Income in India is taxed under five heads — salary, house property, business or profession, capital gains, and other sources — and each head has its own deductions, its own loss rules, and, for capital gains, its own rates. This guide explains the four heads the hub calculator treats in outline, shows how they aggregate into total income, and explains why the regime choice must be made on the whole return, not on salary alone.

The five heads of income

Indian income tax does not tax “income” as a single lump. It taxes income under five heads — salary, house property, business or profession, capital gains, and other sources — and each head has its own rules for what is counted, what is deducted, and how the result is computed, before the five results are added together into total income. The heads matter because a deduction that belongs to one head cannot be claimed under another, a loss under one head can only be set off under the rules for that head, and the special rates that apply to one head — capital gains, for example — do not apply to the others. A return that lumps every receipt together and taxes it at slab rates gets the total wrong in both directions: it overtaxes the gains and under-deducts the expenses that belong to their own heads.

The calculator on the hub page models the salary head in full, the capital gains head for listed equity, and the other heads in outline — pointing to the rules rather than computing every detail — and this guide follows the same division: salary and the remaining heads are explained in the depth a taxpayer needs to classify their income correctly, with the detailed computation left to the calculator and to the return. The classification is the skill: knowing that rental income belongs under house property and not under other sources, that a pension is salary income and not a capital receipt, and that a freelance fee is business income and not salary, determines which deductions are available and which rates apply, and a misclassification is the most common reason a correct-looking total is wrong.

Salary: what counts, and what the standard deduction does

Salary income is the most comprehensively defined head, because it is the head most people live under. It includes wages, salary, pension, gratuity, fees, commission, perquisites, and profits in lieu of salary, and it includes the allowances that form part of pay, subject to the exemptions the law provides for specific allowances — house rent allowance, for example, is exempt up to a computed limit, and the balance is taxable. The standard deduction simplifies the head: under the new regime it is ₹75,000, and under the old regime ₹50,000, deducted from salary income before the slabs are applied, with no bills or proofs required. It is the single largest simplification in the salary head, and it is already built into the calculator’s computation, so a taxpayer should not deduct it again by hand — the commonest double-count in salary returns.

Perquisites — the value of benefits provided by the employer, such as rent-free accommodation, a car, or club facilities — are valued under the rules the law prescribes, and the valuation, not the employer’s cost, is what is taxed. The distinction matters for senior employees, whose perquisite values can be large, and for employees in company accommodation, where the valuation follows a prescribed percentage of salary with adjustments for the city and for furniture. A salary computation that omits perquisites understates income; a computation that uses the employer’s cost instead of the prescribed value misstates it in either direction. The payslip and the employer’s perquisite statement are the evidence, and the computation should be built from them, not from the monthly package total.

Business and profession: profit, not receipts

Income under the head of business or profession is the profit of the business: gross receipts minus the expenses incurred wholly and exclusively for the business. The head covers shopkeepers, manufacturers, contractors, doctors, lawyers, consultants, freelancers, and every other person who earns by carrying on an activity on their own account. The computation follows the profit-and-loss account, with adjustments the law prescribes — disallowing expenses the law excludes, adding back personal expenses that were charged to the business, and applying the depreciation rules to assets rather than deducting their full cost at once. The result is the profit chargeable under this head, and it is taxed at slab rates, together with the other heads, with no special rate.

Two features of the business head deserve emphasis. The first is presumptive taxation: eligible small businesses and professionals may declare a prescribed percentage of gross receipts as income, without maintaining detailed books, up to a receipts limit set by law. The scheme is a simplification, and it should be chosen by comparison — the presumptive figure against the actual profit, year by year — not by habit, because in a high-expense year the presumptive figure overstates the profit and costs tax, while in a low-expense year it understates it and saves tax, and the balance changes every year. The second is the treatment of losses: a business loss may be set off against other heads in the year, subject to the rules for each kind of loss, and carried forward where it cannot be set off, provided the return is filed on time. A business that loses money in its first year has not wasted the loss; it has banked a deduction for later years, and the banking requires the return to be filed.

House property: rent, deductions, and the self-occupied home

Income from house property is the annual value of property owned by the taxpayer, less the deductions the law allows. For a let-out property, the annual value is the rent received or receivable, subject to the municipal value and fair rent considerations the law prescribes, and the deductions are the municipal taxes paid and a standard deduction of 30% of the annual value, plus the interest on borrowed capital used to acquire, construct or repair the property. The 30% standard deduction is a flat allowance for repairs and maintenance, requiring no bills, and it is applied after municipal taxes: the computation is annual value, minus municipal taxes, minus 30% of the balance, minus interest. The result may be a loss — where the interest exceeds the net annual value — and that loss may be set off against other heads, subject to the limit the law places on house-property loss set-off in a year, with the balance carried forward.

For a self-occupied property, the annual value is nil: the taxpayer lives in it, receives no rent, and the head produces no positive income. The interest on a housing loan for the self-occupied property is nevertheless deductible, up to the limit the law sets for self-occupied property — ₹2,00,000 a year under the old regime, where the loan and the conditions satisfy the law’s requirements — and the deduction is claimed under the house property head, reducing total income. Under the new regime, the interest deduction for a self-occupied property is not available in the same way, because the new regime removes most deductions in exchange for lower slab rates: the regime comparison must therefore count the house-property interest, where it is large, as part of the old regime’s advantage. A taxpayer with a large home loan and a modest salary may find the old regime wins on this head alone, and the calculator’s comparison, with the interest entered under Advanced options, is the way to test it.

Two further points complete the head. A property that is let out for part of the year and self-occupied for the rest is computed on the basis the law prescribes for a property used for both purposes, and the annual value and deductions are apportioned accordingly. And a property owned jointly is taxed in the hands of each co-owner in proportion to their share, with each co-owner computing their own head and claiming their own share of the interest — a joint loan does not produce a joint deduction, and each co-owner’s return must show their own share. The house property head rewards documentation: rent agreements, municipal tax receipts, loan certificates showing principal and interest separately, and the co-ownership deed are the evidence the computation needs.

The five heads at a glance. Capital gains is the only head with special rates; the others are taxed at slab rates after their own deductions. Misclassifying income between heads changes the deductions available and the rate applied.

Pension: salary income, with its own rules

Pension is taxed under the head of salary, because it is deferred salary: the pension paid to a retired employee is salary income in the year it is received, taxed at slab rates after the standard deduction, and the commuted portion — the lump sum taken in exchange for part of the pension — has its own exemption rules depending on whether gratuity is also received and whether the employee is a government employee. A family pension — the pension paid to the family of a deceased employee — is taxed under the head of other sources, not salary, with a deduction of a proportion of the family pension up to a ceiling. The distinction between a pension and a family pension is therefore a classification with a tax consequence, and the two should never be added together under one head.

Pensioners should also note the interaction with the regime choice and the age-based slab differences under the old regime. Under the old regime, the basic exemption is higher for senior citizens and super senior citizens — ₹3,00,000 and ₹5,00,000 respectively, against ₹2,50,000 for those below sixty — while the new regime uses the same slabs at every age and relies on the higher 87A rebate cap. A pensioner with modest income may therefore pay no tax under either regime, but for different reasons, and a pensioner with a larger pension plus other income must compare the two on the whole return, including the pension, the house property interest, and the deductions the old regime allows. The pension head, like every head, is computed in the context of the whole return, and the regime that wins for salary alone may not win for the whole.

Other sources: the residual head

Income from other sources is the residual head: it catches the income that does not belong under any other head. Interest on savings accounts, fixed deposits and bonds, dividends, family pension, and income from letting out machinery or plant fall here, together with gifts and winnings that the law taxes under this head at special rates. The head allows the expenses incurred in earning the income — collection charges, for example — and specific deductions the law provides, including the deduction for interest on savings deposits up to a limit for individuals and senior citizens. Dividends are taxed under this head at slab rates in the shareholder’s hands, with tax deducted at source above the threshold credited against the liability — the position described in the capital gains guide’s companion treatment, where the dividend’s tax is slab-rate tax on other-sources income, not a special rate.

The residual head is also where the “income of others” rules operate: income arising from assets transferred to a spouse or a minor child, without adequate consideration, may be clubbed with the transferor’s income under the clubbing provisions, and taxed in the transferor’s hands. The provisions are anti-avoidance rules, and they are the reason a gift of an income-producing asset to a family member does not automatically move the tax on its income to the recipient. A taxpayer planning such a transfer should take advice on the clubbing position before making it, because the transfer is easy to make and the tax consequence follows the transferor, not the asset.

Aggregation, set-off, and the total

Once each head is computed, the results are aggregated: the five heads are added, the losses are set off under the rules for each kind of loss, the deductions under Chapter VI-A — 80C, 80D, 80CCD, 80G and the others, available under the old regime — are claimed, and the result is total income. The slabs are applied to total income, the rebate and surcharge are applied, the cess is added, and the tax deducted at source and advance tax paid are credited. The order is fixed, and it is the order the calculator follows: heads, then set-off, then Chapter VI-A deductions, then slabs, then rebate and surcharge, then cess, then credits for tax already paid. A hand calculation that applies the rebate before the slabs, or the cess before the surcharge, gets the wrong answer even with the right inputs, because the order is part of the law.

The most useful habit for a taxpayer with more than one head of income is to compute each head on its own sheet, with its own evidence, and to aggregate only at the end. The sheets make the return checkable, they make the regime comparison meaningful — because the old regime’s advantage lives in the head-specific deductions — and they make next year’s return easier, because each head’s evidence is already filed in its own place. A return built from five sheets is a return that can be defended; a return built from one lump is a return that must be reconstructed, and reconstruction is where errors live.

Frequently asked questions

What are the five heads of income in India?

Salary, house property, business or profession, capital gains, and other sources. Each head has its own rules for what is counted and what is deducted, and the five results are added into total income. Capital gains is the only head with special rates; the others are taxed at slab rates after their own deductions. Misclassifying income between heads changes the deductions available and the rate applied.

How is house property income calculated?

For a let-out property, the annual value — rent received or receivable — is reduced by municipal taxes paid, then by a 30% standard deduction, then by interest on the loan used to acquire, construct or repair the property. For a self-occupied property the annual value is nil, but loan interest is deductible up to ₹2,00,000 a year under the old regime. Under the new regime the self-occupied interest deduction is not available in the same way, which can make the old regime win for a taxpayer with a large home loan.

Is pension taxed as salary?

Yes. A pension paid to a retired employee is taxed under the head of salary, at slab rates after the standard deduction. A family pension paid to the family of a deceased employee is taxed under the head of other sources, with a deduction of a proportion of the family pension up to a ceiling. The commuted portion of a pension has its own exemption rules depending on whether gratuity is also received.

What is the standard deduction for salary in AY 2026-27?

₹75,000 under the new regime and ₹50,000 under the old regime, deducted from salary income before the slabs are applied, with no bills or proofs required. It is already built into the hub calculator’s computation, so it should not be deducted again by hand.

How is business income taxed for a freelancer?

Business or profession income is the profit — gross receipts minus expenses incurred wholly and exclusively for the business — taxed at slab rates. Eligible small businesses and professionals may use presumptive taxation, declaring a prescribed percentage of gross receipts as income without detailed books, up to a receipts limit; the choice should be made by comparing the presumptive figure with actual profit each year, using the official figures for the year.

Where do dividends and interest go in the return?

Under the head of other sources, taxed at slab rates, with tax deducted at source credited against the liability. Dividends are not taxed at a special rate in India; they are other-sources income at the shareholder’s slab rate, with surcharge and cess where they apply. Interest on savings deposits has a specific deduction up to a limit for individuals and senior citizens.