Month: May 2026

What are the 5 Heads of Income Tax?

Posted on by CA Meet Dhrangadhariya

Last updated: 17 July 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • All income is sorted into five heads: salary, house property, profits and gains of business or profession, capital gains, and income from other sources.
  • Each head has its own rules for what is taxable and which expenses and deductions are allowed.
  • Capital gains are taxed by holding period and asset type, for example 12.5% on long-term gains from most assets sold on or after 23 July 2024.
  • Correct classification decides how tax is computed and which ITR form you file.

Under the Income Tax Act, all income is sorted into five heads of income: salary, house property, profits and gains of business or profession, capital gains, and income from other sources. Each head has its own rules for what is taxable and which expenses and deductions are allowed. Putting each income under the correct head is the first step in computing tax and in choosing the right ITR form. The five heads continue under the Income-tax Act, 2025 (from 1 April 2026), although section numbers have changed. Section numbers quoted below are those of the 1961 Act.

The Five Heads of Income

  1. Income from Salary
  2. Income from House Property
  3. Profits and Gains of Business or Profession
  4. Capital Gains
  5. Income from Other Sources

1. Income from Salary

Salary is income received under a contract of employment. It includes basic pay, allowances, advance salary, bonus, commission, perquisites, gratuity, leave encashment and pension.

  • Section 15 describes what is taxable as salary.
  • Section 16 gives the deductions from salary, mainly the standard deduction.
  • Section 17 defines salary, perquisites and profits in lieu of salary.

Some allowances are exempt in the old regime, for example House Rent Allowance (HRA) for those living in rented houses. A transport allowance of up to ₹3,200 per month for certain specially-abled employees (Rule 2BB) is exempt in both regimes. The new regime allows very few other exemptions but gives a standard deduction of ₹75,000 (₹50,000 in the old regime).

2. Income from House Property

Rent from a building or land attached to it is taxed under this head. The tax is computed on the annual value of the property, less municipal taxes and the standard deduction of 30%, less interest on a home loan.

There are three kinds of property:

  1. Self-occupied property
  2. Let-out property
  3. Deemed let-out property

Up to two self-occupied houses are treated as self-occupied with nil annual value. Any other house is treated as deemed let-out. Interest on a loan for a self-occupied house is allowed up to ₹2 lakh in the old regime. Income from a house property is reported in Schedule HP of the ITR.

3. Profits and Gains of Business or Profession

Profits from any business or profession are taxed under this head after deducting the expenses allowed. It covers:

  • Profits of a trade, manufacture or service business, and professional income.
  • Income taxed under the presumptive schemes of sections 44AD, 44ADA and 44AE.
  • Profit or loss from futures and options trading and intraday trading in shares (speculative income is treated separately).
  • Salary, bonus, commission and interest received by a partner from the firm, to the extent allowed.
  • Certain incentives, licences and export benefits connected to the business.

Individuals and HUFs with business or professional income file ITR-3, or ITR-4 under the presumptive scheme.

4. Capital Gains

Profit from selling a capital asset such as property, shares, mutual funds, gold or bonds is taxed under capital gains. The gain is short-term or long-term, depending on how long the asset was held.

Asset Held for long-term if more than Short-term gain tax Long-term gain tax (sale on or after 23 July 2024)
Land and building 24 months Slab rates 12.5% without indexation
Unlisted shares 24 months Slab rates 12.5% without indexation
Listed shares and equity mutual funds 12 months 20% 12.5% on gains above ₹1.25 lakh a year
Other assets such as gold 24 months Slab rates 12.5% without indexation
Debt mutual funds bought after 1 April 2023 Not applicable Slab rates Slab rates

For land and buildings bought before 23 July 2024, resident individuals and HUFs can choose to pay 20% with indexation instead of 12.5% without it. Capital gains are reported in Schedule CG, and individuals with capital gains generally file ITR-2 or ITR-3.

5. Income from Other Sources

Anything that is taxable but does not fall under the four heads above comes here. Common examples are interest on savings accounts and fixed deposits, dividends, winnings from lotteries and games, gifts above the limit, and rent from plant, machinery or furniture when it is not business income.

Heads of Income vs Sources of Income

A source of income is where the money comes from, for example a salary, a fixed deposit, a rented flat or a business. A head of income is the tax category the Act puts that source into. Many sources can fall under one head, and each head has its own computation rules.

Conclusion

Knowing the five heads helps you report each income in the right place, claim the deductions that belong to it and file the correct ITR form. Consult a qualified professional if an income is difficult to classify.

Frequently asked questions

What are the 5 heads of income?

Income from salary, income from house property, profits and gains of business or profession, capital gains, and income from other sources.

Which head does interest income come under?

Interest on savings accounts and fixed deposits is taxed under Income from Other Sources, unless it is a business receipt.

What is the difference between a head and a source of income?

A source is where the money comes from, such as a job or a rented flat. A head is the tax category the Act puts that source into.

Do the five heads continue under the Income-tax Act, 2025?

Yes. The five heads continue from 1 April 2026, with new section numbers.

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Types Of Taxes In India: Direct Tax And Indirect Tax

Posted on by CA Meet Dhrangadhariya

Last updated: 28 September 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Taxes in India are direct (income tax, Securities Transaction Tax) or indirect (GST, customs duty, limited central excise, state VAT on petroleum and alcohol).
  • Direct taxes are borne by the person on whom they are levied; indirect taxes are passed on to the final consumer.
  • Wealth tax, gift tax and fringe benefit tax no longer exist, and GST replaced service tax, sales tax, state VAT on most goods and octroi.
  • The note compares both kinds with advantages, disadvantages and a difference table.

Taxes in India are broadly classified into direct taxes, such as income tax, and indirect taxes, such as GST and customs duty. Direct taxes are paid by the person on whom they are levied. Indirect taxes are included in the price of goods and services, and the burden passes to the final consumer. Knowing the types of taxes helps taxpayers comply with the law and plan their finances.

Types Of Taxes In India

Direct taxes are administered by the Central Board of Direct Taxes (CBDT). Indirect taxes (GST, customs and central excise) are administered by the Central Board of Indirect Taxes and Customs (CBIC).

Direct Taxes

A direct tax is levied on the income or profits of a person, who has to bear it and cannot pass it on to someone else. The main direct taxes in force are:

  • Income tax: charged on the income of individuals, HUFs, firms, companies and other persons. Capital gains tax is part of income tax. Surcharge and the 4% health and education cess are added on top of income tax.
  • Securities Transaction Tax (STT): charged on specified transactions in listed securities. It is a direct tax collected at the time of the transaction.

Several direct taxes that older books still list no longer exist: wealth tax (abolished from AY 2016-17), gift tax (abolished in 1998; gifts above the prescribed limit are now taxed as income) and fringe benefit tax (abolished from AY 2010-11).

Indirect Taxes

An indirect tax is charged on goods and services. It is collected by the seller and the burden is passed on to the end consumer. The main indirect taxes in force are:

  • Goods and Services Tax (GST): a single tax on the supply of goods and services, in force since 1 July 2017. It replaced service tax, central excise on most goods, state VAT on most goods, central sales tax, octroi and entry tax, and removed the cascading effect.
  • Customs duty: charged on goods imported into India.
  • Central excise duty: now limited to a small set of goods, mainly petroleum products.
  • State VAT: still levied by states on petrol, diesel and alcohol for human consumption.

Other levies

Some levies are neither central direct nor indirect taxes: property tax (local municipal), stamp duty and registration fees (state), and professional tax (state, capped at Rs 2,500 a year under the Constitution). A toll is a fee for using a road, not a tax.

Direct taxes Indirect taxes Other levies
Income tax (including capital gains) GST Property tax
Securities Transaction Tax Customs duty Stamp duty and registration fees
Central excise (limited goods) Professional tax
State VAT (petroleum, alcohol) Toll (a fee)

Advantages And Disadvantages Of Direct Tax

Advantages Disadvantages
Progressive in nature: people with lower incomes pay less tax than people with higher incomes. Some taxpayers evade or avoid tax.
Helps reduce income inequality. Compliance and documentation can be complex and time-consuming.
Certainty: the government and the taxpayer both know what is to be paid and when. The burden cannot be transferred to anyone else.

Advantages And Disadvantages Of Indirect Tax

Advantages Disadvantages
Everyone who spends contributes to nation-building. Raises the overall price of goods and services.
Easy to collect from the end consumer. Consumers often do not know how much tax they pay.
Lower rates can be applied to essential goods and higher rates to luxury goods. Regressive in nature, as it takes a larger share of low incomes.
The burden can be passed to the end consumer. Revenue is hard to predict because it depends on what people buy.

Difference Between Direct Tax And Indirect Tax

Basis Direct Tax Indirect Tax
Definition Tax levied directly on the income or profits of a person. Tax levied on the supply of goods and services.
Burden of Tax Cannot be shifted; borne by the person on whom it is imposed. Can be shifted; ultimately borne by the end consumer.
Governing Body Central Board of Direct Taxes (CBDT). Central Board of Indirect Taxes and Customs (CBIC).
Examples Income tax, Securities Transaction Tax. GST, customs duty, central excise.
Impact on Prices Does not directly affect the price of goods and services. Forms part of the price of goods and services.
Payment Paid directly to the government by the taxpayer. Collected by the seller or service provider and paid to the government.

Now that you know the main types of taxes in India, it is easier to see which ones apply to you.

Frequently asked questions

What are the two main types of taxes in India?

Direct taxes, such as income tax, which are paid by the person on whom they are levied, and indirect taxes, such as GST and customs duty, which are passed on to the final consumer.

Is wealth tax still charged in India?

No. Wealth tax was abolished with effect from AY 2016-17. Gift tax was abolished in 1998 and gifts above the prescribed limit are now taxed as income.

Which taxes did GST replace?

GST replaced service tax, central excise on most goods, state VAT on most goods, central sales tax, octroi and entry tax.

Who administers direct and indirect taxes?

Direct taxes are administered by the Central Board of Direct Taxes (CBDT) and indirect taxes such as GST, customs and central excise by the Central Board of Indirect Taxes and Customs (CBIC).

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.