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Income Exempted from Tax in India

by Vikram | 18 December 2013

In India, certain types of income do not attract taxes. In tax calculations, these types of income are not deducted but rather NOT added or included in the first place, to the gross total income. Mainly the Section 10 provides guidelines for exempt income. Primarily, the following kinds of income are exempted from taxation usually to the entire extent –

Sr. No.

Type of Income

Under Section (u/s)

1.

Agricultural Income

10 (1)

2.

Income to a Member from Hindu Undivided Family (HUF)

10 (2)

3.

Share of Profit from a Partnership Firm

10 (2A)

4.

Leave Travel Concession to the extent actually spent domestically

10 (5)

5.

Foreign Allowance given by Government for services rendered

10(7)

6.

Gratuity

10(10)

7.

VRS Compensation

10(10C)

8.

Non-monetary Perquisites received by Employee (Employer pays tax on behalf of employee)

10(10CC)

9.

Amount received from Life Insurance Policy

10(10D)

10

Amount received from Provident Fund

10(11,12)

11.

Amount received from an approved Superannuation Fund

10(13)

12.

House Rent Allowance

10(13A)

13.

Other Special Allowances such as Transport, Helper, Uniform, Daily, Children’s Education, Children’s Hostel Expenses, Conveyance, Research

10 (14)

14.

Interest on Securities

10(15)

15.

Educational Scholarships

10(16)

16.

Income earned by a Minor + basic provisions u/s 64(1A)

10(32)

17.

Dividend + Interest on Units from an Indian Company (MFs, UTI)

10 (34,35)

 

Section 10 includes many more such scenarios wherein the income or monetary receipts are exempted from tax. Furthermore, this section also elaborates on the various terms and conditions applied under every sub-section, for the exemption to be valid.

This post further elaborates on a few most common and important types of exempted income in the Indian context.

Agricultural Income

Any rent or revenue earned by means of agriculture is tax-exempted u/s 10 (1). However it must be noted that agricultural income generated in foreign countries by Indian citizens is treated as non-agricultural income and hence is taxable. In tax calculations, agricultural income may be used for the purpose of finding out the tax applicable on non-agricultural income, by subtracting it from the total income of the person under assessment.

Compensation Received post Retirement

Since the Gratuity Act of 1972, paying gratuity has become compulsory. Wherever inapplicable, the employee can still claim it under the employment contract terms. Government employees’ gratuity is fully tax exempted.

The non-government employee covered by the Act gets exemption on the least one of the following –

•        Gratuity actually received

•        Rs. 10 lakh (Rs. 3.5 lakh up to 23rd May 2010)

•        Based on salary last drawn for each year of service – 15 days salary or 7 days if the establishment is of seasonal nature

The non-government employee NOT covered by the Act gets exemption on the least one of the following –

•        Gratuity actually received

•        Rs. 10 lakh

•        Half month’s average salary for each year of service completed

The VRS compensation received by employees of Public Sector companies and other similar entities such as local authorities, cooperative societies, state and central government institutions and establishments, etc., is exempted from tax to the extent of Rs. 5 lakh.

Travel Concession and Allowances

The rule of thumb here is that, the exempted amount is generally only the amount that is actually spent or provided for the specific purpose, whichever is lower. In case of allowances for children’s education, travel and hostel, the exempted amounts are restricted purpose-wise and applicable to only 2 children.

Income of a Minor

U/s 64 (1A) – all the income that is earned by a minor is clubbed with the income of the parents or guardians. The tax exemption applies only to the extent of Rs. 1500/- or the income earned by the minor, whichever is lower.

 

Similarly, an elaborate description of the other various kinds of income can be read under Section 10 of the Indian Income Tax 1961. Remember to consider the amendments that may have taken place since or better, simply consult with the experts.


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