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Unit 11: Taxation Planning

largely availed of by the tax payers. Productive investments increase contours of the Notes
national economy embracing in itself the economic prosperity of not only the taxpayers
but also of those who earn the income not chargeable to tax .The planning thereby creates
economic stability of the nation and its people by even distribution of economic resources.

11.5 Income and Various Heads of Income

11.5.1 Income

In order to tax the income of a person the term itself is designed under the Income Tax Act. As per
the Act the term Income includes:
a. Profits and gains of Business or Profession: This includes income from carrying on a
business or income earned by doing any profession.
b. Dividend
c. Profit in lieu of Salary, perquisite: This includes any amount received by an employee
from his employer other then the salary amount.
d. Allowances granted to the assessee to meet his expenses incurred for performance of his
duties: This includes allowances such as HRA, Medical allowance, etc given by an employer
to his employee.
e. Any capital gains: This means any profit derived on sale of any capital asset.
f. Winning from lotteries, crossword puzzles, races, card game, T.V. Show , etc

g. Any sum received for fund created for welfare of employees.

Notes One interesting thing in the definition of income is that it can be received in cash or
in kind. More over the Income Tax Act does not make distinction between legal source of
income or illegal source of income. This means that gambling, smuggling income is also
chargeable to tax under the Income Tax act. More over gifts of personal nature for e.g.
birthday/marriage gifts are not treated as income (but there are some exceptions in this).

In all this one more thing is that the term income does not only means profits but there is a
concept of negative income also.

11.5.2 Various Heads of Income

In the Income Tax any income earned by a person is broadly categorised into five heads of
income. Any income earned to be taxed must come under any of the five heads of income. The
five heads of income are:

Income under Head Salaries

This head taxes the income earned by an individual as salary from any firm or organisation.

As per the income tax law in India any income that is generated under the territory of the
country is subjected to the income tax. Salary is taxed differently than the products as income tax
is applicable on salary where as on commodities there is service tax and value added tax is
applicable on it. The term salary is defines as any kind of remuneration that is generated
through professional services, personal services and from different jobs in the organization.

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