Heads & Scope of Total Income - Residential Status and Scope of Total Income, Income Tax Laws | Income Tax Laws - B Com PDF Download

Although there is only one tax on the income calculated under various heads, but, there are different rules of computation of income under each head and income has to be computed under that head of income after applying such rules only.

The Five Heads of Income have been briefly explained here under:

1. Income from Salaries

An Income can be taxed under head Salaries if there is a relationship of an employer and employee between the payer and the payee. If this relationship does not exist, then the income would not be deemed to be income from salary.

If there is no element of employer-employee relationship, the income shall be not assessable under this head of income.

The method of computation of Income from Salaries has been explained in detail in the following link.

2. Income from House Property

Tax on Income from House Property is the tax on rental income which is being earned from the House Property. However, in case the property is not being rented out, tax would be levied on the expected rent that would have been received if this property was rented out.

Income from House Property is perhaps the only income that is charged to tax on a notional basis. Tax under this head does not only include Income from letting out of House Property but also includes Income from letting out of Commercial Properties and all types of properties. Various Deductions like Standard Deduction, Deduction for Municipal Taxes paid and Deduction for Interest on Home Loan is also allowed under this head of income.

TDS on Rent @ 10% is also to be deducted by the payer before making payment   in case the value of rent is more than a specified limit. Service Tax on Rent is also to be levied in certain cases.

3. Profits and Gains from Business or Profession

Any income earned from any trade/commerce/manufacture/profession shall be chargeable under this head of income after deducting specified expenses.

4. Income from Capital Gains

Any profits or gains arising from the transfer of a capital asset effected in the financial year shall be chargeable to Income Tax under the head ‘Capital Gains’ and shall be deemed to be the income of the year in which the transfer took place unless such capital gain is exempt under section 54, 54B, 54D, 54EC, 54ED, 54F, 54G or 54GA.

5. Income from Other Sources

Any Income which is not chargeable to tax under the above mentioned four heads of income shall be chargeable under this head of income provided that income is not exempt from the computation of total income.

SCOPE OF TOTAL INCOME (SECTION 5)

Section 5 provides the scope of total income in terms of the residential status of the assessee because the incidence of tax on any person depends upon his residential status. The scope of total income of an assessee depends upon the following three important considerations: 

(i) the residential status of the assessee (as discussed earlier);
(ii) the place of accrual or receipt of income, whether actual or deemed; and
(iii) the point of time at which the income had accrued to or was received by or on behalf of the assessee. 

The ambit of total income of the three classes of assessees would be as follows:

(1) Resident and ordinarily resident - The total income of a resident assessee would, under section 5(1), consist of:

(i)  income received or deemed to be received in India during the previous year;
(ii)  income which accrues or arises or is deemed to accrue or arise in India during the previous year; and
(iii)  income which accrues or arises outside India even if it is not received or brought into India during the previous year. 

In simpler terms, a resident and ordinarily resident has to pay tax on the total income accrued or deemed to accrue, received or deemed to be received in or outside India. 

(2) Resident but not ordinarily resident – Under section 5(1), the computation of total income of resident but not ordinarily resident is the same as in the case of resident and ordinarily resident stated above except for the fact that the income accruing or arising to him outside India is not to be included in his total income. However, where such income is derived from a business controlled from or profession set up in India, then it must be included in his total income even though it accrues or arises outside India. 

(3) Non-resident - A non-resident’s total income under section 5(2) includes:

 (i)  income received or deemed to be received in India in the previous year; and 

(ii)  income which accrues or arises or is deemed to accrue or arise in India during the previous year. 

Note: All assessees, whether resident or not, are chargeable to tax in respect of their income accrued, arisen, received or deemed to accrue, arise or to be received in India whereas residents alone are chargeable to tax in respect of income which accrues or arises outside India.