efiling banner
GET. SET. FILE!
Plan, prepare and e-file your taxes.

Exempt Income under Income Tax

author portrait

Hiral Vakil

Capital Gains
Exempt Income
Income Interest
Income Source
Provident Fund
Last updated on May 28th, 2021

What is Exempt Income?

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. Such incomes are known as Exempt Income u/s 10 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

Other Exempt Income

Reporting Exempt Income in ITR

Taxpayers can declare their exempt income while filing for income tax every financial 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, add description and amount.

Exempt Income Tax

The taxpayer should report exempt 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, other exempt income with a relevant option from the dropdown. The Exempt Income is separately reported and not added to the Gross Total Income.

Exempt Income

Disclosure of Exempt Income for Salary and Non-Salary Allowances

For salary account holders, you need to make a disclosure of 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. 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 dividends, agricultural income, interest on funds, capital gains which have to be disclosed under Schedule EI while filing income tax as per ITR-1.

FAQs

Is dividend income exempt from tax?

Earlier, the Dividend received from a Domestic Company was exempt from tax under Section 10(38). However, under Budget 2020, DDT was abolished thus making dividend a taxable income for a taxpayer. If dividend income exceeds INR 5,000, the company is liable to deduct TDS u/s 194 for dividend on equity shares and u/s 194K for dividend on equity mutual funds.

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.

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.

  • Ravindra Nath says:

    Sir
    I am a salaried individual. I started investing in stocks recently. I realised a profit (short term) of Rs. 1796/- for the present FY.

    Am I supposed to inform my employer to show this income in Form 16?
    Which ITR I should file?

    • Maharshi Shah says:

      You do not have to inform your employer about the income received from trading. Moreover, since you have traded under short term delivery, you need to file ITR 2 – Income from capital gains.

Leave a Reply

Your email address will not be published. Required fields are marked *