Section 14 of the Income Tax Act: The 5 Heads of Income

Last updated: Sept 2026

Section 14 of the Income Tax Act is the starting point for every tax calculation. Before any deduction or exemption applies, income must first be sorted into the correct head. Getting this classification wrong changes which rules, rates and deductions actually apply to that income.

• The 5 heads: Salary, Income from House Property, Profits and Gains of Business or Profession, Capital Gains, Income from Other Sources
• Each head has its own computation rules and permitted deductions
• Total income is the sum across all 5 heads, after head-specific adjustments
• Losses under one head can sometimes be set off against income under another, subject to specific rules

• Income not fitting any of the first 4 heads falls into Other Sources, a residual category

  
  

Classify each income source under its correct head first. The applicable deductions and rates follow from that classification.

Each head under Section 14 carries its own set of computation rules, permitted deductions, and in some cases, different treatment for losses. Taxing all income identically, without this classification, would ignore the genuinely different economic nature of salary versus rental income versus a business profit.

Classification is not paperwork for its own sake — it determines which specific deductions actually apply to a given rupee of income. The practical consequences of correct classification are:

• Salary income gets standard deduction and specific salary-linked exemptions, which do not apply to business income
• House property income gets a standard 30% deduction for repairs and maintenance, regardless of actual expense, which no other head offers
• Business income allows deduction of actual documented expenses, which salary income does not

• Capital gains get indexation benefits and different tax rates depending on the holding period, unlike any other head

  
  

Misclassifying income, such as treating freelance income as salary, denies you the deductions your income is actually entitled to under its correct head.

The table below is the practical reference most people actually need — matching a specific income type to its correct head.

Rental income specifically sits under House Property, not Other Sources or Business Income, even though it might intuitively feel like passive "other" income to someone unfamiliar with this classification.

Four questions, worked through in order, resolve most classification ambiguity.

• Ask whether the income comes from an employer-employee relationship. If yes, it is Salary, regardless of how the payment is described.
• Ask whether the income comes from owning a building or attached land. If yes, it is House Property income, even if you also actively manage the property.
• Ask whether the income comes from an ongoing trade, business or professional activity you actively carry on. If yes, it is Business or Profession income.

• If none of the above apply and the income is not a capital gain, it falls under Other Sources by default.

  
  

A freelancer's consulting income is a common point of confusion under Section 14 of the Income Tax Act. It falls under Business or Profession, not Salary, since no employer-employee relationship exists, even if the client treats the arrangement informally like employment.

Consider Deepak, a 40-year-old professional in Hyderabad with a CIBIL Score of 748, who earns a salary, rents out a second property, and holds mutual fund investments generating dividends.

Formula used: Total income = Salary income + House Property income (after standard 30% deduction) + Other Sources income

Deepak's rental income gets a standard 30% deduction (Rs. 90,000) before being added to his total income, a benefit his salary and dividend income do not receive under their own heads.

A lender assessing your home loan eligibility looks at income across the relevant heads, particularly Salary and House Property if you already hold rental property. Approval timelines can extend where income from multiple heads needs separate documentation, and minimum income thresholds can differ by city. Check your home loan eligibility with all your income sources correctly classified.