Introduction

The concept of income tax exemption plays a crucial role in taxation systems worldwide,
including the Income Tax Act of India. Income tax exemptions are provisions that allow
certain types of income or specific categories of taxpayers to be excluded from taxable
income, thereby reducing the tax burden on individuals or entities. These exemptions are
designed to encourage specific behaviours, investments, or activities deemed beneficial to the
economy or society as a whole.
An exemption refers to the deduction allowed by the law to reduce the amount of income that
would otherwise be taxed. It is a legal deduction from the income that would otherwise be
taxed for a qualifying reason. Under the income tax law, exemptions refer to income that do
not form a part of total income taxable under the law. Similarly, exemptions are provided with
an object of the public good under GST. It keeps such transaction of goods and services or
taxable persons out of the scope of supply under GST.

MEANING OF EXEMPTED INCOME

Exempted income is that income on which income tax is not chargeable. Such incomes are
classified as under:
i) Incomes which do not form part of total income nor is income tax payable on them. They
are called fully exempted incomes.
ii) Incomes which are included in the total income but are exempt from income tax at the
average rate of income tax applicable to the total income. They are called partially exempted
incomes.
iii) Incomes of certain Institutions or authorities are exempted subject to fulfilment of the
required conditions.
Types of Income Tax Exemptions

a. Individual Taxpayers
 Exemptions on basic income: Many countries offer tax exemptions on a certain
portion of an individual's income, known as the basic exemption limit.
 Exemptions for specific investments: Certain investments, such as contributions to
retirement funds or donations to charitable organizations, may qualify for tax
exemptions.
 Exemptions for specific expenses: Expenses related to education, healthcare, or
housing may be eligible for tax exemptions.

b. Business Entities
 Exemptions for certain industries: Governments often provide tax exemptions to
businesses operating in specific industries to promote economic growth and
investment.
 Exemptions for startups and small businesses: Startups and small businesses may be
eligible for tax exemptions or reduced tax rates to encourage entrepreneurship and
innovation.
 Exemptions for export-oriented businesses: Countries often offer tax exemptions to
businesses engaged in export activities to enhance competitiveness in international
markets.

EXEMPTIONS UNDER INCOME TAX ACT, 1961

The Income Tax Act, 1961 is the primary legislation governing the imposition and
administration of income tax in India. Within its provisions, various exemptions are provided
to individuals, Hindu Undivided Families (HUFs), and other entities, aiming to incentivize
certain activities, promote economic growth, and provide relief to taxpayers. Understanding
these exemptions is crucial for taxpayers to effectively manage their tax liabilities and
optimize their financial planning.
Section 10 of the Income Tax Act, 1961 provides tax-saving benefits to a salaried
professional. This section focuses on such income which falls under the exempted category
and is not included in the total income for the year.

Section 10(1): Exemption for Income From Agricultural Activities

Section 10(1) offers tax relief to India’s farmers and those who make a living from
agriculture. The section further clarifies and lists down the type of incomes from agriculture
that would be eligible for tax exemption under Section 10(1). They are:
 Income from sale of farm produce
 Rent or income generated through agricultural land holding in India
 Income derived from agricultural operations, such as cultivation, ploughing, and
tilling
 Income made from subsequent operations for preservation and to increase the yield of
the produce, such as cutting, weeding, pruning, irrigation, use of compost, manure,
and fertiliser, etc.
 Income made from renting out buildings required for preserving farm produce or for
carrying out other agricultural operations

Section 10(2): Tax Exemption on Income Made as a Member of a HUF

This section states that any income or profit made from businesses or investments as a
member of a Hindu Undivided Family (HUF), will be tax-exempt in the hands of any
member or shareholder in the family. As per this clause, income for a member of a HUF will
only be eligible for tax exemption in the following situations:
 Where the income or the profit share has been paid to the member from the total
income made by the family
 Where, in case of an impartible estate, the income is generated through business
activities carried out by the estate belonging to the family

Section 10(2A): No Tax on Profit Share Made as a Co-Owner of a Partnership Firm

Section 10(2A) offers tax exemptions on profit shares received by each member as co-owners
of a partnership firm. However, the following conditions must be satisfied to be eligible for
this tax exemption:
 The partnership firm must be taxed as per the provisions of Income Tax Act, 1961
  Each shareholder must receive profit shares in the same proportion as mentioned in
the partnership deed
 The applicable tax exemption for each partner will be limited to their income as co-
owners or shareholders of the firm in question

Section 10 (3): Income From Eligible Awards Due to Outstanding Contribution to

Literature, Science, Arts, or Sports
In accordance with the changes stipulated under Direct Taxes Amendment Act (1974),
Section 10 (3) offers full tax exemption to monetary awards and grants received from the
Central Government or State Governments for outstanding contributions to literary, arts,
scientific, and sports fields.

Section 10(4): Tax Exemption on Income Made by an NRI From India

This section pertains to the income made by a non-resident Indian (NRI) from their
investments or savings accounts in India. They can claim full tax exemption for income from
the following:

 From interest income from rupee-denominated bonds and securities specified by the
Government of India
 From premiums or income earned from redemption of such securities or bonds
 From interest income on deposits made in a non-resident (external) savings account
i.e., an NRE account as per Section 2 of Foreign Exchange Management Act (FEMA),
1999
 From interest income earned outside India by an NRI from their deposits in an NRE
account

Section 10(5): Tax Exemption Available on Leave Travel Concession Offered to Salaried
People in India
This is an income tax exemption available to individual taxpayers. Section 10(5) of I-T Act,
1961 states that an employee can claim full tax exemption on the LTA component of their
salary. This is applicable to both Indian and foreign employees. The section also states that
the benefit will be extended to the employee’s dependent family members, including:
 Spouse
  Children
 Parents
 Siblings
However, in order to be eligible for tax exemption, the following conditions must be
satisfied:
 On LTA received from an employer for the employee and their dependents in a
financial year
 For upcoming travel of employees (current or former)
 The exemption limit will depend on the actual amount spent in a financial year on
travel by an eligible employee and their dependents
 The exemption will not be available if the employee is not travelling with their family.

Section 10(6): Exemption on Income Received by an Individual Working Abroad as a

Representative of India
This section pertains to individuals, who are working outside India and representing India in
their official capacity or a dignitary/employee visiting India as a representative of a foreign
state/company. The individual can only claim income tax exemption under this section if:
 They work at an:
o Indian embassy
o An Indian high commission
o An Indian mission or a legation
o A consulate or commission
 They work as a representative of a foreign state or company and are currently visiting
India on official business
The tax benefits under this section will be available, subject to the following limits:
 The foreign entity or employer, paying the remuneration, should not be involved in
any business or trade activities in India
 The tenure of stay in India of a foreign employee should not exceed 90 days
 The remuneration received by the employee must not have been deducted from the
income of the foreign employer in India
Section 10(7): Exemption on Perquisites or Allowances Paid by the Government of India
to an Indian Citizen Working Abroad
This section offers tax exemption to an employee of the Indian Government stationed abroad
on perquisites or allowances earned by them for rendering their services.

Section 10(10CC): Exemption on Tax Paid by an Employer on Perquisites

As a practice, some employers bear the tax applicable on certain non-monetary benefits or
perquisites offered to their employees. While the perquisite is taxable in the hands of the
employees, since the tax is paid by the employer, effectively it becomes tax-free in the hands
of the employees.

Section 10(10C): Exemption on Money Received by an Employee Under a Voluntary

Retirement Scheme
This section stipulates that any money received by an employee as part of a voluntary
retirement or golden handshake arrangement will be fully tax-exempt. This will also include
an employee’s termination of service, provided the relevant conditions are satisfied. To
receive tax exemption under this scheme, an individual must be an employee of one of the
following organisations:
 A central or state government department
 A public sector company
 A cooperative society
 A company specified by notification in the Official Gazette of the Government of
India
 An Indian Institute of Technology, as defined within Section 3 of the Institutes of
Technology Act, 1961
 An Institute of Management specified by notification in an Official Gazette of the
Government of India
 A university set up by a provisional, state or central government act
 An authority set up under a central, state, or provisional act
 Any other company
Section 10(10D): Exemption on Payouts From a Life Insurance Policy

The maturity amount i.e. the sum insured, death benefit received and bonus payouts, if any,
from a life insurance policy are fully tax-exempt under Section 10(10D) of I-T Act, 1961.
However, in order to claim tax exemptions under this section, a policyholder must satisfy the
following conditions:

On life insurance policies issued after 1st April, 2012, the premium paid shouldn’t exceed
10% of the sum insured
On life insurance policies issued before 1st April, 2012, the premium shouldn’t exceed 20%
of the sum insured
Only applicable on a life insurance policy held by a policyholder, who is disabled or ill as
specified by the provisions under Sections 80U and 80DDB
This section is also applicable to payouts received from an ULIP (full form: Unit Linked
Insurance Plan) and all other forms of life insurance schemes

Budget 2023 Update

As per Union Budget 2023, a policyholder can claim tax exemptions under this section,
provided:
The total premium paid on life insurance policies, other than ULIPs, cannot exceed ₹5 Lakh
For ULIPs, the total premium paid cannot exceed ₹2.5 Lakh

Section 10(11): Exemption on Returns From a Retirement Fund Like EPF and Sukanya
Samriddhi Account
Any amount received by an employee from the savings and interest payment from a
retirement savings scheme, such as Employees’ Provident Fund, after retirement is tax-free.
Also, the principal and interest payments received from Sukanya Samriddhi Yojana are fully
exempt from income tax.

Section 10(10BC): Tax Exemption on Any Amount Received to Cope With a Disaster
Under this section, any amount received from the central government, a state government, or
a local authority by an individual or their legal heirs on account of a natural or man-made
disaster, will not be considered while calculating the income tax liability of the individual (or
their legal heirs) for the year.
However, it must be noted that only an amount received as compensation for a disaster, as
defined in Section 2(d) of the Disaster Management Act, 2005, will be considered for
exemption under this particular Income Tax section. The disaster could be natural, man-made,
a massive accident, or result from negligence and lead to substantial human loss, suffering,
environmental degradation or severe damage to property.

Section 10(13A): Exemption on House Rent Allowance

In India, the standard salary structure usually receives a component called the house rent
allowance (HRA), which employees can use to meet their house rental expenses. The portion
of the salary which can be used towards rent and accommodation is fully exempt under
Section 10(13A). The HRA tax exemption will be the minimum of the following:
 The actual amount the employee receives as HRA
 40% of the basic salary for employees residing in non-metro cities and 50% for
employees residing in metro cities
 The amount paid as rent over 10% of the basic salary.

Section 10(14): Exemption on Special Allowances Received as Part of Salary

An employer can offer their employees certain special allowances as part of their salary.
While there is no upper limit on the amount the employer can designate as special allowance,
an employee must utilise the special allowance only for specified purposes. Section 10(14)
states that a special allowance will not be considered while calculating an employee’s tax
liabilities for the year. In addition, the special allowances have been divided into two broad
categories as follows:
Section 10(14)(i):
1. Daily Allowance
Employees receive this allowance to meet their daily expenses when they are not in the actual
place of work.
2. Travel Allowance
This type of allowance is paid to an employee for the travel expenses incurred during an
official visit.
3. Uniform Allowance
If you are associated with a company where it is mandatory to wear a uniform while you are
on duty, its purchase or maintenance costs are covered under this allowance.
4. Helper Allowance
This is provided to the employees who need an assistant or helper for carrying out official
duties. The exemption is available under Section 10 of the IT Act for the salary that the helper
is paid.
5. Conveyance Allowance
This helps in meeting the expenses of transportation incurred while you are travelling for
official work.
6. Research or academic allowance
This is granted mainly to encourage training, research, and other academic activities.

Section 10(14)(ii)
You are liable to pay taxes on these special allowances only if they exceed the prescribed
limit. The following are some of the allowances under this subsection and their respective
limits:
1. Allowance for Children’s Education
A special grant of ₹100 is provided for the education of an employee’s child. However, this
allowance is limited to 2 children per employee. This allowance is fully tax-exempt under
Section 10 of I-T Act, 1961.
2. Allowance Awarded for High Active Field Area
The armed forces may award such an allowance to its members under specific conditions.
The tax exemption limit is set at ₹4,200 per month.
3. Border area
This allowance is also limited to armed forces personnel. It can range from ₹200 to ₹1,300,
depending on whether one is working in a difficult area, remote locality, or a disturbed area.
4. Special Compensatory Payment
If you work in a snowbound area, hilly or high-altitude location, you are eligible for this
allowance. The prescribed limit can range between ₹300 and ₹7,000, based on certain
conditions.
5. Allowance for Island Duty
Armed forces personnel posted on the Andaman & Nicobar Island regions or the
Lakshadweep can claim this allowance. The limit is set at ₹3,200 per month.
6. Allowance for Counter-Insurgency
A defence personnel, forced to stay away from their permanent residence, is eligible for such
pay. The limit is ₹3,900 per month. However, an individual cannot claim border area pay and
counter-insurgency pay simultaneously, which also means that they cannot claim income tax
exemption simultaneously for both categories.
7. Compensatory Field Area Allowance
Certain employees, who are ineligible for border area pay, may qualify for this particular
allowance. However, they must meet certain conditions. The monthly limit under this pay is
₹2,600.
8. Tribal Area Pay
If you are posted in agency areas, tribal areas or scheduled areas, you can get up to ₹200 per
month in additional pay under this category.

Section 10(15): Exemption on Income From Interest Payments

This section states that interest earned from investments are exempt from income tax for
certain taxpayer entities. It has various sub-sections, each of which offer exemptions to
specific taxpayers as follows:
10(15)(i) All taxpayers
Exemption on interest earnings, sum insured, or maturity amounts on certain categories of
bonds, certificates, and securities

10(15)(iiB) Individuals and Hindu Undivided Families (HUFs)

Interest earned from bonds of capital investment, notified before 1st June, 2001

10(15)(iiC) Both individuals and HUFs

Interest earned on relief bonds

10(15)(iiD) NRI individuals or Indian individuals who received it as a gift from an NRI
individual
Interest on bonds purchased in foreign exchange and where the interest has been declared
before 1st June, 2001

10(15)(iii) On securities issued by the Central Bank of Ceylon

Interest on securities
10(15)(iiia) Incorporation of a scheduled bank abroad
The interest earned from interest from deposits in scheduled banks abroad with approval from
the Reserve Bank of India (RBI)

10(15)(iiib) Exemption on interest paid to Nordic Investment Bank Nordic Investment

Bank