Section-14 of Income-tax Act 1961 provides for the computation of total income of an assessee which is divided under five heads of income. Each head of income has its own method of computation. These five heads are
(i) Income from ‘Salaries’;
(ii) Income from House Property’;
(iii) Income from ‘Profits and Gains of Business or Profession’;
(iv) Income from ‘Capital Gains’; and
(v) Income from ‘Other Sources’.
Income from all these heads shall be computed separately according to the provisions given in the Act. Income computed under these heads shall be aggregated after adjusting past and present losses and the total so arrived at is known as ‘Gross Total Income’.
Out of Gross Total Income, Income-tax Act 1961 allows certain deductions under section 80. After allowing these deductions the figure which we arrive at is called ‘Total Income’ and on this figure tax liability is computed at the prescribed rates.
These five heads of income are water tight compartments. Income from one source of Income, which is to be included in a particular head, cannot be included in any other head. Each head of income has its own deductions. After computing income from various sources of income within a particular head its own deductions are allowed and thus we arrive at income from that head. (See Chart on page 2/2).