Ordinary Income

What is Ordinary Income?

Ordinary income is the income earned from the business, employment in the form of wages or salaries, rent, commissions or , short term capital gain, etc and get taxed at the normal tax rate, however, income from long term capital gains and qualified dividends are taxed at special tax rates.

Explanation

Ordinary-Income

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Source: Ordinary Income (wallstreetmojo.com)

Ordinary Income Examples

  1. Tips received by hotel staff due to its periodic nature;
  2. Salaries, wages earned by engaging in
  3. Interest
  4. Rent
  5. Unqualified dividends
  6. Business income

How Does Ordinary Income Works?

  1. Ordinary  Income can be in two forms i.e., business income and personal incomePersonal IncomePersonal income refers to the total earnings of the individuals and households of a nation through multiple sources such as salary, wages, business profits, bonus, investment returns, dividends, rental receipts, employer contribution in provident or pension funds, etc.read more.
  2. Business income is earned from day to day business operations except for income from capital gains i.e., income from the sale of capital assets, or for example, income earned from the regular sale of land, buildings, etc.
  3. Personal income means any cash inflow which is subject to income tax as defined by IRS (Internal Revenue Service)

Substitutes

#1 – If the transaction involves income either in the present or future, then that transaction is considered as ordinary income.

For Example: If the business is engaged in buying cars and reselling cars for profit after some modifications made to cars, then the income earned from selling that used cars will be considered as ordinary income but not capital gain.

#2 – Money earned from an asset.

For Example, Interest earned from a savings bank account, rent earned from the property.

Ordinary Income Tax Rate 2019

Tax rates in India for the financial year 2019 – 2020 are given below:

Applicable surcharge + 4% health and education fess is applicable.

Income Tax Slabs (Annual income)Rate for Individual & HUF Below the Age Of 60 YearsRate for Individual & HUF Below the Age Of 80 Years and above 60 yearsRate for Individual & HUF Above the Age Of 80 Years 
Income up to INR 250,000, up to 300,000, up to 500,000NilNilNil
>250,000 to 500,000,
>300,000 to 500,000,
Up to 500,000
5% of total income >250,0005%Nil
>500,000 to 10,00,00012500+20% of total income > 500,00020%20%
>10,00,0001.125 L +30% of total income >10,00,00030%30%

For companies, partnership firms-  Tax rate is at the flat rate of 30% +  applicable surcharge+ 4% health and education cess

Ordinary Income vs. Capital Gain

Sr. NoOrdinary IncomeCapital Gain
1Earned regularly from employment, trading, business activities, etc.Earned from selling investments like shares, buildings, etc.
2Income is taxed according to the slab rates for different income levels.Capital gain is taxed at a lower rate according to the nature of transactions short term gain or long term gain.
3Ordinary income can be offset with standard tax deductions.Capital gains can only be offset with capital losses.

Advantages

  • A basic exemption limit is given to individuals within that income limits, so no need to pay tax.
  • Individuals, HUF, BOI ( Body of individuals) need to pay tax according to their income levels at prescribed rates for different income levels.

Disadvantages

  • Companies and partnership firms need to pay at a rate of 30%+surcharge if applicable+4% health and education cess. Even if there is a small amount of profit earned, one needs to pay tax at prescribed rates.

Conclusion

Recommended Articles

This article has been a guide to ordinary income and its definition. Here we discuss characteristics, examples, and how does ordinary income work along with its tax rate and advantages and its comparison to Capital Gains. You may learn more about financing from the following articles –

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