Exempt Income u/s 10 of the Income Tax Act

There is a common myth that if you are earning any income, 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. Such incomes are Exempt Income u/s 10 of the Income Tax Act. Exempt income can be of any form such as interest received from PPF, interest from agricultural land, and many more.

What is Exempt Income?

Exempt income refers to certain types of income that are not subject to tax under the provisions of the Income Tax Act. Such income is different from Deduction under Income Tax. While exempted incomes are excluded from the total taxable income of a taxpayer, deductions are availed on taxable incomes.

Types of Exempt Income

• Agriculture Income:
  • Any income earned by the taxpayer from agriculture activity is exempt from tax. However, the agriculture income must be included in the total income for the calculation of the applicable slab rate. Thus, it is indirectly taxed by taking the non-agriculture income at higher tax slab rates.
• Gift received from Relatives:
  • Any gift received by an individual from relatives is exempt from tax. A gift received on the marriage or by way of will is not taxable. Monetary gift received from non-relatives up to INR 50,000 is also exempt from tax.
• Long Term Capital Gain:
  • From FY 2018-19, LTCG up to INR 1,00,000 is not liable to tax. Earlier, the long-term capital gain on the sale of stocks and equity mutual funds was exempt from tax under section 10(38). This section does not apply to debt mutual funds.
• Interest on Securities:
  • Income from securities in the form of interest, premium, etc from government-issued bonds, certificates, and deposits is tax-free. For eg: Bonds issued by NHAI, IRFC, REC, etc.
• Profit Share from Partnership Firm:
  • Any share of profit from a partnership firm or LLP is exempt from tax in the hands of the partner. However, interest on capital and remuneration is taxable.
• Provident Fund:
  • Payment received from PF is exempt under Section 10. However, PF withdrawal is taxable for less than 5 years of service. In the case of EPF, the taxpayer can withdraw the balance subject to a few conditions.
• Gratuity:
  • Gratuity received by a government employee is exempt from tax. Whereas in the case of employees of a private organization, it is tax-free subject to certain conditions.
• Commuted Pension:
  • Commuted pension received by the government employee is fully tax free. However, for other employees, it is exempt subject to certain conditions.

Other Exempt Income

• 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.
• Receipts From HUF:
  • Any amount received out of family income is tax-free 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 tax-free 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 exempt from tax. The entire sum of money received as a scholarship gets that tax exemption.
• Amount Received under VRS (Voluntary Retirement Service):
  • When an employee receives an amount under the scheme of voluntary retirement as per Rule 2BA of the Income Tax Rules gets a tax exemption of up to Rs. 5,00,000 from the amount received as voluntary retirement.
• Allowance for Foreign Services:
  • Any Indian resident rendering service outside India and receiving any allowances or perquisites outside the country are exempt from income tax u/s 10(7) of the Act. Due to this section, any perquisites and allowances received by government servants while working outside India are tax-free.

Reporting of Income in ITR

Taxpayers can declare their exempt income while filing their income tax returns every year. The taxpayer should report exempt income under the section ‘Exempt Income’ in the tab ‘Computation of Income and Tax’ of ITR-1 & ITR-4. You can add a row, select the nature of income from the dropdown list, and add a description and amount.

The taxpayer should report not taxable income under Schedule EI i.e. Schedule Exempt Income of ITR-2 & ITR-3. The taxpayer should report the details under the specific row for Interest Income, Agriculture Income, Income not chargeable as per DTAA, and other exempt income with a relevant option from the dropdown. This income is separately reported and not added to the Gross Total Income.

Disclosure of Exempt Income for Salary and Non-Salary Allowances

For salary account holders, you need to disclose exempt income under Schedule S – Details of Income from Salary’ while filing income tax as per ITR-2. The various exemptions are:

1. HRA – House Rent Allowance
2. LTA – Leave Travel Allowance
3. Leave Encashment Amount
4. Pension Amount
5. Gratuity Amount
6. Any form of perquisites received
7. The amount received from a Voluntary Retirement Scheme

For self-employed or non-salary account holders, there are certain incomes categorized under exempt income. They include agricultural income, interest on funds, and other income which have to be disclosed under Schedule EI while filing income tax returns.

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