Certain types of income which are non-taxable or are not subject to any Income taxes are known as Exempt Income. Under Section 10 of the Income Tax Act,1961 there are quite a large number of sub-sections which give us an idea of what are the types of income that are exempt from taxes.
The main objective of Section 10 of the Income Tax Act is to make the taxpayers understand about the exemptions to widen the ways for appreciating tax. Moreover, with all the exemptions mentioned in Section 10, the Section tends to reduce the burden of taxes by all these exemptions.
Let us have a look at some of the major exempt income as per Section 10.
List of Exempt Income
- Agricultural Income U/s 10(1),
- Share of profit from Partnership Firm U/s 10(2A),
- Compensation on account of any disaster U/s 10(10BC),
- Educational Scholarships U/s 10(17),
- Pension to gallantry award winners U/s 10(18),
- Family Pension received by family member of armed force U/s 10(19),
- Income of Minor of Rs. 1500 per minor child U/s 10((32),
- Dividend from Indian companies on which Dividend Distribution Tax is paid by the company U/s 10(34),
- Long Term Capital Gain on transfer of Listed Securities U/s 10(38)
Agricultural Income u/s 10(1)
Since India is an agrarian economy and in order to give a boost to the agricultural sector, the Government has included the provision for tax exemption on any income through agriculture. According to Agricultural Income Exemption, those taxpayers who are making income from agriculture and agricultural practices are eligible to get exemptions from tax. Based on certain conditions, those taxpayers who are obtaining certain income from sources relating to farmhouse will get exemptions from tax.
Share of profit from Partnership Firm U/s 10(2A)
There are quite a large number of benefits which are enjoyed by the partners of a firm. According to Section 10(2A), in a partnership firm the profit which is earned by a co-owner is exempted from tax. Similarly, any profit which is earned by a partner in LLP is also exempted from taxation. However, any other funds, remuneration, interest, etc. are taxable income. Any interest which is received by a partner on the capital or remuneration is exempt from taxation.
Compensation on account of any disaster U/s 10(10BC)
According to Section 10(10BC), a taxpayer when receives any compensation for a natural disaster from the Central Government, those compensations are tax exempted.
Educational Scholarships U/s 10(16)
Section 10(16) states that any amount which is received by a taxpayer as an educational scholarship i.e. a scholarship which helps in meeting the expenditure related to education are exempted from any tax. The term education scholarship here refers to the amount of fellowship, stipends, grants for traveling due to educational-related purposes, etc. All these inclusions under educational scholarship are exempted from tax. This scholarship which qualifies for tax exemption might have been given by the Government, University, Trust or Board, etc.
Pension to gallantry award winners U/s 10(18)
Any individual who has received gallantry award such as the ‘Param Vir Chakra’ or the ‘Mahavir Chakra’ or the ‘Vir Chakra’ or any such bravery awards and has offered services to the State Government or the Central Government is not liable for paying taxes for the pension received.
Family Pension received by family member of armed force U/s 10(19)
According to Section 10(19), if there occurs an unfortunate on-duty death of a member of the Armed forces, then the family pension which is obtained by his wife. Or children or any other nominated heir is tax exempted.
Income of Minor of Rs. 1500 per minor child U/s 10(32)
According to Section 64(1A), the income of minor child and the income of his parents are put together. Suppose, the income of an individual consists of the income of his minor child as well. In such a case, the individual is eligible to claim tax exemption concerning the income of the minor child. The individual can claim for a tax exemption of either Rs.1500 per minor child or the amount of income of each child whichever is lower.
Dividend from Indian companies on which Dividend Distribution Tax is paid by the company U/s 10(34)
According to Section 10(34), the following incomes are tax exempted in nature.
Any income which is obtained by dividends i.e. any dividend from a domestic company is not liable for Income tax. However, there are certain exceptions to this as well. According to Section 115BBDA, if the aggregate amount of dividend that has been obtained in a year exceeds Rs.10, 00,000 for an individual or HUF or a firm then the dividends will be charged at the rate of 10%.
Any income which is obtained from mutual fund units.
Income received by a unit holder of UTI.
Income received from the units of a specific company.
Long Term Capital Gain on transfer of Listed Securities U/s 10(38)
According to Section 10(38), long term capital gain obtained by transfer of listed securities is not liable for taxation. There are certain conditions which need to be fulfilled for the long term capital gain to be tax exempt.
The assets which are transferred should be the equity shares of a company, units of a mutual fund or the units of a business trust.
The assets should be long term capital asset.
The transfer of the securities should have taken place on or after 1st October 2004.
Declaration of Exempt Income
Taxpayers can declare about their exempt income during filing for ITR every assessment year.
Disclosure of Exempt Income for Salary Allowances
For salaried people, disclosure of exempt income needs to be made under Schedule S according to ITR. Some of the exempt income which needs to be disclosed is mentioned below.
- House Rent Allowance
- Leave Travel Allowance
- Pension Amount
- Gratuity Amount
- Leave Encashment Amount
Disclosure of Exempt Income for Non-salary allowances
There are some categories of Exempt Income which need to be disclosed by the self-employed or non-salaried people. Some of those exempt incomes are mentioned below.
- Agricultural Income
- Capital Gains
- Interest on funds
Non-disclosure of Exempted Income
There can be cases where the taxpayer does not disclose the exempt income as he feels it is unimportant due to no role of exempt income in taxation. It is advisable for all to disclose their exempt income failing which can bring them into the attention and suspicion of the Income Tax Department.
Hence, as said earlier the Government has included the provision of exempt income in the taxation system so as to change the outlook of general taxpayers towards taxation. By this provision, taxpayers may feel that the burden of tax has been reduced up to a certain extent. As a diligent taxpayer, you should always go ahead and disclose about your exempt income while filing for the Income Tax Return.
- Suppose, I am receiving extra allowance for doing overtime duty at my workplace. Is it taxable?
Yes, any additional or extra income is considered to be taxable income.
- Are arrears received in salary taxable?
Yes, arrear received in salary is taxable. However, the benefits will be spread over the years and there is relief available under Section 89 of the Income Tax Act.
- If allowance is provided for cell phone at workplace, is it taxable?
Yes, allowances on cell phone are taxable.