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
- 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 taxing 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. Gift received on the marriage or by way of will is exempt. Monetary gift received from non-relative up to Rs. 50,000 is also exempt from tax.
- Long Term Capital Gain:
- From FY 2018-19, LTCG up to INR 1,00,000 is exempt from 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 is not applicable to debt mutual funds.
- Interest on Securities:
- Income from securities in the form of interest, premium, etc from government-issued bonds, certificates, deposits are 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 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.
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 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 prerequisite outside the country are exempt from income tax u/s 10(7) of the Act. Due to this section, any perquisite and allowances received by government servant while working outside India are tax-free.
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.
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.
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:
- HRA – House Rent Allowance
- LTA – Leave Travel Allowance
- Leave Encashment Amount
- Pension Amount
- Gratuity Amount
- Any form of perquisites received
- 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.
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.
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.
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.