Tag: Business Income

Old or New Tax Regime: How and When to Choose It in Your Return (Section 202, Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 16 August 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • The new regime in section 202(1) applies to individuals and HUFs by default. To use the old regime you must exercise an option under section 202(4).
  • A person with no business or professional income exercises the option with the return furnished under section 263(1) for that tax year, so the choice can be made afresh each year.
  • A person with business or professional income must exercise it on or before the due date; once exercised it continues, and it can be withdrawn only once.
  • The option rides on the return filed by the due date; do not assume a belated return can opt out of the new regime.
  • Your employer’s TDS follows the regime you tell it, but the return decides the final regime.

For tax year 2026-27, an individual is taxed under the new regime unless he chooses otherwise. The choice is made in the return, and the rules on how and when depend on whether you have business income. This post sets out section 202 of the Income-tax Act, 2025.

The default and the option

  • Section 202(1) states the slabs of the new regime: nil up to ₹4,00,000, then 5%, 10%, 15%, 20%, 25% and 30% above ₹24,00,000, and it applies to an individual, a HUF, an association of persons (other than a co-operative society), a body of individuals and an artificial juridical person, unless the person exercises the option in section 202(4).
  • Section 202(4) says that section 202(1) does not apply to a person who has exercised an option, in the prescribed manner, for the tax year. That person is taxed under the old slabs, with the old regime deductions and exemptions. Form 125 uses the same words: “opting out of the new tax regime under section 202”.

When to exercise the option (section 202(4))

Your income When and how
No income from business or profession (for example a salaried person, pensioner or investor) Along with the return of income furnished under section 263(1) for the tax year. The option applies to that year, so you can choose again next year
Income from business or profession On or before the due date for furnishing the return under section 263(1). Once exercised it applies to later tax years. It may be withdrawn only once for a tax year other than the year of the first exercise; after that you can never exercise it again, unless you cease to have business or professional income, in which case the option for persons without such income is open

What the new regime does not allow (section 202(2))

If you stay in the new regime, your total income is computed without:

  • Exemptions in Schedule III at serial numbers 5, 6, 7, 8, 11 and 17 (this includes the HRA exemption at serial 11), and serial numbers 12 and 13 other than those prescribed;
  • Professional tax under section 19(1) Table serial 1;
  • Interest under section 22(1)(b) on self-occupied houses (section 21(6));
  • Chapter VIII deductions, except the employer’s contribution to the notified pension scheme (section 124(1) and (2)), section 125(2) and section 146;
  • certain business deductions (sections 33(8), 45(3), 46, 47(1)(a), 48 and 49);
  • set-off of house property loss against other heads, and set-off of carried-forward losses or depreciation attributable to these deductions; and
  • any exemption or deduction for allowances or perquisites provided under any other law.

The standard deduction of ₹75,000 under section 19(1) and the retirement exemptions such as gratuity and leave encashment remain available.

The late return trap

The option is exercised “along with the return of income to be furnished under section 263(1)”. A belated return is furnished under section 263(4). Advisers read this to mean that a person who files after the due date cannot opt out of the new regime for that year. We have not found a ruling or circular that says otherwise, so file on time if you want the old regime.

Your employer and the regime

At the start of the year, tell your employer which regime to use for TDS. You may change your mind before the return; the employer’s deduction is only an estimate. At filing, you choose the regime that gives you the lower tax, on the evidence of your HRA, home loan, section 123 and other claims (Form 124 evidence, Rule 205). Any excess TDS comes back as refund.

How to decide

  1. Add up your actual old regime deductions: standard deduction ₹50,000, HRA exemption, section 123, own NPS, health insurance, home loan interest and others.
  2. Compare with the break-even for your salary in our post on saving tax by salary level. For example, at a salary of ₹20 lakh the old regime needs roughly ₹7.6 lakh of total deductions to match the new regime.
  3. If the old regime is better, exercise the option in the return and file by the due date.
  4. If you have business income, remember that the choice can be changed only once, and plan with a professional.

Frequently asked questions

Which regime applies if I do nothing?

The new regime in section 202(1) applies by default to an individual, HUF, AOP, BOI or artificial juridical person. To be taxed under the old regime you must exercise the option under section 202(4).

When must a salaried person choose the regime?

A person who has no income from business or profession exercises the option along with the return furnished under section 263(1) for that tax year (section 202(4)(b)). The choice is for the tax year, so it can differ from year to year.

What if I have business or professional income?

The option must be exercised on or before the due date for the return. Once exercised it applies to later tax years. It can be withdrawn only once, for a year other than the year it was exercised, and after that you can never opt out of the new regime again, unless you stop having business or professional income, when the salaried-type option becomes available (section 202(4)(a)).

Can I change the regime in a revised return?

The option is tied to the return furnished under section 263(1) for the year. The Act does not say that it can be exercised or changed through a revised or belated return. If you filed on time and made a different choice, take advice before relying on a revised return to change it.

What if I file late?

The section ties the option to the return under section 263(1). A belated return is furnished under section 263(4), so you should assume the new regime applies. Check with a professional before you claim old regime deductions in a belated return.

Does my employer’s choice bind me?

No. The employer deducts TDS on the regime you declare to it, but you decide the final regime when you file the return, and any excess TDS comes back as a refund.

Official sources

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Rental Income: House Property or Business Income? Supreme Court Tests (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 22 July 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Rent from a building you own is taxed as income from house property (section 20 of the Income-tax Act, 2025), with only taxes, a flat 30% and interest as deductions.
  • If letting is itself your business, the same rent can be business income, with actual expenses and depreciation allowed. This depends on facts, not on your choice.
  • The Supreme Court decided this in Chennai Properties (2015), Rayala Corporation (2016) and Raj Dadarkar (2017): look at what the owner actually does, from a businessman’s point of view.
  • A person with long-term rights in a building, such as a lease of 12 years or more, is a deemed owner under section 25, and the rent from sub-letting can be house property income.

Rent from a property can be taxed under two heads, and they are taxed very differently. House property income allows only a flat 30% deduction, local taxes and loan interest. Business income allows the real costs of running the activity. The choice is not yours. It follows from what you actually do.

The two heads

House property (section 20). The annual value of a building and its appurtenant land that you own is chargeable to tax as income from house property, except for the part you occupy for your own business or profession. The deductions are the local taxes you paid, 30% of the annual value and interest on borrowed capital (sections 21 and 22).

Business income (section 26). Profits of a business carried on at any time in the year. If letting out property is itself a business, its profits are computed under the business provisions, with deductions such as salaries of staff, repairs, insurance, depreciation and interest, and the usual books of account.

What the Supreme Court has said

The Court looks at the activity, not just the ownership or the wording of a document.

Case Facts in brief Result
Chennai Properties and Investments Ltd v CIT (09/04/2015) A company whose main object was to acquire properties and let them out; its only income was rent Business income. The object clause alone is not decisive. It depends on the circumstances whether letting is the business
Rayala Corporation Pvt Ltd v ACIT (11/08/2016) A company whose only business was leasing its property and earning rent Business income, following Chennai Properties
Raj Dadarkar and Associates v ACIT (09/05/2017) A partnership firm held a long-term licence over market space, built 95 shops and 30 stalls and sub-licensed them, collecting licence fees and service charges House property income. The firm was a deemed owner; the service charges were inseparable from the rent, and it did not provide organised, systematic services

The test the Court applied in Raj Dadarkar was whether, from a businessman’s point of view, the letting was the doing of a business or the exploitation of property by an owner. In Chennai Properties, where the entire income was from letting properties owned by the company, letting was the business. In Raj Dadarkar, ownership of the property characterised the activity.

A reading to avoid: some articles say Raj Dadarkar held that sub-letting as an activity makes the income business income. On its facts the Court held it was house property income.

Signs that point to business

  • The object and the main activity of the person are letting properties, and that is the only or main source of income.
  • The activity is organised: staff, systematic management, a range of services (not only the use of space), and books of account.
  • Several properties are let continuously, and letting is exploited commercially rather than as a way of holding an asset.
  • The income comes from services (a hotel, a hostel, a co-working space, a hall with caterers), not just the right to occupy.

Signs that point to house property

  • You own one or a few properties and let them as an investment.
  • The rent is for occupation of the building. Any service charge is a minor, inseparable part of the rent.
  • The owner does no organised business activity around the letting.
  • You have acquired rights in the building of the kind listed in section 25(e), such as a lease of 12 years or more, and you sub-let it: you are a deemed owner, so the rent is house property income. That was the basis of Raj Dadarkar, where the firm held long-term rights under a licence.

Worked comparison

A property is let at ₹35,000 a month. Local taxes paid ₹20,000, loan interest ₹60,000.

As house property

Step Amount (₹)
Annual value (35,000 × 12) 4,20,000
Less: local taxes 20,000
Net 4,00,000
Less: 30% 1,20,000
Less: interest 60,000
Income 2,20,000

As business income, if letting is genuinely a business, with actual running costs of ₹1,10,000 (staff ₹60,000, repairs ₹30,000, insurance ₹10,000, depreciation ₹10,000) in addition to taxes and interest:

Step Amount (₹)
Rent 4,20,000
Less: taxes 20,000
Less: interest 60,000
Less: running costs 1,10,000
Profit 2,30,000

The business head is not always lower: in this case the flat 30% deduction under house property is larger than the real costs. A business also brings the burden of books of account and, above the limits, audit. Do not claim a head only for the tax result.

Other points

  • Loss: a house property loss can be set off against other income only up to ₹2,00,000 in the old regime, and not at all in the new regime. A business loss is treated differently (section 109), though it cannot be set off against salary.
  • Basic exemption: if rent is your only income, tax is nil up to the basic exemption limit of your regime, after the deductions for the head.
  • Documentation: keep the agreement, rent receipts, and for a business, evidence of services provided and of the staff and records.

Before you rely on this

The rulings are on their own facts and later cases apply them to different set-ups, so a case-specific opinion is worth having if the amount is large or the Assessing Officer questions your head. The sub-letting position of a deemed owner follows section 25(e) of the 2025 Act (earlier section 27(iiib)).

Frequently asked questions

Is rental income house property income or business income?

Usually house property income. It is business income only when letting is itself the business, as the Supreme Court found in Chennai Properties and Rayala Corporation, where the company’s main business was letting its properties.

Does the object clause of the company decide it?

No. In Chennai Properties the Court said that an entry in the objects is not decisive; the question depends on the circumstances of each case, from a businessman’s point of view.

Who decides which head applies?

The facts decide, and in a return you must report under the head the facts support. The Assessing Officer can differ. You cannot pick the more favourable head.

What deductions are allowed under each head?

House property: local taxes paid, 30% of the annual value and interest on borrowed capital. Business: expenses allowed under the business provisions of the Act (such as staff, repairs, insurance, depreciation and interest), which usually need books of account.

What did Raj Dadarkar decide?

That a partnership firm which held a long-term licence and sub-licensed shops, earning rent and service charges that were inseparable from the rent, was a deemed owner and its income was house property income, not business income.

Is sub-letting income house property or other income?

If you are a deemed owner under section 25 (for example, you hold a lease of 12 years or more), it is house property income. Otherwise it is business income or income from other sources depending on the facts.

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

What are the 5 Heads of Income Tax?

Posted on by CA Meet Dhrangadhariya

Last updated: 17 July 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • All income is sorted into five heads: salary, 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 which expenses and deductions are allowed.
  • Capital gains are taxed by holding period and asset type, for example 12.5% on long-term gains from most assets sold on or after 23 July 2024.
  • Correct classification decides how tax is computed and which ITR form you file.

Under the Income Tax Act, all income is sorted into five heads of income: salary, 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 which expenses and deductions are allowed. Putting each income under the correct head is the first step in computing tax and in choosing the right ITR form. The five heads continue under the Income-tax Act, 2025 (from 1 April 2026), although section numbers have changed. Section numbers quoted below are those of the 1961 Act.

The Five Heads of Income

  1. Income from Salary
  2. Income from House Property
  3. Profits and Gains of Business or Profession
  4. Capital Gains
  5. Income from Other Sources

1. Income from Salary

Salary is income received under a contract of employment. It includes basic pay, allowances, advance salary, bonus, commission, perquisites, gratuity, leave encashment and pension.

  • Section 15 describes what is taxable as salary.
  • Section 16 gives the deductions from salary, mainly the standard deduction.
  • Section 17 defines salary, perquisites and profits in lieu of salary.

Some allowances are exempt in the old regime, for example House Rent Allowance (HRA) for those living in rented houses. A transport allowance of up to ₹3,200 per month for certain specially-abled employees (Rule 2BB) is exempt in both regimes. The new regime allows very few other exemptions but gives a standard deduction of ₹75,000 (₹50,000 in the old regime).

2. Income from House Property

Rent from a building or land attached to it is taxed under this head. The tax is computed on the annual value of the property, less municipal taxes and the standard deduction of 30%, less interest on a home loan.

There are three kinds of property:

  1. Self-occupied property
  2. Let-out property
  3. Deemed let-out property

Up to two self-occupied houses are treated as self-occupied with nil annual value. Any other house is treated as deemed let-out. Interest on a loan for a self-occupied house is allowed up to ₹2 lakh in the old regime. Income from a house property is reported in Schedule HP of the ITR.

3. Profits and Gains of Business or Profession

Profits from any business or profession are taxed under this head after deducting the expenses allowed. It covers:

  • Profits of a trade, manufacture or service business, and professional income.
  • Income taxed under the presumptive schemes of sections 44AD, 44ADA and 44AE.
  • Profit or loss from futures and options trading and intraday trading in shares (speculative income is treated separately).
  • Salary, bonus, commission and interest received by a partner from the firm, to the extent allowed.
  • Certain incentives, licences and export benefits connected to the business.

Individuals and HUFs with business or professional income file ITR-3, or ITR-4 under the presumptive scheme.

4. Capital Gains

Profit from selling a capital asset such as property, shares, mutual funds, gold or bonds is taxed under capital gains. The gain is short-term or long-term, depending on how long the asset was held.

Asset Held for long-term if more than Short-term gain tax Long-term gain tax (sale on or after 23 July 2024)
Land and building 24 months Slab rates 12.5% without indexation
Unlisted shares 24 months Slab rates 12.5% without indexation
Listed shares and equity mutual funds 12 months 20% 12.5% on gains above ₹1.25 lakh a year
Other assets such as gold 24 months Slab rates 12.5% without indexation
Debt mutual funds bought after 1 April 2023 Not applicable Slab rates Slab rates

For land and buildings bought before 23 July 2024, resident individuals and HUFs can choose to pay 20% with indexation instead of 12.5% without it. Capital gains are reported in Schedule CG, and individuals with capital gains generally file ITR-2 or ITR-3.

5. Income from Other Sources

Anything that is taxable but does not fall under the four heads above comes here. Common examples are interest on savings accounts and fixed deposits, dividends, winnings from lotteries and games, gifts above the limit, and rent from plant, machinery or furniture when it is not business income.

Heads of Income vs Sources of Income

A source of income is where the money comes from, for example a salary, a fixed deposit, a rented flat or a business. A head of income is the tax category the Act puts that source into. Many sources can fall under one head, and each head has its own computation rules.

Conclusion

Knowing the five heads helps you report each income in the right place, claim the deductions that belong to it and file the correct ITR form. Consult a qualified professional if an income is difficult to classify.

Frequently asked questions

What are the 5 heads of income?

Income from salary, income from house property, profits and gains of business or profession, capital gains, and income from other sources.

Which head does interest income come under?

Interest on savings accounts and fixed deposits is taxed under Income from Other Sources, unless it is a business receipt.

What is the difference between a head and a source of income?

A source is where the money comes from, such as a job or a rented flat. A head is the tax category the Act puts that source into.

Do the five heads continue under the Income-tax Act, 2025?

Yes. The five heads continue from 1 April 2026, with new section numbers.

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.