Incomes exempt from Income Tax

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By Hiral Vakil on March 8, 2019

There is a common myth that if you are earning any income then you will have to pay tax on it. The more you earn, the more would be the tax liability. But it is not true. there exist certain types of income for which your tax liability is Zero. This types of income are known as Exempt Income.

Exempt income is different from Deduction under Income Tax. Exempt incomes are excluded from the total taxable income of a taxpayer. Section 10 of the Income Tax Act, covers exempt incomes.

Following are the exempt incomes under the Income Tax Act:

Agriculture Income: Any income earned by the taxpayer from agriculture activity is exempt from tax. However, if it is accompanied by income from other sources than one needs to consider the basic exemption limit for taxability.

Gift Received from Relatives: Any gift received by an individual from relatives is exempt from tax. Gift received on the occasion of marriage or by way of will is exempt from income tax. Monetary gift received from non-relative upto Rs. 50,000 is also exempt from tax.

Treatment of Gift under Income Tax Act

Long Term Capital Gain: From FY 2018-19, LTCG up to Rs. 1,00,000 is exempt from tax. Earlier Any long term capital gain received on sale of stocks and equity mutual funds was exempt from tax under section 10(38). This section is not applicable to debt mutual funds.

What is Capital Gain under Income Tax

Dividend Received: Dividend received from any company in case of mutual funds or stocks are exempt from tax in the hands of an individual. However, as per budget 2016 if a sum of the total dividend exceeds Rs. 10 lakhs need to pay tax @10% of such dividend income.

Interest on Securities: Income from securities in the form of interest, premium, etc from government-issued bonds, certificates, deposits are exempt from tax. For eg: Bonds issued by NHAI, IRFC, REC, etc.

Life Insurance: The payment proceeds of a life insurance policy are exempt under section 10(10D). This includes a maturity amount as well as death claims.

A share of Profit from Partnership Firm: Any share of profit received by a partner from a firm is exempt from tax in the hands of the partner. Further, any share of profit received by a partner of LLP (Limited Liability Partnership) from the LLP will be exempt from tax in the hands of a partner. This exemption is limited only to share of profit. It does not apply to interest on capital and remuneration received by the partner from Firm/LLP.

Receipts From HUF: Any amount received out of family income is exempt in the hands of a member. For example, a family owns an impartible estate. An amount received out of an income of family estate by the member of such HUF is exempt from tax in the hands of the member.

Scholarship and awards: Any type of scholarship or award granted to any deserving student to meet the cost of education is exempted from tax. The entire sum of money received as a scholarship gets that tax exemption.

Provident Fund: Payment received from PF are exempt as part of section 10. However, PF withdrawal is taxable for less than 5 years of service. In the case of EPF, balance can be withdrawn only subject to a few conditions.

Amount Received under VRS(Voluntary Retirement Service): Any amount received by the employee where the scheme of voluntary retirement is framed as per rule 2BA of the Income Tax Rules gets a tax exemption upto Rs. 5,00,000 from the amount received as voluntary retirement.

Gratuity: Gratuity received by a government employee is totally exempt from tax. Whereas in the case of employees of a private organisation, it is exempt subject to certain conditions.

Commuted Pension: Commuted pension received by the government employee is fully exempt. However, for other employees, it is exempt subject to certain conditions.

Allowance for Foreign Services: Any Indian resident rendering service outside India and receiving any allowances or prerequisite outside the country remain tax-free under section 10(7) of the Act. Due to this section, any perquisite and allowances received by government servant while working outside India are tax-free.

FAQs:

1. Is it mandatory to show exempt income in ITR?

Yes. You have to mention all your incomes while filing Income Tax Return, be it taxable or exempt. There is a separate tab to show exempt income in ITR. You need to mention the nature of exempt income and the amount of income received during the year.

2. Which ITR should I file if i have earned exempt income during a year?

You can file ITR-1 if you have earned only exempt income during a year. However, if you have earned agriculture income exceeding Rs. 5,000 then you should file ITR-2.