Prior to filing their taxes each year, individuals typically seek ways to reduce their taxable income. One effective approach is to familiarize oneself with the various sources of income that are exempted from taxation, as outlined in Section 10 of Income Tax Act of 1961. It is a critical provision that outlines various exemptions available to taxpayers in India and plays a crucial role in determining the tax liability of individuals and businesses. In this article, we delve into the comprehensive details of each type of exempt income and the specific exemption under section 10 of income tax act. Reading and understanding this is essential for taxpayers to optimize their tax planning and ensure compliance with the Income Tax Act.
Section 10 of Income Tax Act: Everything to Know
It is important to have thorough knowledge of section 10 of Income Tax Act as it can save you a lot of money. On the other hand, a lack of understanding of the terms related to Section 10 of Income Tax Act can get you in trouble. So let us go over it step by step. We will begin by understanding the meaning of exempt income.
What is Exempt Income?
An individual’s “exempt income” is income that is not subject to federal or state income taxation. In layman’s terms, it indicates that some types of income are not subject to government or legal taxation and do not contribute to total taxable income. According to each country’s state or central taxation regulations, an individual’s or a business entity’s income is categorized under a separate category, and some revenues are excluded from taxation.
According to the legislation, this income is regarded as exempt income in the Income Tax Act. Here are some of the following types of income that are exempted under Section 10 of Income Tax Act:
- Agricultural revenue.
- The money a person receives from being a Hindu Unbroken Family.
- Any payment made to a worker under the 1947 Industrial Disputes Act.
- The reimbursement received in the event of any catastrophe.
- Income received following the central government’s revised pension rule in the form of a gratuity.
- Legal Provident Fund.
- Allowance for housing rent (HRA).
- The mutual fund’s earnings.
- Superannuation Fund for Known Provident Funds.
- Payment to MPs and MLAs.
- The investor protection fund’s earnings.
- The Employees Protection Insurance Fund’s revenue.
- The revenue from the pension and retirement funds.
- The revenue from Mutual Fund units.
- The money received from the Securitization Trust Scholarship.
- The local authority’s revenue.
- The dividend income from the Indian Company.
If the amount of income assessed or reassessed exceeds the amount of income reported by the assessee, or if a return has not been submitted and the amount of income exceeds the basic exemption level, a penalty of 50% of the tax due on the unreported income will be imposed. Let us now go over the exemption under section 10 of Income Tax Act.
Exemptions under Section 10 of Income Tax Act
Following is a list of the various exemptions in the income under Section 10 of Income Tax Act.
Under Section 10(1) of Income Tax Act, agricultural income is exempted from income tax. The land from which the income is generated should be in India. The income can be generated from:
- Renting the land.
- Selling the produce.
- Basic operations on the land like cultivation
- A growth-oriented activity like pruning, weeding, etc.
- Agricultural building on the land.
Under Section 10(2) of Income Tax Act, the income of any member of a Hindu Undivided Family is exempted from income tax. If the estate is impartible, the family’s share of the estate’s revenue must be used to pay the income. Also, here the family’s income must be used to pay for the individual’s income. It is among the exemption under section 10 of Income Tax Act.
Under Section 10(2A) of Income Tax Act, income from a taxed partnership firm under the Income Tax Act 1961 is exempted. It is crucial to note, that the income or the profit received from the partnership firm, must be equivalent to the mentioned percentage in the partnership deed of the enterprise.
Under Section 10(4) of Income Tax Act, income received by non-residential Indians from securities and bonds issued by the central government is exempted from income tax. The income can be either in the form of interest on bonds or a premium on redemption of these bonds. Any interest income that a resident of a country other than India receives from the credit in a non-resident (external) account falls in the category of exemption under Section 10 of Income Tax Act.
Under Section 10(5) of Income Tax Act, concession on leave travel (with family) received from a previous or existing employer are exempted from income tax. The travel concession from the existing employer should be within the same financial year. And travel concession from the previous employer should be in terms of upcoming travel after retirement. The amount exempted under Section 10 of the Income Tax Act as part of the concession should not be more than the actual spending.
Note: All those who are included within the family are spouses, children, parents, and siblings (partially or completely dependent).
Under Section 10(6) of Income Tax Act, income is exempt when someone who isn’t a citizen receives compensation for representing India abroad. They could be a representative of an embassy, high commission, legation, or commission, or they might be acting in the capacity of an employee of one of these representatives. They may also be representatives of a foreign state’s trade office or consulate.
Under Section 10(7) of Income Tax Act, income received from the government in form of perquisite payment or allowance for those who represented India in any form outside India is exempt from income tax.
Under Section 10(CC) of Income Tax Act, income received in form of perquisite from an employer is exempted from income tax. A person can earn money in the form of perquisites rather than cash payments.
The employee is responsible for paying taxes on this perquisite income because it is included in their pay. However, the employer has the option of paying the tax on the employee’s behalf. In this situation, the employee is exempt from paying taxes.
Under Section 10(BC) of Income Tax Act, income or any type of financial compensation received from the government in an event of a disaster is exempted from income tax. Here the paying government body can be a state, central or local authority. Let us now learn about the section 1010d of Income Tax Act.
Under the section 1010d of Income Tax Act, any returns or bonus received after the maturity of the LIC policy is exempted from income tax. Premium is exempted only if the amount is less than 20 percent of the sum assured on policies issued before 1 April 2012 and 10 less than 10 percent if the policy is issued after 1 April 2012. Also, on LIC policies for a disabled person or with those diseases, the premium should not be more than 15 percent of the sum assured.
One must keep in mind that a Tax Deduction at Source (TDS) rate of 5% is applied to net income from insurance proceeds if the maturity benefit falls beyond the scope of the tax exemption under Section 10(10D).
Keep in mind that no TDS can be charged if a person got life insurance payments of less than Rs 1 lakh in the financial year. A TDS rate of 20% is payable if a PAN card is not submitted while filing claims. Now you know section 1010d of Income Tax Act.
Under Section 10(C) of Income Tax Act, the amount received from an employer after taking voluntary retirement from one’s employment is exempted from income tax. Employees of the following type of organizations are eligible for such Section 10 of the Income Tax Act exemption:
- State or central government authority
- Public sector company
- Co-operative society enterprise
- Local authority
- University of state-level institutions or IITs, etc.
Also Read: 40 Ways to Save Income Tax Legally in India
Under Section 10(10A) of Income Tax Act, the amount a government employee receives after the accumulation of the pension is exempted from income tax. Let us now take a look at Section 1011 of Income Tax Act.
Under the Section 1011 of Income Tax Act, after resignation or retirement, interest received from a provident fund is exempted from income tax. Any payment you make via a Sukanya Samriddhi Account is also included. Now you know about Section 1011 of Income Tax Act.
Under Section 10(13A) of Income Tax Act, the amount received from the employer to cover the House Rent Allowance (HRA) is exempted from income tax. There are a few conditions to this, as per Section 10(13A) Rule 2A. The exempt income under Section 10 is of the least amount:
- 40 percent of Dearness allowance + salary for metro cities or 50 percent of Dearness allowance + salary for other cities
- Actual HRA
- Actual rent – 10 percent of salary + Dearness allowance
Section 10(14) (I)
Under the Section 1014 of Income Tax Act, expenses like traveling, research expense, and conveyance incurred by the employee for the employer’s business is exempted from income tax.
Under Section 10(26) of Income Tax Act, members of the scheduled tribe of states Nagaland, Andhra Pradesh, Manipur, Tripura, and Mizoram are exempted from income tax.
Under Section 10(26AAA) of Income Tax Act, the income of Sikkimese people working in Sikkim or the dividend earnings on securities is exempted from income tax.
Under Section 10(34) of Income Tax Act, dividend earned after investing in any Indian enterprise is exempted from income tax. However, the dividend should be less than Rs. 10,000, and one will have to pay income tax on the earnings.
Under Section 10(35) of Income Tax Act, earnings after selling pre-decided mutual fund units are exempted from income tax.
Under Section 10(38) of Income Tax Act, long-term capital gains from mutual funds that are equity centered are exempted from income tax. However, one will have to pay the Securities Transaction Tax.
Special Allowance under Section 10 (14)
Certain non-taxable allowances are allowed to those taxpayers who earn income in the form of salary. When submitting tax returns using ITR-2, disclosure of this kind of exempted income must be given on “Schedule S – Details of Income from Salary.” Some of these allowances under the Income Tax Act are:
- Daily Allowance: This covers daily remuneration for costs an employee incurs when on business travel or while moving/transferring to a new employment site.
- Travel Allowance: Employees who need to travel as part of a business trip or for a job transfer is given a travel allowance.
- Research Allowance: This allowance is provided to support academic research as well as any other professional endeavors such as academic training.
- Conveyance Allowance: This covers costs incurred when using a vehicle to carry out work-related responsibilities.
- Climate Allowance: This is to pay for working in high-altitude or hilly regions of India.
- Border Area Allowance: This Allowance is for members of the armed forces stationed in border regions or other remote locations.
- Island Duty Allowance: Armed forces personnel operating in the Andaman and Nicobar Islands, or the Lakshadweep Islands are free from paying island duty allowance.
- Tribal Allowance: this is for working in pre-classified tribal, schedule, or agency regions, including West Bengal, Orissa, Assam, Karnataka, Tamil Nadu, Madhya Pradesh, and Bihar.
The maximum limit on the exemption under Section 10 of Income Tax Act is:
- For those under the age of 60 – Rs. 2.50 lakhs,
- For those between the ages of 60 and 80 – Rs. 3 lakhs
- For those who are 80 years of age or over – Rs. 5 lakhs.
Only individuals who are residents of India are eligible for the upper limit of Rs 3 & 5 lakhs. After learning about exempt income under section 10 and exemption under Section 10 of Income Tax Act, let us learn how you can claim them.
Claiming the Exemptions
You must notify the government by submitting an income tax return if you qualify for Section 10 income tax exemption. You should have the following documents on hand for this.
- Card PAN
- ID card
- Financial statement or passbook
- login information for income taxes
As you must be able to see, Section 10 of Income Tax Act primarily focuses on the many categories of income tax exemptions available to people of India who earn a living via employment. Its comprehensive scope highlights the importance of understanding these regulations to navigate the complexities of income tax liabilities effectively.
You are legally permitted to skip paying taxes on a variety of incomes and allowances under several subsections of this part of the act. However, to keep these exemptions from one’s yearly income, you must file an income tax return in time.