The five heads

Indian income tax does one thing before it does anything else: it sorts your income into five boxes. Everything downstream — the rate, the deductions available, the losses you can set off — depends on which box.

The five

Salaries. Income from an employer-employee relationship. The relationship is the test: without it, the money is not salary whatever it is called.

Income from house property. Rental income from property you own, and a notional treatment for property you own and do not let out.

Profits and gains of business or profession. Income from running a business or practising a profession.

Capital gains. Profit from transferring a capital asset. Chapter 4 is the mechanics, and it has three conditions: there must be a capital asset, it must be transferred, and the transfer must produce a gain.

Income from other sources. The residuary head — income that is not exempt and does not belong under any of the other four. Interest lives here.

Why classification decides everything

The heads are not labels on a shelf. They carry different consequences.

Different treatment. Capital gains are taxed under their own regime, which depends on how long the asset was held. Income from other sources joins your other income and is taxed at your slab rate. Two investments producing the same rupee outcome can be taxed very differently because they land in different heads.

Different deductions. Each head has its own rules about what can be deducted against it.

Different loss rules. A loss under one head can usually be set off against income under the same head, and the rules for setting off against other heads, and for carrying losses forward, differ by head.

So "how is this taxed?" is almost always answered by first asking "which head is it?"

The one that catches investors

Income from other sources is a residuary head, which means it collects anything not claimed by the other four, and it is taxed at your slab rate with no concessional treatment for having waited.

Interest lands here. Interest on a deposit, on a bond, on a savings account. There is no long-term rate, no benefit for holding longer, nothing.

Capital gains do not land here — a profit on selling shares or units is a capital gain, taxed under that head. That difference is the single most consequential classification in personal investing, and chapter 3 works through where each kind of investment income goes.

What the 2025 Act changed here

Essentially nothing about the structure, which is the point of chapter 1.

The five heads survive the rewrite. The Department describes the new Act as streamlining language and consolidating provisions "without imposing new taxes", so the classification you learned under the old Act still classifies.

What changed is the vocabulary around it — the year you are taxed on is now the tax year rather than the "previous year" — and the section numbers that used to be quoted alongside each head.

The order of operations

Worth having the sequence straight, because it explains why deductions behave the way they do.

1. Classify each source of income into its head.
2. Compute the income under each head, applying that head's own rules.
3. Set off losses according to the rules for each head.
4. Aggregate into gross total income.
5. Apply deductions available to you.
6. Arrive at total income, and compute tax on it.
7. Credit what has already been paid — TDS and advance tax, chapter 6.

Most people encounter this sequence backwards, starting from a tax number on a payslip. Seeing it forwards explains why a deduction reduces tax by your marginal rate rather than rupee for rupee, and why a loss in one place may not help with a gain in another.

A caution about what this chapter does not say

No rates. No thresholds. No list of deductions.

Those are set by the Finance Act each year, and they move. Chapter 1's standing instruction applies throughout this subject: for any figure you will act on, go to the Department's own site, and for anything consequential, to a chartered accountant.

What this subject gives you is the shape — which is what lets you ask the right question and recognise a wrong answer.

The point

Income is classified into five heads — salaries, house property, business or profession, capital gains, and the residuary other sources — before anything else happens, and the head decides the treatment, the deductions and the loss rules. Interest lands in other sources at slab rates; gains on investments land in capital gains under their own regime. The 2025 Act kept all five.