Head of Income

Head of Income refers to the classification under which different types of income are grouped for taxation under the Income Tax Act. Every income earned by a taxpayer must be reported under the correct head to determine the applicable tax treatment.

This classification is the foundation of accurate income tax computation.

1. Five Heads of Income

Income is divided into the following five categories:

Income from Salary

• Salary, wages, bonus, pension
• Allowances like HRA, LTA
• Perquisites provided by employer

Income from House Property

• Rental income from property
• Deemed rent for multiple properties
• Deduction for interest on home loan

Profits and Gains from Business or Profession (PGBP)

• Income from business activities
• Professional income (CA, doctor, consultant, etc.)
• Includes presumptive taxation cases

Capital Gains

• Profit from sale of capital assets
• Includes property, shares, gold, etc.
• Classified as short-term or long-term

Income from Other Sources

• Residual category for income not covered above
• Includes interest income, dividends, gifts, lottery winnings, etc.

2. Why Correct Classification Matters

Each head has:

• Different tax rules and deductions
• Different computation methods
• Different loss set-off rules

Wrong classification can lead to excess tax or notices.

3. Key Rules to Remember

• One income can fall under only one head
• Specific heads override general ones (e.g., rent → house property, not other sources)
• Proper segregation is essential for compliance

4. Common Mistakes

• Showing business income under “other sources”
• Incorrectly reporting rental income
• Mixing capital gains with regular income
• Ignoring head-specific deductions

These errors are common triggers for scrutiny.

Practical Insight

Most people think tax is about rates.

It’s not.

It’s about classification first, calculation later.

If the head of income is wrong, everything that follows is wrong:

• deductions
• exemptions
• final tax liability

How N D Savla & Associates Can Help

At N D Savla & Associates, we help you:

• Classify income correctly across all heads
• Optimise deductions under each category
• Ensure accurate tax computation and filing
• Avoid misreporting that leads to notices