenant to it.
- Set-off rules differ sharply by head — capital losses, for instance, cannot be set off against any other head at all, while a business loss can be set off against most heads except salary.
- Dividend is always income from other sources, however it might intuitively feel connected to capital gains on the same shares — the two are computed and taxed completely separately.
- Do not confuse Total Income (after Chapter VI-A deductions) with Gross Total Income (before them) — both are built from the same five heads, but at different stages of the computation.
Where this is taught
Free preparation for NISM Series X-BRelated terms
- Clubbing of incomeSections 60 to 64 add someone else's income to yours — the Act's answer to families who move income to a lower-taxed relative while keeping the asset.
- Final dividendA dividend declared at the AGM, taxable in the shareholder's hands in the year it is declared — unlike an interim dividend, which is taxed only in the year it is actually made available to the shareholder.
- Income from other sourcesThe head of income under which interest and dividends earned in a PMS are taxed, at the investor's slab rate — with no indexation or capital gains benefit.
- Indian incomeThe Income-tax Act's shorthand for total income excluding income from foreign sources — the figure tested against Rs 15 lakh in the deemed resident and 120-day residence rules.
- Section 115BAC regimeThe tax regime that applies by default under Section 115BAC(1A) unless the taxpayer opts out under Section 115BAC(6) — and which caps the surcharge at 25% instead of 37%.
- Section 80M deductionA deduction that stops the same dividend being taxed twice in a corporate chain: an Indian company that receives dividend from another Indian company and passes it on in time can deduct what it received.
- Effective rate of taxThe actual tax paid as a percentage of income — not a defined term in the Income Tax Act, but total tax including surcharge and cess, divided by total income.
- Pre-construction interestInterest paid on a home loan for the period before the property was acquired or constructed, deductible from house property income in 5 equal instalments starting the year of acquisition or construction.
- Post-tax advantage of open-ended debt fundsThe workbook's point that a growth-option open-ended debt fund can beat a comparable debt instrument on post-tax return, since a withdrawal from it is part return of capital, not fully taxable interest.
- Inclusive definition of income (Section 2(24))Section 2(24) of the Income Tax Act lists specific sums as "income" but does not close the list — any other receipt of an income-like nature can still be taxed even if it is not named there.
- Gross Total Income (Section 80B(5))The total income computed under the Act before any Chapter VI-A deduction — arrived at by adding the five heads of income, clubbing any income the law attributes to the assessee, and setting off losses.
- Income from foreign sourcesIncome accruing or arising outside India, other than income from a business controlled in or a profession set up in India, and not deemed to accrue or arise in India.
- Interest on borrowings to purchase securitiesInterest paid on money borrowed to acquire securities, allowed as a permissible deduction from gross interest on securities when computing income from other sources.
- Interest on securities (Section 2(28B))Interest on any security of the Central or a State Government, and interest on debentures or other securities for money issued by a local authority, a company, or a statutory corporation.
- Land appurtenant theretoLand attached to and forming part of a building, whose income is taxable under income from house property only because the building is there — vacant land alone is not.
- Unabsorbed depreciationDepreciation that could not be set off in the year it arose — treated as a separate item from business loss, carried forward for any number of years, and set off against any income except salary.