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Unit 4.2 Income Tax

The document discusses the computation of total income for income tax purposes in India. It outlines the five main heads of income according to Section 14 of the Income Tax Act: (1) income from salary, (2) income from house property, (3) income from profits and gains of business or profession, (4) income from capital gains, and (5) income from other sources. It then provides details on what types of income fall under each of these five categories and the rules for setting off losses against income across categories.

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0% found this document useful (0 votes)
20 views5 pages

Unit 4.2 Income Tax

The document discusses the computation of total income for income tax purposes in India. It outlines the five main heads of income according to Section 14 of the Income Tax Act: (1) income from salary, (2) income from house property, (3) income from profits and gains of business or profession, (4) income from capital gains, and (5) income from other sources. It then provides details on what types of income fall under each of these five categories and the rules for setting off losses against income across categories.

Uploaded by

SAMIR AHMED
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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 FRIDAY FIRST CUT

Unit 4.2 Computation of Total income


salaries, Income from house property, profit
and gains from business and profession,
Capital gains and other sources of income.
Aggregation of income and carry forward
and set off
Five heads of Income eligible for Income
Tax Computation
As per the Section 14 of the Income Tax Act of 1961, there can be several modes of income for
an individual. The income tax computation is an important part and has to be calculated according
to the income of a person. For a hassle-free computation, the income has to be classified
properly so that there is zero confusion regarding the same. The government has classified the
sources of income under separate heads and then the income tax is computed accordingly. The
provisions and rules are according to the details mentioned in the Income Tax Act.
The five main heads of income according to the above-mentioned Section 14 for the
computation of the Income Tax in India are:
 Income from Salary
 Income from House Property
 Income from Profits and Gains of Business or Profession
 Income from Capital Gains
 Income from Other Sources
Let us understand these one by one in detail.

Income from Salary


This head essentially includes any remuneration, which is received by an individual on terms of
services provided by him based on a contract of employment. This amount qualifies to be
considered for income tax only if there is an employer-employee relationship between the payer
and the payee respectively. Salary also include the basic wages, advance salary, pension,
commission, gratuity, perquisites as well as annual bonus.

The important point to note here is that salary is taxable on due basis or received basis whichever
is earlier. Let me explain this with the help of an example. If you receive salary for the month of
march 2020 in April 2020, it will still be taxable in previous year 2019-20. This is because it was
due in march. Similarly if your employer has given you salary of April and May in advance in the
month of March, then it will be taxable again in the month of march itself.

Therefore, salary income will be taxable on due basis or received basis whichever is earlier.

Income from House Property


According to the Income Tax Act 1961, Sections 22 to 27 is dedicated to the provisions for the
income tax computation of the total standard income of a person from the house property or land
that he or she owns.
In simple terms, this head includes rental income received from the properties. For tax
computation purposes, the property in which you are staying and not earning any rental income
can give you benefit. This benefit is in the form of deductions of interest paid on home loan.

However, if the property is utilized for letting out the normal course of business, then the income
from the rent will be considered.

Income from Profits of Business


The income tax computation of the total income will be attributed from the income earned from
the profits of business or profession. The difference between the expenses and revenue earned will
be chargeable. Here is a list of the income chargeable under the head:
 Profits earned by the assessee during the assessment year
 Profits on income by an organisation
 Profits on sale of a certain license
 Cash received by an individual on export under a government scheme
 Profit, salary or bonus received as a result of a partnership in a firm
 Benefits received in a business
Income from Capital Gains

Capital Gains are the profits or gains earned by an assessee by selling or transferring a capital asset,
which was held as an investment.

Capital asset can be real estate, stocks, Mutual funds, Bonds, Gold etc.

So whenever you sell a capital asset and earn gains. This is considered as your income which will
be taxable under the head Capital Gain.

Just to clarify, please note that rental income from property is taxed under “Income from house
Property” but if you sell the property and experience gain, it will be taxed under “capital gain”.

Income from Other Sources


This is the last head of income. Any other form of income, which is not categorized in the above
mentioned 4 heads, can be sorted in this category.

Some of the examples can be interest income from bank deposits, lottery awards, card games,
gambling or other sports awards are included in this category.

These incomes are attributed in the Section 56(2) of the Income Tax Act and are chargeable for
income tax.

 Carry Forward & Set Off of Losses


Set off
Set off means setting off the loss in the same Assessment Year in which it is incurred.
Carry forward and Set off
Carry forward and Set off means carrying forward the losses and setting them off in
the future Assessment Years.
There are total five heads of income under Income Tax Act namely:

1. Income under the head Salary


2. Profit or Gains from Business or Profession
3. Income under the head Capital Gains
4. Income under the head House Property
5. Income under the head Other Sources

Whatever income assesses earns is being classified under the five heads under
Income Tax Act for the purpose of collection of Taxes. For the purpose of Set off or
Carry Forward and Set off of the losses (losses other than Dead Losses) under the
five heads also the provisions are made keeping in mind the heads of income.

Set off or Carry forward and Set off of the losses


under the head Salary:
As there can never be a loss under the head salary set off or carry forward of the same
is not possible.
Carry forward and Set off of the losses under the head Other Sources is not
allowed.
Set Off of Losses
Set off of the losses is being allowed in the following manner:

1. Intra Head Adjustment


2. Inter Head Adjustment

1. Intra Head Adjustment


Intra Head means setting off the loss within the same head. Example: Setting off the
loss under PGBP from manufacturing business with the income under PGBP from
trading business. Under the Income tax Act all kind of Intra head adjustments are
allowed except the following cases:

1. Losses from speculative business cannot be set off against income from non-
speculative business. But Losses from non-speculative business can be set off with
income from speculative business.
2. Long Term Capital Loss cannot be set off with Short Term Capital Gain.
3. No Loss can be Set off with any casual income i.e. Income from lotteries, crossword
puzzles, race including horse race, card game, and any other game of any sort or
from gambling or betting of any form or nature.
4. Losses from the business of owning and maintaining race horses cannot be set off
against any income other than income from the business of owning and maintaining
race horses.
5. Losses from the business specified under Section 35AD (Specified Business)
cannot be set off against Incomes other than income from business specified under
Section 35AD. But Losses from Non-Specified Business can be set off against
Income of Specified Business.
2. Inter Head Adjustment
Inter Head means setting off the loss of one head with income of other head. Example:
Setting off the loss under the head PGBP with the Income under the head Capital
Gains. Under the Income tax Act all kind of Inter head adjustments are allowed except
the following cases:

1. Losses from speculative business cannot be set off against income under any other
head.
2. Losses under the head PGBP cannot be set off against Salary Income.
3. Losses under the head Capital Gain cannot be set off against any other head. But
Losses under any other head can be set off with Income under the head Capital
Gain.
4. NO loss can be set off against casual incomes.
5. Losses from the business of owning and maintaining race horses cannot be set off
against any other head.
6. Loss from the business specified under section 35AD cannot be set off against any
other head of income.

Carry Forward & Set Off of Losses


The losses which could not be set off either by way of Intra head adjustments or Inter
head adjustments are allowed to be carried forward to the future years subject to the
conditions and restrictions as prescribed by the Act. Income Tax Act does not
allow Carry forward and set off of Losses under the head Other Sources.
Losses under the various heads of income can be carried forward and set off only if
the return has been filed on or before the due date of filing the return of income. But
this provision does not apply in case of carry forward of Loss under the head income
from House Property, it means loss under the head house property can be carried
forward even if the return is filed after the due date.

Losses under the head PGBP:


It can be set off against any income except salary in the year the loss is incurred. If
the loss could not be set off in the year loss was incurred it can be carried forward up
to 8 Assessment Years and loss will be allowed to set off against income under the
head PGBP. It can be simply concluded that in the year the loss is incurred both intra
& inter head adjustments are possible, but in the years of carry forward only intra head
adjustments are possible.

Losses under the head Capital Gains:


It can be set off or carry forward and set off in the following manner:
Losses Set off/Carry forward and Set off
Long Term Capital Loss Long Term Capital Gain
Short Term Capital Loss Long Term Capital Gain/Short Term Capital Gain
The losses which could not be set off in the year in which loss was incurred can be
carried forward for 8 Assessment Years.

Losses under the head House Property:


It can be set off against any income in the year the loss is incurred. If the loss could
not be set off in the year loss was incurred it can be carried forward up to 8 Assessment
Years and loss will be allowed to set off against income under the head House
Property. It can be simply concluded that in the year the loss is incurred both intra &
inter head adjustments are possible, but in the years of carry forward only intra head
adjustments are possible.

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