EXEMPT INCOME

EXEMPT INCOME

Saturday Brain Storming Thought (287) 09/08/2025

Saturday Brain Storming Thought (287)
09/08/2025

Exempt Income

Exempt Income are the incomes that are not chargeable to tax as per Income Tax Act, ie they are not included in the total income for the purpose of tax calculation while taxable incomes are chargeable to tax as per Income Tax Act

Exempt Income are those on which the tax is not likely to be paid

Example of Exempted Income

1) Agricultural Income

Income derived from agricultural activities within India is given tax exemption under section 10(1)

2) HRA (House Rent Allowance)

Exemptions applicable to HRA are determined based on specific criteria including the actual HRA received, rent payments made and components of salary

3) Income for HUF (Hindu Undivided Family)

Funds received by a member from the income of an HUF or from an impartible estate are exempt section 10(2)

4) Partner’s share from a firm

Profits distributed to a partner from a firm are exempt under section 10 (2A)

5) Interest to Non-Residents

Certain interest earnings are exempt for non-residents under section 10(4)

Income categories exempt for tax

1) Scholarship and grants

Amounts received as scholarships for education are exempt from tax, provided they are used for educational purposes

2) Dividends from domestic companies

Dividends received from domestic companies were previously exempt but are now taxable in the hands of the shareholder as per Finance Act, 2020

3) Interest from certain securities

Interest earned on specific securities such as Public Provident Fund (PPF) and certain bonds, are exempt from tax

4) Amounts received under life insurance policies

Proceeds from a life insurance policy, including bonuses, are exempt, provided certain conditions are met under section 10(10D) of the Income Tax Act

Eligibility for Exempt Income

1) Any taxpayer earning from qualified exempt income sources can avail of the exemption

2) Exempt Income must be declared while filing income tax returns, even if no tax liability exists for such income

Steps for filing Exempt Income

1) For Salaried Individuals

Report exempt income such as HRA, LTC and Leave Encashment under Schedule S of the ITR form

Common items to disclose

House Rent Allowance
Leave Travel Allowance
Leave Encashment
Pension Amount
Gratuity
Voluntary Retirement Scheme (VRS) payments

2) For Non-Salaried Individuals

Report other forms of exempt income, such as dividends and agricultural income, under Schedule EI (Exempt Income)

Key Takeaways of Exempt Income

1) Disclosure is Mandatory

Even if exempt income does not attract tax, it must be disclosed in the income tax return for transparency

2) Maintain Documentation

Keep proof of income and relevant documentation for audit purposes (ie PPF passbook, HRA receipts)

3) ITR Form Selection

Choose the correct ITR form based on the type of income earned

ITR – 1 ( Sahaj)

Salaried Individuals with exempt income up to Rs 5000

ITR – 2

If exempt income exceeds Rs 5000 or includes agricultural income above Rs 5000

Important Sections for Exempt Income

1) Section 10(1) – Agricultural Income

2) Section 10(2) – Sum paid out of income of family or income of impartible estate

3) Section 10(2A) – Share in the total income of the firm separately assessed as a firm for partmer

4) Section 10(4)(i) – Interest on specific securities or bonds for non-residents

5) Section 10(4)(ii) – Interest from NRE account

6) Section 10(4B) – Interest on specified saving certificates issued before 01/06/2002 subscribed in the foreign currency

7) Section 10(7) – Allowances or perquisites by Government for services rendered outside India

8) Section 10 (10BC) – Compensation from Central Government, State Government or Local Authorities on account of any disaster to individual or his legal heir

9) Section 10 (10D) – Any sum received under a life insurance policy including bonus

10) Section 10(11) – Payments from a statutory PF or public PF from notified PF

11) Section 10(11A) – Payment from an account opened under Sukanya Samriddhi Account Scheme

12) Section 10(12) – Accumulated balances due from recognised PF for salaried employee

13) Section 10(13) – Payment from approved superannuation

14) Section 10(15)(i) – Income by way of interest, premium on redemption or other payment from notified securities, bonds, certificates etc issued and notified by Central Government

15) Section 10(15)(iib) – Interest on notified capital investment bonds

16) Section 10(15)(iic) – Interest on notified Relief bonds

17) Section 10(15)(iid) – Interest on notified bonds being NRI bonds issued by SEBI

18) Section 10(15)(iv)(c) – Interest payable by industrial undertaking on money borrowed or debt incurred prior to 01/06/2001 in foreign country in respect of purchase of raw materials, components or plant and machinery and approved by Central Government including usance interest payable outside india by an undertaking engaged in the business of ship breaking in respect of a ship from outside india

19) Section 10(15)(iv)(fa) – Interest paid by a scheduled bank on RBI approved foreign currency deposits, FCNR and RFC accounts

20) Section 10(15)(vi) – Interest on Gold Deposit Scheme, 1999

21) Section 10(15)(vii) – Interest on notified bonds issued by a local authority or by a State Pooled Finance Entity

22) Section 20(15)(viii) – Interest on deposit made on or after 01/04/2005 in an offshore banking unit referred to in Special Economic Zones (SEZ) Act, 2005

23) Section 10(16) – Scholarship granted to meet cost of education

24) Section 10(17A) – Payment in cash/kind as award instituted by Central/State Government or approved body

25) Section 10(18) – Pension or family pension

26) Section 10(19) – Family pension to widow, children or nominated heir

27) Section 10(23AAA) – Any income from employees welfare fund

28) Section 10(23C)(iiiaa) – Any income by Swachh Bharat Kosh set up by Central Government

29) Section 10(23C)(iiiaaa) – Any income from clean Ganga fund set up by Central Government

30) Section 10(23DA) – Any income from the activity of securitisation

31) Section 10(23ED) – Contribution received from the depository from investor protection fund

32) Section 10(23F) – Dividend and LTCG in respect of equity shares of a Venture Capital Undertaking

33) Section 10(23FA) – Dividend other than referred on section 115-O and LTCG in respect of equity shares of a Venture Capital Undertaking

34) Section 10(23FB) – Income from investment in Venture Capital Undertaking

35) Section 10(23FBA) – Any income other than income chargeable under the head profits and gains of business or profession

36) Section 10(23FBB) – Income distributed by an investment fund which is taxed as business income in the hands of investment fund

37) Section 10(23FC) – Interest received or receivable from Special Purpose Vehicle (SPV) by business trust

38) Section 10(23FCA) – Income from renting, leasing or letting out any real estate asset owned by REIT

39) Section 10(23FD) – Any income distributed as referred to in section 115UAfor unit holders of a business trust

40) Section 10(32) – All income of a minor child which is clubbed – Upto Rs 1500 per minor child

41) Section 10(33) – Capital Gains arising on transfer of Unit 64 on or after 01/04/2003

42) Section 10(34) – Dividends referred to in section 115-O

43) Section 10(34A) – Amount received on buy back of unlisted shares referred to section 115QA

44) Section 10(35) – Income in respect of UTI, Mutual Funds specified under section 10(23D)

45) Section 10(35A) – Income distributed by a securitisation trust referred to in section 115TA

46) Section 10(36) – LTCG on transfer of equity shares purchased between 01/03/2003 and 01/03/2004

47) Section 10(37) – Capital Gains arising from transfer by way of compulsory acquisition under any law of the agricultural land in urban area referred to in section 2(14)(iii)(a or b) for which is determined or approved by Central Government or RBI with effect from AY 2005-06

48) Section 10(38) – LTCG on transfer of equity share in company or a unit of an equity oriented fund or a unit of a business trust where such transaction of sale is entered into on or after 02/10/2004 and is subjected to Securities Transaction Tax (STT) with effet from 01/10/2004

49) Section 10(45) – Notified allowances and perquisites

50) Section 10(46) – Specified Income

51) Section 10(47) – Any income from infrastructure debt fund set up in accordance with prescribed guidelines

52) Section (10A) – With effect from AY 2000-01 income for 10 years of Commercial production and income from exports eligible for deduction for 10 years from the year of commercial production

53) Section (10AA) – With effect from 2006-07 income from export eligible for deduction starting from the year of commercial production

54) Section (10B) – Same as Industrial undertaking in Free Trade Zone

55) Section (10BA) – With effect from 2004-05 income derived from export out of India of eligible articles or things up to AY 2009-10

56) Section (10C) – Income of 10 consecutive A Ys from the year of production up to A Y 2003-04