Important Keyword: Capital Gains, Exempt Income, Income Interest, Income Source, Provident Fund.
Table of Contents
Exempt Income u/s 10 of the Income Tax Act
It's a common misconception that any income earned is subject to taxation. However, certain types of income fall under the category of Exempt Income according to section 10 of the Income Tax Act, meaning there's no tax liability on them. Exempt income can take various forms, such as interest received from PPF or agricultural land, among others.
What is Exempt Income?
Exempt income pertains to specific types of earnings that are not taxable under the Income Tax Act's provisions. This differs from deductions under income tax, where deductions are claimed against taxable income. In essence, exempted incomes are excluded from a taxpayer's total taxable income, while deductions are applied to taxable incomes. Section 10 of the Income Tax Act, 1961 provides that certain incomes “not included” in the total income of a taxpayer are exempt and do not form part of taxable income. These exemptions are distinct from deductions (like under Chapter VI‐A). Exempt incomes are simply not taxed.
Types of Exempt Income
Agriculture Income:
Income derived from agricultural activities is exempt from taxation under the Income Tax Act. However, this income must be accounted for in the total income calculation to determine the applicable tax slab rates. As a result, it indirectly impacts taxation by potentially pushing non-agricultural income into higher tax brackets.
Gifts from Relatives:
Gifts received from relatives are not subject to taxation. This exemption extends to gifts received during marriage ceremonies or through wills. Additionally, monetary gifts from non-relatives up to INR 50,000 are also exempt from tax.
Long Term Capital Gains:
As of the financial year 2018-19, long-term capital gains (LTCG) up to INR 1,00,000 are not taxable. Previously, gains from the sale of stocks and equity mutual funds were exempt from tax under section 10(38), though this provision does not apply to debt mutual funds.
Interest on Securities:
Income from securities such as interest and premium received from government-issued bonds, certificates, and deposits is tax-free. This includes bonds issued by entities like NHAI, IRFC, and REC.
Profit Share from Partnership Firms:
The share of profits from a partnership firm or LLP is exempt from tax in the hands of the partner. However, interest on capital and remuneration received may be taxable.
Provident Fund:
Payments received from Provident Fund (PF) are exempt under Section 10. However, withdrawals from PF before completing five years of service may be taxable. For EPF, withdrawal is permissible under certain conditions.
Gratuity:
Gratuity received by government employees is tax-free. In the case of private organization employees, gratuity is exempt from tax subject to specific conditions.
Commuted Pension:
Commuted pension received by government employees is entirely tax-free. Other employees may also enjoy tax exemption on commuted pension subject to certain conditions.
Other Exempt Income
Life Insurance:
Payments received from a life insurance policy are exempt from tax under section 10(10D) of the Income Tax Act. This exemption applies to both the maturity amount and death claims.
Receipts from HUF:
Any funds received from the family income are tax-free for the member of a Hindu Undivided Family (HUF). For instance, if a family owns an impartible estate, any amount received by a member from the family estate's income is exempt from tax.
Scholarships and Awards:
Scholarships or awards granted to deserving students to cover educational expenses are exempt from tax. The entire scholarship amount receives this tax exemption.
Amount Received under VRS (Voluntary Retirement Service):
Employees receiving amounts under voluntary retirement schemes, as per Rule 2BA of the Income Tax Rules, are eligible for tax exemption of up to Rs. 5,00,000 from the retirement amount received.
Allowance for Foreign Services:
Indian residents providing services outside the country and receiving allowances or perquisites abroad are exempt from income tax under section 10(7) of the Act. This provision ensures that allowances and perquisites received by government servants while working overseas remain tax-free.
Key Exemptions Under Section 10
Below are some of the major categories of exempt incomes under Section 10, along with conditions, limits, and recent changes:
| Clause / Subsection | What is Exempt | Key Conditions / Limits | Recent Amendments / Important Updates |
|---|---|---|---|
| 10(1) | Agricultural income | Income from agricultural land, cultivation, etc. | No major change recently; long-standing exemption. |
| 10(2A) | Profit share of partner in firm / LLP | Only the profit component; other payments (salary, commission) taxable separately. | No major change recently. |
| 10(5) / 10(5B) | Leave Travel Allowance (LTA) | Reimbursement of domestic travel cost for self & family under certain conditions; frequency as per rules. | Exempt only when used; declarations needed. No notable change in recent Acts. |
| 10(10), 10(10A), 10(10AA), etc. | Gratuity, Commuted Pension, Leave Encashment, etc. | Different rules for govt vs private employees; some caps (e.g. leave encashment limit increased). | Biggest recent change: Section 10(10D) (life insurance) amendments under Finance Act 2023. |
| 10(10D) | Sum received under Life Insurance Policy (LIP) / bonus etc. | Exempt unless certain conditions met; premium thresholds etc. | As per Finance Act 2023: for policies (other than ULIPs) issued on or after 1 April 2023, aggregate premium in any year exceeding ₹5,00,000 (five lakh rupees) disqualifies exemption. Also, if someone holds more than one such policy, aggregate premium limit applies across policies. Death benefit sums are still exempt. CBDT notified rules & a new Rule 11UACA to compute taxable sums when exemption is not available. |
| 10(11) | Provident Fund / Sukanya Samriddhi etc. Interest / amounts depending on scheme | Conditions of the specific fund. | No new change noted recently; PPF interest etc. remain exempt but must disclose. |
| 10(13A) | House Rent Allowance (HRA) | Exemption limited to least among: actual HRA received; percentage of salary (basic + DA) depending on city; rent paid minus 10% of (basic + DA) etc. | Continues as before. No major recent change. |
| 10(14) | Special allowances and perquisites for employees | Some allowances wholly or partly exempt (conveyance, travel, etc.) if used for official duties; also limits apply. | No radical change, but perquisites and allowances thresholds have occasionally been modified; check specific allowances. |
| 10(23C) | Educational, medical and charitable institutions, trusts, universities, etc. | Must apply income wholly/exclusively for objects; various threshold & compliance rules (e.g. percentage of income spent; accumulation rules; prescribed authority approvals) | In Finance Act 2022 & 2023: modifications to include “provisional approval”, tweaks to conditions, etc. |
| 10(34B), 10(4E), etc. | Exemptions related to IFSC units, non-resident shareholders, dividends, offshore derivative instruments, etc. | Subject to location, activity, whether the unit is in an IFSC, conditions of section 80LA, and whether the distributing company/unit is also located appropriately. | Recent amendment: Section 10(4E) was modified (from AY 2024‑25) to remove double taxation of incomes distributed to non‐resident holders of offshore derivative instruments (ODIs / derivative contracts) via IFSC Banking Units (IBUs). Exemption now also for distributions, but only up to amount taxed in IFSC Banking Unit under section 115AD. |
Reporting of Income in ITR
Taxpayers can disclose their exempt income when filing their income tax returns each year. Exempt income should be reported in the "Exempt Income" section under the "Computation of Income and Tax" tab in ITR-1 and ITR-4. By adding a row, selecting the nature of income from the dropdown list, and entering a description and amount, taxpayers can accurately report their exempt income.
For ITR-2 and ITR-3, taxpayers should report non-taxable income under Schedule EI, which stands for Schedule Exempt Income. Details should be provided for various types of exempt income, including Interest Income, Agriculture Income, Income not chargeable as per DTAA, and other exempt income, selecting the relevant option from the dropdown list. This income is reported separately and not included in the Gross Total Income.
Disclosure of Exempt Income for Salary and Non-Salary Allowances
For individuals with salary income, exempt income should be disclosed under Schedule S - Details of Income from Salary when filing income tax returns using ITR-2. Various exemptions such as House Rent Allowance (HRA), Leave Travel Allowance (LTA), Leave Encashment Amount, Pension Amount, Gratuity Amount, and any perquisites received, including amounts received from a Voluntary Retirement Scheme, should be reported here.
For self-employed individuals or those without salary income, certain incomes fall under the category of exempt income. These include agricultural income, interest on funds, and other income, which must be disclosed under Schedule EI while filing income tax returns.
Things to Watch Out For / Challenges
- Premium Thresholds & Multiple Policies: Some taxpayers may inadvertently plan policies such that premium limits are breached. Careful aggregation across policies is needed.
- Eligibility Conditions: Many exemptions have precise conditions (use of money for charitable objects, frequency of LTA claims, nature of allowances, etc.). If not met, exemption can be denied or subject to litigation.
- Disclosure Requirements: Even non‑taxed income must be declared; mismatch can cause notices.
- Choice between Old vs New Tax Regime: Under the new tax regime (introduced from FY 2020‑21 / AY 2021‑22), many exemptions under Section 10 are not available. So one should compute tax both ways to see which is beneficial.
- Validity of Exemptions Over Time: Legislation can change thresholds, insert provisos, or completely withdraw specific subsections. Keep updated (e.g. Finance Acts, CBDT notifications, circulars).
Conclusion
Section 10 plays a vital role in tax law by defining incomes that are not charged to tax. The recent amendments, especially in Finance Act 2023, introduce significant changes — particularly for life insurance policies (10(10D)), distributions via IFSC Banking Units (10(4E)), and charitable / educational institutions (10(23C)). While the core idea of exempt income remains the same, thresholds, provisos, and applicability are evolving. For taxpayers, staying current with these changes, understanding the conditions, and proper disclosure are essential to maximize benefits and avoid pitfalls.
Frequently Asked Questions
1. Do I need to report exempt income like PPF interest in my ITR?
Yes, even though it's exempt, you must report it under the “Exempt Income” section in your ITR to avoid compliance issues.
2. Is income from agriculture always tax-free?
Yes, agricultural income is exempt, but it must still be disclosed, as it can impact your tax slab due to aggregation with other income.
3. Are gifts from friends taxable?
Yes, if the total value exceeds ₹50,000 in a financial year. However, gifts from relatives or received during marriage are fully exempt.
4. I received maturity from a life insurance policy. Is it taxable?
It depends. If the annual premium exceeds ₹5 lakh for policies issued after April 1, 2023, the maturity amount may be taxable unless it's a death benefit.
5. Is PF withdrawal before 5 years of service tax-free?
No, early withdrawal (before 5 years) from EPF is usually taxable unless specific conditions are met.
6. I got a scholarship for my studies. Do I have to pay tax on it?
No, genuine scholarships for educational purposes are fully exempt under Section 10(16).
7. Is my share of profit from a partnership firm taxable?
No, your share of profit is exempt under Section 10(2A), but interest and remuneration received from the firm may be taxable.
8. I switched to the new tax regime. Can I still claim exemptions like HRA and LTA?
No, most exemptions under Section 10 (like HRA, LTA) are not available in the new regime. Compare both regimes before filing.
Read More: Tax on Dividend Income
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Official Income Tax Return filing website: https://incometaxindia.gov.in/
