Income: Definition, Meaning, Types, and Importance

What is Income?

In simple terms, income refers to the money one gains in exchange for a product or labor. Every individual, business or entity gains income over a period of time. For business and entities, income may be termed as the revenue a company is generating by lending of services or products made by them. 

Types of Income

Under income, there are several other terms related to income such as:

• Gross Income: This is the sum total value of your money without excluding the cash outflows. It includes all sources of income such as wages, salaries, bonuses, interest, dividends, and rental income. For example, If an employee’s annual salary is ₹5,00,000 and they earn an additional ₹50,000 in dividends, their gross income is ₹5,50,000.
• Net Income: It is the income after all the taxes. It represents the actual take-home pay or profit. For example: If an employee’s gross income is ₹8,00,000 but they pay ₹2,00,000 in taxes and have ₹50,000 in other deductions, their net income is ₹5,50,000 (₹8,00,000 – ₹2,00,000 – ₹50,000).
• Taxable Income: It refers to the portion of gross income that is subject to income tax, calculated after accounting for deductions, exemptions, and adjustments. For example:  If a person has a gross income of ₹8,00,000 and is eligible for a ₹1,00,000 deduction, their taxable income would be ₹7,00,000 (₹8,00,000 – ₹1,00,000).
• Disposable Income: It refers to the money left with an individual after payment of all the taxes from the gross income. This also reflects the purchasing power. For example: If an individual’s gross income is ₹5,00,000 and their taxes and deductions total ₹1,50,000, their disposable income is ₹3,50,000 (₹5,00,000 – ₹1,50,000).

Various Sources of Income

Following is a list of ways through which one can earn income:

• Employment
• Entrepreneurship
• investment

Why is Income Important?

• Financial Stability: Income promotes financial ability of a person to carry out basic living requirements.
• Wealth Building: Regular income allows individuals to accumulate assets, invest, and build wealth over time.