Income Exempt from Tax

Know the incomes which can save your taxes!

What is Exempt Income?

Generally speaking, any income earned is liable to tax. However, certain incomes have been granted exemption from the levy of tax under Income Tax Act, 1961. Such tax free incomes are termed as exempt income. It is important to state that there is a difference between exemptions and deductions.

Deductions are the investments by the assessee that are reduced from the taxable income whereas exemptions are the incomes on which tax is not levied and hence are not considered in computing total taxable income.

Incomes Exempted from Income Tax under section 10

Income tax Act, 1961 offers various tax exemptions to each and every individual. Amongst them, lot of exemptions come under Section 10 of Income Tax Act. However, this article covers some of the major exemptions available to taxpayers. For better understanding, here, exempt income has been bifurcated into two categories :

  1. Incomes which are part of allowances; and
  2. Other Incomes

1. Incomes which are part of allowances

Below mentioned is the summary of certain exemptions available to an individual being a salaried employee :

  • House Rent Allowance : It is one of the most prominent allowances that form the part of the salary of the individual. It is an allowance given by the employers to employees to meet out their cost of accommodation or rent paid by them. Section 10 of income tax has exempted HRA received from income tax in the hand of employees if they are living in rented house. The amount of HRA exempted from income tax is calculated by taking lower of the following :
    1. Actual HRA Received
    2. 40% of Basic Salary if the employee is residing in cities other than Mumbai, Chennai, Kolkata and New Delhi.
    3. Rent Paid Minus 10% of Salary

    Where the employee resides in metro cities, 40% is substituted with 50% in the above mentioned computation of HRA exemption available.

    Read our guide on HRA calculation and exemption.

    Calculate your exemption with HRA Calculator.

  • Leave Travel Allowance or LTA : Leave Travel Allowance (LTA) is a tax free allowance received by the employee to meet the cost of travelling to anywhere in India. The most important condition of availing this exemption is that the employee must be on leave from his work. Where the allowance is received otherwise than on leave, it shall become taxable under the head, Income from salary.

    Read our guide to know how you can claim Leave Travel Allowance Exemption.

    Know your LTA amount with our Leave Travel Allowance calculator.

  • Conveyance Allowance : It is another most common allowance received by employees to meet their commuting expenses. The maximum amount of exemption available is Rs. 1600 per month.

2. Other Incomes

Below mentioned are the exempt incomes available to both, salaried and non – salaried individuals, provided the requirements, if any, of the respective sections have been complied with.

  • Dividends Received : Dividends declared by any company in case of stocks or mutual funds are exempt from income tax in a taxpayer’s hands. However, this is exempt only in case the dividend is declared by an Indian company. If a person receives dividend from any foreign company then it shall be taxable in the hands of the recipient.
  • Interest on Securities : As per Income Tax Rules, interest received on certain securities shall be exempt from taxation. Presently, the security which is exempt from income tax is tax free bonds.
  • Interest on Provident Funds : As per section 10(11) and (12), interest received from amount deposited in provident funds like employees provident fund, statutory provident fund, public provident fund, etc are exempt of tax.
  • Long Term Capital Gain on Equity Shares : Any income arising on sale of equity shares, being registered in a recognised stock exchange and held for a period of more than twelve months shall be exempt from the purview of income tax. However, this exemption shall be available only if securities transaction tax (STT) has already been charged on the transactions of sale and purchase of such shares.
  • Amount Received in Form of Gifts : Income Tax Act has given a great relief to a gift receiver by exempting the gifts received on some special occasions as mentioned below :
    1. From a specified relative;
    2. On the occasion of the marriage of the individual;
    3. By way of will or in contemplation of death of the payer;
    4. From any local authority, any university, trust, educational or medical institution

    Apart from the above mentioned cases, any sum received as money or a property not exceeding Rs. 50,000 shall also be tax free.

  • Life Insurance : The payment received from the life insurance policy is exempt from income tax under section 10(10D). However, the exemption for the maturity claims or survival benefits shall be granted subject to following conditions :
    1. Where the policy has been acquired between 01.04.2003 to 31.03.2012, premium during the year must not exceed 20% of the sum assured.
    2. Where the policy has been acquired after 31.03.2012, premium for the year must not exceed 10% of the sum assured.
    3. Where the life insurance is for a disabled person under section 80U or person suffering with specified diseases under section 80DDB and the policy has been acquired on or after 01.04.2013, premium for the year must not exceed 15% of the sum assured.

    The above mentioned conditions are not applicable to death claims i.e. claims received on death of the insured shall be exempt from tax even if the premium exceeds the above given limits.

  • Agriculture Income : Any income derived by a land situated in India and engaged in agriculture activities shall be exempt from tax.
  • Share in Profit of a Firm : Where a person is a partner in a firm, any amount received as share in profit of that firm shall not be charged to tax.
  • Sukanya Samriddhi Account : The amount received on maturity or otherwise from Sukanya Samriddhi Account shall not be liable to tax. Moreover, any interest received from such account shall also be tax free.

Benefits of Disclosing Exempt Incomes

Exempt income is considered to be an income on which tax is not levied and therefore lot of people don’t reveal these incomes in the ITR. However, not disclosing these exempt incomes in ITR may result to later compliances since the IT department specially asks for thorough details of exempted income.

If you don’t disclose these incomes in the ITR, the IT department will not be aware about the source as from where you acquired such income and may deem of undergoing any suspicious activity.

For instance, if you have earnings of say about Rs. 8 lakhs p.a. and you possess shares which you had purchased about20 years ago giving you handsome revenue of Rs. 30 lakhs. Now you tend to dispose of these shares and buy a property.

Since you haven’t revealed the exempt income in ITR Form, the IT Department is not aware as from where the money came and the moment you buy a property a major suspicion comes up that how can an individual with an income of about 8 lakhs buy a property and thus chances of scrutiny notice becomes higher.

Even though, when the IT officer will contact you for scrutiny, you will possess all possible documents in order to give reason for the income source and the officer will let you go without any penalty as it is exempted income. But why an individual must generate such situation when such income is exempt from income tax and may be effortlessly disclosed devoid of any hassle.

It is important to keep in mind that the above article is related to disclosure of income tax exemptions and not income tax deductions.

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