Classifications of Income for the Purpose of Income Tax

Classifications of Income for the Purpose of Income Tax

Classifications of Income for the Purpose of Income Tax

Income tax is a typical example of a direct tax. The tax imposed on a person or entity under the orbit of income tax law is called income tax. It is the tax levied directly on personal income. The resulting revenue is usually one of the chief sources of cash for a government entity.

Classifications of Income for the Purpose of Income Tax: classifications of income for the purpose of income tax are given below –

  • Tax-free income
  • Tax credit income/investment allowance
  • Chargeable income

Income: Income means what comes in the hand of a person in terms of money or money’s worth as a result of mental, physical, and financial efforts during a period which has usual characteristics of income and is within the preview of relevant income tax law.

There are two types of income –

Assessable income: Assessable incomes are income for those which include total income ascertaining total income. There are three types of assessable income –

  • Tax-free income: There are some items of income included in total income but tax rebate is granted on these items at an average rate of tax. These sources of income are called tax free income. These items increase total income and determine the tax rate. But they reduce the net tax liability.
  • Tax credit income/investment allowance: Some items of expenses or investment by the assessee under the sixth schedule are called investment allowances. They are accumulated for calculating tax rebate allowances allowable to the assessee to determine met tax liability. Such tax rebate is different from that on tax-free income both in terms of items and rate.
  • Chargeable income: Chargeable income is an income which taxpayer is originally payable on income. Chargeable income = Taxable income – Tax free income.

Non-assessable Income: Those sources of incomes of income which are not included in the calculation of total income are non-assessable income.