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?
• Types of Exempt Income
• Reporting of Income in ITR
• Disclosure of Exempt Income for Salary and Non-Salary Allowances
• FAQs

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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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 exempt from tax. Whereas in the case of employees of a private organization, it is tax-free subject to certain conditions.
  • 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.
    • 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.
    • 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.
    • 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.
    • 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.

    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 dividends a taxable income for a taxpayer. If dividend income exceeds INR 5,000, the company is liable to deduct TDS u/s 194 for dividends on equity shares and u/s 194K for dividends on equity mutual funds.

    Is it mandatory to show exempt income in ITR?

    Yes. You must mention all your income while filing an Income Tax Return, whether 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.

    Is HRA fully exempted from tax under section 10 of the Income Tax Act?

    As per section 10 (13A), HRA can be fully exempt or not, it depends on the structure of your salary, the amount of rent paid during the previous year, and the location of the taxpayer.

    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.

    Jatinder Singh Bedi says:

    Hi , In case sender want to show the gifted shared to Relative in ITR as part of disclosure. Where he can show What is definition of Relative in this context

    Bharti Vasvani says:

    Hello Jatinder, In the case of gift, the receiver has to report it in their ITR either as exempt income or taxable income. The definition of relative as per the Income tax act would include: 1 Spouse of an individual
    2 Brother/ sister of individual and spouse
    3 Any lineal ascendant or descendant of individual and spouse
    4 Brother/ sister of either of the parents of individual
    5 Spouses of persons referred to in points 2 to 4 Hope this helps!

    ganesh says:

    Sir,
    i have gifted some share to my wife in fy 21-22 those are not yet sold by her. but p&l statement of mine showing profit of 6000 rs against gifted share. will it be considered as capital gain on my head or not.

    Khalid Aziz says:

    Suppose, i am taking salary along with an amount as monthly fuel expense. income tax is being deducted from my salary, whether income tax may be deducted from amount of monthly fuel expense or not?

    Bharti Vasvani says:

    Hello @Khalid Aziz, If you’re receiving conveyance allowance from your employer for reimbursement of fuel expense then it shall form part of your salary structure and employer shall deduct TDS on the same as well. Hope this helps!

    Mukund says:

    Life insurance maturity amount received in a particular financial year is included in the gross annual income of that particular financial year or it’s not included in it?? please clarify

    Swapnil Agarwal says:

    Hello
    If you are receiving the maturity amount from the life insurance then it will be included in the Total Income of the financial year. But whether it will be taxable or exempt depends on the certain conditions specified under Section 10(10D).

    James Metcalf says:

    I receive long term disability insurance payments for which I paid for the premiums,not my employer. Is this considered earned income?

    I am salaried but i also invested in Growpital platoform which provide profit share with partnership firm LLP, which comes under section 10(2A). So which ITR i need to file and where to show that exempted income.

    Aditi says:

    Sir I left my job and received an EPF amount of 1 lakh for 1.5 years of service. Can I put it in exempt income.

    Santanu Bhattacharyya says: PHD stipend is exempted under section 10(16). How to file an ITR in this case? K S GANESH says:

    I want some clarification if an employee superannuating from PSU Bank and receives EPF on superannuation The same is included in in Form 16 and shown as deduction under sec 10., Where to showthe same in ITR1 as there is provison only for Gratuity, commutation and leave encashment. Whether we hve to add in Any other and mention in description? OR WHETHER WE HAVE TO SHOW IN EXEMPT INCOME.IF WE SHOW THE SUPER ANNUATION BENEFIT EPF UNDER SEC 10(11)IN EXEMPT INCOME. IT IS NOT REDUCING THE GROSS SALARY WHERE SUPERANNUATION EPPF IS INCLUDED.
    KINDLY CLARIFY

    Vinod Kumar says:

    Is Intrest upto ₹3500, on Post Office Saving Account exempted exempted from income tax, under section 15(10)(1), alongwith deduction available under 80TTA and 80TTB

    Vinod Kumar says:

    Is Intrest upto ₹3500, on Post Office Saving Account exempted from income tax, under section 15(10)(1), alongwith deduction available under 80TTA and 80TTB

    Ashok Kumar says:

    Hi,
    I have received Rs. 3000/- as professional fee for attending a board. The Institute has deducted a TDS of Rs. 300/- on it. Where I can show this income in itr2 and what is exemption limit for income under section 194 jb.
    Thanks and regards,

    Venkatesh says:

    Parent Company in dubai
    Subsidary Company in India
    Subsidary Company providing services to dubai. the income received form dubai is taxable?
    perecentage of income tax rate?
    any exemptions/deductions

    Utsav Vaish says:

    I had surrendered the Unit Linked insurance Plan after the Lock-in Period was over(After 5years) where should if display this income in ITR Form-2?