written by | May 2, 2022

Exempt Income Under Section 10 of Income Tax

Income is the money or any other value set as a reward for the service one provides to the other. According to the income tax act, every citizen of each country is liable to pay tax for their income in a specific financial year. Under section 10 of the income tax comes the other class called 'Exempt Income Tax'. Any non-taxable income is known as exempt income. Exemption income is not included in total income. It can be classified into the following categories:

  1. For all assessees 
  2. For employees and 
  3. For institution

Did you know?

As per the income exemption under 80C, the combined maximum limit for a deduction, which can be availed, is ₹ 1,50,000. This is as per section 80CCE.

Exempt Income

The income tax exemption of two journeys for the succeeding block. Any income that is non-taxable under the Income Tax Act is known as exempt income. Income exemption comes under section 10 of the Income Tax Act. Under section 10, different subsections give the reader a complete idea of an exempt income. To be more specific, "Any income an individual earns in a financial year that is said to be non-taxable is referred to as exempt income". There are specific kinds of income that are exempt from tax. The income tax act was enacted in 1961.

Under this statute, everything which is listed is related to taxation. It also includes levy, collection, administration and recovery of income tax. The main aim of this act is to unite and revise the rules related to taxation in the country.

The list of exempted income tax under the section 10 of the Income Tax Act is:-

  •  Interest is received through agricultural means.
  • Interest received through PPF.
  • Long term capital gains are earned through stock and shares.
  • Exemption on housing loans.
  • Leave and travel allowance.
  • Allowance on transport, children's education, subsidy on hostel fee.

Many debates are still going on about the definition of exempt income tax. Some of the exempted income tax under section 10 include the income earned through agricultural means as per section 10(1), house rent allowance (HRA) as per section10(13A), allowances utilised to meet business expenses as per section 10(14), income received in the form of interest as per section 10(15) etc.

The largest source of such exempt income is excluding employer contributions to health care for employees. The second-largest exclusion is the imputed rental income of an owner-occupied home, which is the rental income that you don't report for living in your own home. Most people don't consider this exempt income, but from a theoretical perspective, it is income that is not reported for tax purposes. As you go through the report, you can see the lists of the largest "tax expenditures" and those grouped by activity.

Also Read: All About Tax Exemption & Its Categories for FY 2020-21

The special allowances exempt under Section 10 (14) can be divided into 2 parts:

Allowances Exempt Under Section 10 (14)(i)

(14) (i) any such special allowance or benefit, not being like a perquisite within the meaning of clause (2) of section 17, specifically granted to meet expenses wholly, necessarily and exclusively incurred in the performance of the duties of an office or employment of profit, as may be prescribed, to the extent to which such expenses are incurred for that purpose ;

(ii) any such allowance granted to the assessee either to meet his expenses at the place where he ordinarily performs the duties of his office or employment of profit or at the place where he ordinarily resides, or to compensate him for the increased cost of living, as may be prescribed and to the extent as may be prescribed.

Allowances Exempt Under Section 10 (14)(ii)

The total taxable salary would be calculated after deducting the allowances exempt under Section 10, and the net salary would be taxable in accordance with the Income Tax slabs. Another deduction made on the salary is TDS, and at the time of filing income tax returns, the employee receives credits.

Under section 10(14) of the Income Tax Act, there is another subsection that is section 10(14(2)) that gives exemption in the form of climatic allowances, tribal area allowances, border area allowances, compensatory field allowances, children's education fund, counterinsurgency allowance, island duty allowance etc. Now, when one goes through the Income Tax Act, it can be found that there are also various types of non-salary income that are non-taxable.

For example, dividends, agricultural income, interest on funds, capital gains etc. The taxpayer must disclose these types of income under "Schedule EI - Details of Exempt Income" when filing the tax returns under ITR-1.

According to the latest update of the taxation guidelines, any exempted income earned by a taxpayer in a financial year, which comes out to be ₹ 5000, should be disclosed when filing income tax returns for the financial year in the ITR-2 instead of the ITR-1 form.

There are a few incomes that do not attract any tax. Many taxpayers also fail to disclose details related to this type of income. Any individual who does not disclose these details can end up under the review of the Income Tax Department. This is mainly because they fail to show the origin of income.

Any two journeys out of a block of 4 years can be claimed for exemption. To understand this better, the first block of 4 years would be the calendar years 1984-87. The second block would be 1988-92; the third block would be 1993-96, the fourth block would be 1997-2000, the fifth block would be 2001-04, the sixth block would be 2005-08, the seventh block is 2009 to 2012, eight-block is 2013-2016, and the ninth block will be 2017-2020.

If the exemption of LTC has not been availed in a particular block for either case of the journey, the exemption can be claimed in the calendar year immediately after the end of the block of four calendar years. Such journeys undertaken during an extended period will not be taken into account to determine 

Also Read: Taxable Income: What is it, and How Can You Reduce It?

House rent allowance

Any special allowance specifically granted to an employee by his employer to meet expenditure incurred on payment of rent in respect of residential accommodation occupied by the assessee is exempt to the extent of least of the following:

(i) Actual amount of such allowance received in respect of the relevant period; or

(ii) Rent paid over 10% of salary [rent paid – 10% of salary]

(iii) an amount equal to:

(a) where such accommodation is situated at Mumbai, Kolkata, Delhi or Chennai, one-half (i.e., 50%) of the amount of salary due to the assessee in respect of the relevant period; and

(b) where such accommodation is situated at any other place, two-fifth (i.e., 40%) of the amount of salary due to the assessee in respect of the relevant period.

Conclusion

Exempted income under section 10 allowances for salary account holders and non-salary account holders are different. Various exemptions for the salary account holders are rent for the house allowance, leave travel allowance, leave encashment amount, pension amount, gratuity amount etc.

Exemptions for the non-salary account holders are dividends, agricultural income interest on funds, capital gains, etc. The schedules in the Income Tax Act 1961 have various annexures that were included and amended so that many topics which were not discussed earlier could be included. Various schedules have been enhanced to the Income Tax Act at several points to create the IT Act more broad and detailed.

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FAQs

Q: How much can I save under Section 80C of the Income Tax Act?

Ans:

Under Section 80C of the Income Tax Act, exemption of up to ₹ 1.5 lakhs is provided. However, no exemption is provided under the new tax regime.

Q: Which are the general incomes that can be exempted from tax?

Ans:

  • HUF Income
  • Share of profit from the firm
  • Casual and non-recurring receipts
  • Receipts from Life Insurance Policy
  • Scholarships to meet the cost of education
  • Allowances of MP and MLA
  • Awards and rewards from central and state government
  • Income of Members of scheduled tribes residing in certain areas in the North-Eastern States or in the Ladakh region
  • Income of residents of Ladakh
  • Subsidy from Tea Broad under the approved scheme of replantation
  • Subsidy from any other concerned board under the approved scheme of replantation
  • Minor's income clubbed with individual
  • Dividends from Indian Companies, Income from units of Unit Trust of India and Mutual Funds, and income from Venture Capital Company/fund
  • Profit of newly established undertaking in free trade zones electronic hardware technology park on software technology park for 10 years (net beyond 10 years from 2000-01)
  • Profit of 100% export-oriented undertakings manufacturing articles or things or computer software for 10 years (not beyond 10 years from 2000-01)
  • Profit of newly established undertakings in IIDC or IGC in North-Eastern Region for 10 years, and many more.

Q: What is the difference between exemption and deduction of tax?

Ans:

Under Chapter VI A of the act, it has been mentioned that exemptions and deductions are different. An exemption means exclusion, i.e. if a certain income is exempt from tax, then it will not contribute to a person's total income. Deduction means subtraction, i.e. an amount that is eligible to reduce taxable income. The deduction is a concession, but the exemption is relaxation.

Q: What is exempt income? Differences between exempt income and taxable income.

Ans:

An income that is not charged to tax, i.e., the Income Tax Act specifically grants exemption from tax to such income, is known as exempt income. Incomes which are chargeable to tax are called taxable incomes.

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