Taxation · Basic Concepts

Heads of Income and Computation of Total Income

Updated 4 October 2026 · Fact-checked

Income under the Income-tax Act, 2025 is grouped into five heads: salaries, house property, business or profession, capital gains and other sources. You compute each head, apply clubbing and set-off to reach gross total income, subtract allowed deductions to get total income, then round it to the nearest ₹10.

Understand Heads of Income and Computation of Total Income

Income-tax law does not tax your income as one lump. It first sorts every rupee into a head of income. There are five heads: Salaries, Income from house property, Profits and gains of business or profession, Capital gains and Income from other sources. Each head has its own rules for what is taxable and what can be deducted.

The heads work as a ladder. Income from other sources is the residuary head. If a receipt is taxable but fits no other head, it lands there. A receipt goes to only one head, so first ask which head it belongs to, then apply that head's rules.

After you compute income under each head, you combine them. Three things happen on the way: clubbing (adding another person's income to yours where the law says so), set-off of losses within a head and between heads, and set-off of brought-forward losses. Set-off has limits. Capital losses can be set off only against capital gains. A speculative business loss can be set off only against speculative business income. A business or profession loss cannot be set off against salary. The result is gross total income (GTI).

From GTI you subtract the deductions the law allows, such as those for savings, health, donations or certain incomes. The result is total income. Tax is charged on total income, not on GTI. Deductions cannot take total income below zero, and they are limited to the relevant income and to the conditions of each provision.

This topic is the map of the whole Taxation Section A. Every later chapter fits into one box of this map. Learn the order of steps well, because comprehensive problems test exactly this order. Always check which tax regime the question assumes, because many deductions are not available under the default regime.

Key rules to remember

Five heads of income: Salaries | Income from house property | Profits and gains of business or profession | Capital gains | Income from other sources; Every taxable income falls under exactly one head. Other sources is the residuary head.
Gross total income: GTI = Sum of income under the five heads (after clubbing, intra-head set-off, inter-head set-off and brought-forward loss set-off); Business or profession loss cannot be set off against salary income. A house property loss can be set off against other heads, including salary, but this inter-head set-off is capped at ₹2,00,000 for the year. Any excess is carried forward for set-off against house property income in later years. Capital losses can be set off only against capital gains. A speculative business loss can be set off only against speculative business income.
Total income: Total income = GTI − Deductions allowed; Deductions are claimed only if the conditions are met and cannot exceed the income they relate to.
Order of steps: Classify by head → Compute each head → Clubbing → Set-off within head → Set-off between heads → Brought-forward losses → GTI → Deductions → Total income; Follow this order. Marks in long problems are allotted along it.
Rounding of total income: Round total income to the nearest multiple of ₹10 (last digit 5 or more goes up; less than 5 goes down); Round the final total income, not the figures under each head.
Residuary head rule: Taxable income not falling under the other four heads = Income from other sources; Use it only after ruling out the first four heads.

How to solve Heads of Income and Computation of Total Income questions

Use the same ladder for any question that asks for GTI or total income. It keeps your answer in the order the examiner expects.

1Read the facts and fix the person's status (individual, HUF, firm and so on), the tax year 2026-27 and residential status. These decide which income is taxable in India.
2List every receipt and put it under one head. Drop receipts that are exempt or not part of total income.
3Compute income under each head separately, using that head's own deductions and rules. Show each computation in a clear sub-working.
4Apply clubbing provisions. Add the income of the spouse, minor child or others where the law requires, under the head the income belongs to.
5Do set-off. First set off losses within the same head, then losses of one head against income of other heads where allowed. Business or profession loss cannot be set off against salary income. A house property loss can be set off against other heads, including salary, but the inter-head set-off is capped at ₹2,00,000 for the year; carry the excess forward for set-off against house property income in later years. Capital losses go only against capital gains, and a speculative business loss only against speculative business income. Then set off brought-forward losses in the permitted order.
6Add the heads to get gross total income. Show it as a separate line.
7Deduct the allowed deductions, each with its condition and limit. Check that total deduction does not exceed what the law allows against GTI.
8Write total income, rounded to the nearest ₹10. If asked, then proceed to tax computation.

Quickest way: Head-wise table method for MCQs and written answers

When to use it: Use it in any problem with three or more income items, especially comprehensive problems with losses, clubbing and deductions.

Draw five rows for the five heads. Write each item's amount in its row before doing any arithmetic.
For MCQs, first eliminate options that include exempt income or that set off a business or profession loss against salary income. A house property loss can be set off against other heads, including salary, but only up to ₹2,00,000 for the year, with the excess carried forward.
Compute head totals, then GTI, then subtract deductions. Check that your answer is a multiple of ₹10.
In written answers, use a statement with columns: particulars, amount, and a short note on the rule or reason. Step marks are given for each head, each set-off and each deduction.
End with the line 'Total income (rounded off)'. Never leave GTI and total income unlabeled.

Common mistakes in Heads of Income and Computation of Total Income

Taxing an item under the wrong head, for example showing rent from letting out machinery as house property.
Students go by the word used in the question rather than the nature of the income.
Fix: Ask what the source is. Apply the head rules for that source. If nothing else fits, use other sources.
Subtracting deductions before arriving at GTI, or mixing deductions allowed under a head with deductions from GTI.
Both are called deductions, so the two stages blur.
Fix: Keep two stages. Head-wise deductions give income under each head. Deductions from GTI give total income. Show the GTI line.
Setting off a loss from business or profession against salary income.
Students believe inter-head set-off works for every head.
Fix: Remember that a business or profession loss cannot be set off against salary income. A house property loss can be set off against salary and other heads, but only up to ₹2,00,000 for the year. Carry the excess forward for set-off against house property income in later years. Check the specific set-off restrictions before adjusting.
Clubbing income earned on clubbed income, such as interest earned on interest that has already been clubbed.
Students assume everything connected with the transferred asset is clubbed.
Fix: Club only the income arising directly from the transferred asset. Income earned on that income is taxed in the recipient's hands.
Rounding off each head or rounding GTI instead of total income.
Students round early to make numbers tidy.
Fix: Carry exact figures. Round only the final total income to the nearest ₹10.
Claiming deductions without checking the regime or the condition, or claiming more than GTI.
Deduction lists are memorised without conditions.
Fix: Read the question for the regime and the evidence of payment or investment. Limit the deduction to what the provision allows and to the income available.

Worked examples

Example 1

Ms Rita, a resident individual, has the following for tax year 2026-27: income from salary ₹6,00,000 (computed); income from house property ₹1,20,000 (computed); loss from a non-speculative business ₹70,000 (current year); short-term capital gain (taxable at normal rates) ₹50,000; interest from bank ₹30,000. She has opted for the regime in which deductions from GTI are allowed, and she is eligible for a deduction of ₹60,000 from GTI. Compute her total income.

Show the solution

Heads: Salaries ₹6,00,000; House property ₹1,20,000; Business (₹70,000) loss; Capital gains ₹50,000; Other sources ₹30,000.
Intra-head set-off: nothing to do, because each head has one item.
Inter-head set-off: the current-year business loss can be set off against income under other heads except salary. Set it off against house property: ₹1,20,000 − ₹70,000 = ₹50,000.
Gross total income = ₹6,00,000 + ₹50,000 + ₹50,000 + ₹30,000 = ₹7,30,000.
Deduction from GTI = ₹60,000. It is admissible because Rita has opted for the regime that allows such deductions.
Total income = ₹7,30,000 − ₹60,000 = ₹6,70,000. It is already a multiple of ₹10.

Answer: Gross total income ₹7,30,000; total income ₹6,70,000.

Example 2

Mr Amit gave his wife ₹5,00,000 as a gift without any consideration. She invested it in a bank deposit that earned interest of ₹40,000 in tax year 2026-27. Amit has salary income of ₹7,25,000 (computed) and his own bank interest of ₹12,345. The couple are not living apart under any agreement. Amit is eligible for a deduction of ₹50,000 from GTI. Compute Amit's total income.

Show the solution

The rule: where an individual transfers an asset, directly or indirectly, to his spouse without adequate consideration, the income from that asset is clubbed in the transferor's hands. The only exception is a transfer made under an agreement to live apart.
Apply the rule. The gift of ₹5,00,000 was made without any consideration, so the inadequate-consideration condition is met. The couple are not living apart under any agreement, so the exception does not apply. The ₹40,000 interest on the deposit is clubbed in Amit's income.
Clubbed interest is taxed under income from other sources. Any later income that the wife earns on this interest is not clubbed. It is taxed in her own hands.
Other sources = ₹12,345 + ₹40,000 = ₹52,345.
GTI = Salary ₹7,25,000 + Other sources ₹52,345 = ₹7,77,345.
Deduct ₹50,000: ₹7,77,345 − ₹50,000 = ₹7,27,345.
Round to the nearest ₹10. The last digit is 5, so round up: ₹7,27,350.

Answer: Gross total income ₹7,77,345; total income ₹7,27,350 (rounded off).

Exam tips

Always show a separate line for gross total income. Examiners look for it as a step mark.
In comprehensive problems, write a one-line reason beside each exclusion, such as 'exempt, not included'. It protects marks even if the amount is disputed.
Check the regime stated in the question before claiming any deduction from GTI.
Scan MCQs for options that are not multiples of ₹10. They cannot be a rounded total income.
Use the tax year 2026-27 and the Income-tax Act, 2025 terms in your answers. Do not write 'assessment year' or the old Act.

Practice questions from Basic Concepts

Heads of Income and Computation of Total Income in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Heads of Income and Computation of Total Income: frequently asked questions

What are the heads of income under the Income-tax Act, 2025?

There are five: salaries, income from house property, profits and gains of business or profession, capital gains and income from other sources. Each taxable receipt falls under one head. Other sources is the residuary head.

What is the difference between gross total income and total income?

Gross total income is the sum of income under all heads after clubbing and set-off of losses. Total income is GTI less the allowed deductions. Tax is charged on total income.

Can I set off a business loss against salary?

No. Business or profession loss cannot be set off against salary income. A house property loss can be set off against other heads, including salary, but the inter-head set-off is capped at ₹2,00,000 for the year. The excess is carried forward for set-off against house property income in later years. A current-year business loss can generally be set off against income under other heads except salary, subject to the specific restrictions.

Do I round off total income?

Yes. Total income is rounded off to the nearest multiple of ₹10. A last digit of 5 or more is rounded up, and less than 5 is rounded down.