Every rupee of taxable income must be funneled into one of the designated statutory categories for correct deduction and tax calculation.
1. Income from Salaries (Sections 15-17)
- Employer-Employee Relationship: Essential for taxing income under this head (e.g., salaries of MPs/MLAs are taxed under 'Other Sources' because they are not employees of the government).
- Allowances:
- Fully Taxable: Dearness Allowance (DA), City Compensatory Allowance.
- Partially Taxable: House Rent Allowance (HRA) exempt under Section 10(13A) to the extent of the minimum of: (1) Actual HRA; (2) Rent paid minus 10% of salary; (3) 50% of salary (metro cities) or 40% (other cities).
- Fully Exempt: Foreign allowance paid by the government to Indian citizens abroad.
- Deductions (Section 16): Standard deduction of Rs. 50,000, Entertainment allowance, and Professional tax.
2. Income from House Property (Sections 22-27)
Tax is levied on the annual value of property consisting of any buildings or lands appurtenant thereto, of which the assessee is the owner.
- Self-Occupied Property: The Net Annual Value (NAV) is taken as Nil (up to 2 residential houses).
- Deductions under Section 24:
- Standard Deduction (Section 24(a)): 30% of the Net Annual Value is allowed as a flat deduction for repairs and maintenance.
- Interest on Borrowed Capital (Section 24(b)): Deduction of interest on housing loans used to acquire, construct, or repair property. Capped at Rs. 2,00,000 for self-occupied properties.