NISM-Series-X-B: Investment Adviser (Level 2) · Concepts in Taxation

Heads of Income and Computation of Total Income under the Income-tax Act

Updated 11 October 2026 · Fact-checked

The Income-tax Act groups income into five heads: salaries, income from house property, profits and gains of business or profession, capital gains, and income from other sources. You compute income under each head, apply clubbing, set off losses, deduct Chapter VI-A deductions, and the result is total income.

Understand Heads of Income and Computation of Total Income

Tax law does not tax your income as one lump. It sorts every receipt into a head of income. Each head has its own rules for what is taxable and what expenses you can deduct. This is why you compute head by head first.

The five heads are: Salaries, Income from house property, Profits and gains of business or profession (PGBP), Capital gains, and Income from other sources. An income that fits no earlier head falls under other sources. Interest on bank deposits and dividends are common examples.

After computing each head, you apply clubbing of income. In some cases, income earned by another person is added to the income of the person who is taxed. A common case is income of a minor child, which is generally clubbed with the income of the parent whose total income is higher. Income from assets transferred to a spouse without adequate consideration is another case.

Next comes set-off and carry forward of losses. You first set off a loss against income of the same head (intra-head). Then you set off any remaining loss against income of other heads (inter-head), subject to restrictions. Loss not fully set off may be carried forward to later years, again subject to conditions. Adding the heads after this gives gross total income. Deductions under Chapter VI-A are then subtracted to reach total income.

Key formulas to remember

Five heads of income: Salaries + House property + PGBP + Capital gains + Other sources; Every taxable income must fall under one of these heads.
Gross total income: Income under all heads (after clubbing and set-off of losses) = Gross total income; Gross total income is the sum of income under all heads, after clubbing and after intra-head and inter-head set-off of current-year losses.
Total income: Total income = Gross total income − Chapter VI-A deductions; Tax is calculated on total income, rounded as per the Act.
Order of loss set-off: Intra-head set-off first, then inter-head set-off, then carry forward; Remember the key restrictions below.
Capital loss restrictions: Long-term capital loss: set off only against long-term capital gain. Short-term capital loss: against short-term or long-term capital gain; Capital losses cannot be set off against any other head.
Speculative business loss: Set off only against speculative business income; Can be carried forward for 4 assessment years, but only if the return is filed within the due date. Only house property loss and unabsorbed depreciation are exempt from this filing condition.
Carry forward of capital losses: Carry forward up to 8 assessment years; Allowed only if the return is filed within the due date.
House property loss: Inter-head set-off of house property loss is capped at ₹2,00,000 per year; Unabsorbed loss carries forward for 8 assessment years, against house property income only. A return filed within the due date is not a condition for this carry forward.

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

Use this order for any question on heads of income or total income. The sequence matters because each step feeds the next.

1Identify the nature of each receipt and place it under the correct head.
2Compute income under each head separately, using that head's allowed deductions.
3Check for clubbing: minor child income, transfers to spouse, and similar cases. Add clubbed income to the right person.
4Set off losses within the same head first.
5Set off any remaining loss against other heads, applying the restrictions on capital losses, speculative losses and house property loss.
6Add the heads to get gross total income.
7Subtract Chapter VI-A deductions to get total income.
8Check what loss is left to carry forward, and note the number of years and the filing condition.

Quickest way: Head-first elimination

When to use it: Use for MCQs that ask which head applies or whether a loss can be set off.

Name the head first. Salary relationship means Salaries. Sale of an asset means Capital gains. Anything left over means Other sources.
For loss questions, ask: which head is the loss from? Capital loss and speculative loss are the restricted ones.
Eliminate options that set off a long-term capital loss against short-term gain, or any capital loss against salary.
For total income, check that deductions come last.

Common mistakes in Heads of Income and Computation of Total Income

Setting off a long-term capital loss against short-term capital gain.
Students remember that short-term loss can be set off against both and assume it works both ways.
Fix: Long-term loss only against long-term gain. Short-term loss against either.
Setting off capital loss against salary or business income.
Students treat inter-head set-off as unrestricted.
Fix: Capital losses stay within capital gains. Never set them off against other heads.
Deducting Chapter VI-A deductions before adding heads.
Students confuse the order of steps.
Fix: Deductions are subtracted from gross total income, after all heads and losses are dealt with.
Treating all unabsorbed losses as carried forward for the same number of years.
Time limits for different losses blur together.
Fix: Learn each loss separately: house property loss, capital loss and non-speculative business loss 8 assessment years; speculative business loss 4 assessment years; unabsorbed depreciation indefinitely. A carried-forward non-speculative business loss can be set off against any business income, and a speculative loss only against speculative business income.
Forgetting the filing condition for carry forward.
Students focus on set-off rules and ignore the return.
Fix: Carry forward of capital losses, non-speculative business losses and speculative business losses requires a return filed within the due date. House property loss and unabsorbed depreciation do not. Check this in option wording.

Worked examples

Example 1

A resident individual has salary income of ₹8,00,000, a house property loss of ₹1,00,000 and interest from a savings account of ₹20,000. Chapter VI-A deductions are ₹50,000. Compute total income.

Show the solution

Salaries: ₹8,00,000.
House property: loss of ₹1,00,000, which is within the ₹2,00,000 cap, so it can be set off against other heads.
Other sources: ₹20,000.
Gross total income = 8,00,000 + 20,000 − 1,00,000 = ₹7,20,000.
Total income = 7,20,000 − 50,000 = ₹6,70,000.

Answer: ₹6,70,000

Example 2

In a year, an investor has long-term capital loss of ₹60,000, short-term capital gain of ₹40,000 and salary of ₹5,00,000. What can be done with the loss?

Show the solution

A long-term capital loss can be set off only against long-term capital gain.
There is no long-term capital gain this year, so no set-off is possible.
It cannot be set off against the short-term gain or against salary.
The full ₹60,000 is carried forward, provided the return is filed on time, to be set off against long-term capital gains in later years.

Answer: No set-off this year. The entire ₹60,000 is carried forward against future long-term capital gains.

Exam tips

Memorise the restrictions on capital loss, speculative loss and house property loss. These are the most common MCQ traps.
Remember the sequence: heads, clubbing, set-off, gross total income, deductions, total income.
Read the option for a time-limit and the return-filing condition. Wrong options often change one of them.
With negative marking of 25% of the marks for the question, skip an option you cannot place under a head rather than guess blindly.

Practice questions from Concepts in Taxation

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 five heads of income?

They are salaries, income from house property, profits and gains of business or profession, capital gains, and income from other sources. Each has its own computation rules.

Can a capital loss be set off against salary?

No. Capital losses can be set off only against capital gains, subject to the long-term and short-term rules. Any unabsorbed loss is carried forward.

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 gross total income less Chapter VI-A deductions.

What is clubbing of income?

It means adding income earned by another person to the income of the person who is taxed on it. Common examples are income of a minor child and income from assets transferred to a spouse without adequate consideration.