Income Exempt from Tax (Sec 10)The income on which tax is not levied is generally known as income exempt from tax. This is also known as “Tax Free” Income.

Agriculture Income Sec 10 (1)

Agriculture income is exempt from tax by virtue of sec 10(1). By virtue of sec 2(1A) the expression Agriculture Income means any income derived from land which is used for agriculture purpose and which is assessed to land Revenue in India. Any income derived from such land by agricultural operations including processing of the agriculture produce, raised or received as rent-in- kind so as to render it fit for the market or sale of such produce.

The Conditions for income to be satisfied as an agricultural income is as follows

• Rent or revenue should be derived from land (may be in cash or kind).

• The land should be in India

• The land should be for agriculture purpose.

If the above conditions are satisfied then, income from a farm building is exempt from tax.

e.g. Income from letting out of agricultural land, rent of building which is in the immediate vicinity of agricultural land which is used for

1. Dwelling unit for agricultural labourers

2. Out-home for animals

3. Store rooms/go down for agri products.

Commercial activity of dairy farming, poultry farming, horticulture, sericulture is not agricultural income.

Receipt from HUF ( U/S 10(2) )

Any sum received by an individual as a member of HUF out of the estate of income of the family is exempt from tax and not included in the total income of the individual.

The logic behind this is that HUF is already taxed on this income and hence no tax should be levied on distribution of the income of HUF.

Partner’s share in the profit of the firm: [U/S 10(2A)]

In case of a person who is a partner of a firm which is separately assessed in that case the amount of this share in the profits of the firm ascertain as per the partnership deed is exempted from tax.

The logic behind this is that the partnership firm is already taxed on this income and hence no tax should be levied on distribution of the distribution of profit to the partners of the firm.

Interest to non- resident [U/S 10(4)]

Tax exemptions from income tax Income from the following investments made by NRIs/PIO out of convertible foreign exchange is totally exempt from tax.

(a) Deposits in under mentioned bank accounts:

(i) Non Resident External Rupee Account (NRE)

(ii) Foreign Currency Non-resident Account (FCNR)

(b) Units of Unit Trust of India and specified mutual funds, other specific securities, bonds and savings certificates (subject to conditions and prescribed limits under the Income-tax laws and regulations).

(c) Dividend declared by Indian company.

(d) Long term capital gains arising from transfer of equity shares in a company and/or equity oriented schemes of Mutual Funds, which are subject to securities transaction tax.

Leave Travel Concession [U/S 10(5) ]

As per section 10(5), the amount exempt under section 10(5) is the value of any travel concession or assistance received or due to the assessee from his employer for himself and his family in connection with his proceeding on leave to any place in India. The amount exempt can in no case exceed the expenditure actually incurred for the purposes of such travel. Only two journeys in a block of four year’s is exempt. Exemption is available in respect of travel fare only and also with respect to the shortest route.

The exemption is available to any individual in respect of the value of any travel concession or assistance received by or due to him,

From his employer for himself and his family, in connection with his proceeding on leave to any place in India.

From his employer or former employer for himself and his family, in connection with his proceeding to any place in India after retirement service or after the termination of service.

Foreign Allowances and perquisites to Government Employees outside India [U/S 10(7)]

Sub-section (7) of section 10 states that any allowance or perquisites paid or allowed as such outside India by the Government to a citizen of India for rendering services outside India will be totally exempted from tax.

GRATUITY (Sec. 10(10)):

(i) Any death cum retirement gratuity received by Central and State Govt. employees, Defence employees and employees in Local authority shall be exempt.

(ii) Any gratuity received by persons covered under the Payment of Gratuity Act, 1972 shall be exempt subject to following limits:-

(a) For every completed year of service or part thereof, gratuity shall be exempt to the extent of fifteen days Salary based on the rate of Salary last drawn by the concerned employee.

(b) The amount of gratuity as calculated above shall not exceed Rs 10 Lakh.

(iii) In case of any other employee, gratuity received shall be exempt subject to the following limits:-

(a) Exemption shall be limited to half month salary (based on last 10 months average) for each completed year of service

(b) Rs. 10 Lakhs whichever is less.

Where the gratuity was received in any one or more earlier previous years also and any exemption was allowed for the same, then the exemption to be allowed during the year gets reduced to the extent of exemption already allowed, the overall limit being Rs. 10 Lakhs.

As per Board’s letter F.No. 194/6/73-IT(A-1) dated 19.6.73, exemption in respect of gratuity is permissible even in cases of termination of employment due to resignation. The taxable portion of gratuity will quality for relief u/s 89(1).

Gratuity payment to a widow or other legal heirs of any employee who dies in active service shall be exempt from income tax(Circular No. 573 dated 2 1.8.90).

COMMUTATION OF PENSION (SECTION 10(10A)):

FULL exemption of commuted value of pension received by person getting commutation of pension under Civil Pension (Commutation) Rules or similar rule. This is generally applicable in case of Central Government employee or State Government employee or a local authority or a corporation established under Cetral or State or Provincial

In case of pension received from any other employer under any other scheme , maximum exempt is 33% of the if the employee also receives gratuity .

In any other case i.e employee not getting gratuity , 50 % but the commuted value is determined having regard to age ,health ,rate of interest and officially recognised mortality rate.

LEAVE ENCASHMENT (Section 10(10AA)):

(i) Leave Encashment during service is fully taxable in all cases, relief u/s 89(1) if applicable may be claimed for the same.

(ii) Any payment by way of leave encashment received by Central & State Govt. employees at the time of retirement in respect of the period of earned leave at credit is fully exempt.

(iii) In case of other employees, the exemption is to be limited to the least of following:

(a) Cash equivalent of unutilized earned leave (earned leave entitlement cannot exceed 30 days for every year of actual service)

(b) 10 months average salary

(c) Leave encashment actually received. This is further subject to a limit of Rs.3,00,000 for retirements after 02.04.1998.

(iv) Leave salary paid to legal heirs of a deceased employee in respect of privilege leave standing to the credit of such employee at the time of death is not taxable.

RETRENCHMENT COMPENSATION (Sec. 10(10B)):

Retrenchment compensation received by a workman under the Industrial Disputes Act, 1947 or any other Act or Rules is exempt subject to following limits:-

(i) Compensation calculated @ fifteen days average pay for every completed year of continuous service or part thereof in excess of 6 months.

(ii) The above is further subject to an overall limit of Rs.5,00,000 for retrenchment on or after 1.1.1997

COMPENSATION ON VOLUNTARY RETIREMENT OR ‘GOLDEN HANDSHAKE’(Sec. 10(10C)):

(i) Payment received by an employee of the following at the time of voluntary retirement, or termination of service is exempt to the extent of Rs. 5 Lakh:

(a) Public Sector Company.

(b) Any other company.

(c) Authority established under State, Central or Provincial Act.

(d) Local Authority.

(e) Co-operative Societies, Universities, IITs and Notified Institutes of Management.

(f) Any State Government or the Central Government.

(ii) The voluntary retirement Scheme under which the payment is being made must be framed in accordance with the guidelines prescribed in Rule 2BA of Income Tax Rules. In case of a company other than a public sector company and a co-operative society, such scheme must be approved by the Chief Commissioner/Director General of Income-tax. However, such approval is not necessary from A.Y. 2001- 2002 onwards.

(iii) Where exemption has been allowed under above section for any assessment year, no exemption shall be allowed in relation to any other assessment year. Further, where any relief u/s 89 for any assessment year in respect of any amount received or receivable or voluntary retirement or termination of service has been allowed, no exemption under this clause shall be allowed for any assessment year.

Payment Received Under a Life Insurance Policy (Sec 10 {10 D} )

Under the provisions of section 10(10D) of the Income-tax Act, 1961, Maturity/Death claims proceeds of life insurance policy, including the sum allocated by way of bonus on such policy, is exempted from income- tax.

PAYMENT FROM PROVIDENT FUND (Sec. 10(11), Sec. 10(12)):

Any payment received from a Provident Fund, (i.e. to which the Provident Fund Act, 1925 applies) is exempt. Any payment from any other provident fund notified by the Central Govt. is also exempt. The Public Provident Fund(PPF) established under the PPF Scheme, 1968 has been notified for this purpose. Besides the above, the accumulated balance due and becoming payable to an employee participating in a Recognised Provident Fund is also exempt to the extent provided in Rule 8 of Part A of the Fourth Schedule of the Income Tax Act.

Statutory Provident Fund (Sec 10 {11})

Statutory provident fund is set up under the provisions of the Provident Funds Act, 1925. This fund is maintained by Government and Semi-Government organizations, local authorities, railways, universities and recognized educational institutions. Any payment received from such provident fund would be exempt from tax without any monetary or other limits

Recognized Provident Fund (Sec 10 {12})

Recognised Provident fund is one which is recognized by the commissioner of income-tax is accordance with the rules contained in Part A of the Fourth Schedule to the Income Tax Act. It includes a provident fund established under a scheme framed under the Employees Provident Funds Act, 1952. This fund is maintained by private sector organization. Any payment received from such provident fund would be exempt from tax without any monetary or other limits

Conditions for amount to be exempted from tax from Recognised Provident Fund is as follows

Employee has to rendered continuous service for a period of 5 or more years

If not continuous service, the employment of the employee has been terminated on reason of employees ill health, or by the contraction of discontinuance of employer’s business or any other cause beyond the control of the employer

In case the employee obtains employment with any other employer and the balance standing in his Recognised Provident Fund is transferred to his account in a recognised Provident Fund maintained by the new employer.

Payment from an Approved Superannuation Fund (sec 10 {13})

Payment from an Approved Superannuation Fund will be exempt provided the payment is made in the circumstances specified in the section viz. death, retirement and incapacitation.

Any payment from an approved superannuation fund made

(i) on the death of a beneficiary; or

(ii) to an employee in lieu of or in commutation of an annuity on his retirement at or after a specified age or on his becoming incapacitated prior to such retirement; or

(iii) by way of refund of contributions on the death of a beneficiary; or

(iv) by way of refund of contributions to an employee on his leaving the service in connection with which the fund is established otherwise than by retirement at or after a specified age or on his becoming incapacitated prior to such retirement, to the extent to which such payment does not exceed the contributions made prior to the commencement of this Act and any interest thereon;"

Some other points are :

Superannuation Fund is a retirement benefit given to employees by the Company.

Normally the Company has a link with agencies like LIC Superannuation Fund, where their contributions are paid.

The Company pays 15% of basic wages as superannuation contribution. There is no contribution from the employee.

This contribution is invested by the Fund in various securities as per investment pattern prescribed.

Interest on contributions is credited to the members account. Normally the rate of interest is equivalent to the PF interest rate.

On attaining the retirement age, the member is eligible to take 25% of the balance available in his/her account as a tax free benefit.

The balance 75% is put in a annuity fund, and the agency (LIC) will pay the member a monthly/quarterly/periodic annuity returns depending on the option exercised by the member. This payment received regularly is taxable.

In the case of resignation of the employee, the employee has the option to transfer his amount to the new employer. If the new employer does not have a Superannuation scheme, then the employee can withdraw the amount in the account, subject to deduction of tax and approval of IT department, or retain the amount in the Fund, till the superannuation age.

House Rent Allowance (Sec 10{13A})

House rent allowance (HRA) is received by the salaried class. A deduction is permissible under Section 10(13A) of the Income Tax Act, in accordance with Rule 2A of the Income Tax Rules. The HRA deduction is based on salary, HRA received, the actual rent paid and place of residence.

The allowance your employer pays you for house rent does not form part of your taxable income. Housing Rent Allowance or HRA has income tax exemptions. Section 10(13A) lays down rules for calculation of HRA exemption.

Eligibility for 10(13A) rebate

Most importantly, HRA exemption is available only if you are staying in a rented accommodation. You must not be staying in a house owned by you in order to claim HRA exemption. Rental receipts must be strictly submitted to the HR every financial year for getting exemption on rent allowance.

The place of residence is important. For Mumbai, Kolkata, Delhi or Chennai, the tax exemption on HRA is 50 percent of the basic salary, while for other cities it is 40 percent of the basic salary.

The city of residence is to be considered for calculating HRA deduction.

Owning a house does not make you ineligible to claim HRA exemption. You should not be living in that house, or simply put you should be actually paying rent for your accommodation. You could be eligible to claim both HRA tax rebate and home loan tax benefits as long as you satisfy conditions for both these separately.

Finally, if you do not receive HRA you can still get tax deduction on the rent paid through provisions in section 80GG.

Special Allowance ( sec 10 {14})

Exemption depends upon actual expenditure by the employee: Following allowances are exempt to the extent the amount is utilised for the specific purpose for which the allowance is received.

Name of allowance Nature of allowance

Travelling allowance/ transfer allowance

Any allowance granted to meet the cost of travel on tour or on transfer.

Conveyance allowance Conveyance allowance granted to meet the expenditure on conveyance in performance of duties of an office.

Daily allowance Any allowance granted to meet the ordinary daily charges incurred by the employee.

Helper allowance Any allowance granted to meet the expenditure on a helper engaged in the official activities.

Research allowance Any allowance granted for encouraging the academic research & other professional pursuits.

Uniform allowance Any allowance granted to meet the expenditure on the purchase or maintenance of uniform for wear during the office hours.

Special Compensatory Allowance for hilly areas or high altitude allowance or climateallowance.

Rs.800 common for various areas of North East, Hilly areas of UP, HP. & J&K and Rs. 7000 per month for Siachen area of J&K and Rs.300 common for all places at a height of 1000 mts or more other than the above places.

(ii) Border area allowance or remote area allowance or a difficult area allowance

Various amounts ranging from Rs.200 per month to Rs.1300 per month are exempt for various areas specified in Rule 2BB.

or disturbed area allowance.

(iii) Tribal area/Schedule area/Agency area allowance available in MP, Assam, UP., Karnataka, West Bengal, Bihar, Orissa, Tamilnadu, Tripura

Rs.200 per month.

(iv) Any allowance granted to an employee working in any transport system to meet his personal expenditure during duty performed in the course of running of such transport from one place to another place.

70% of such allowance upto a maximum of Rs.6000 per month.

Children education allowance.

Rs.100 per month per child upto a maximum 2 children.

(vi) Allowance granted to meet hostel expenditure on employee’s child.

Rs.300 per month per child upto a maximum two children.

(vii) Compensatory field area allowance available in various areas of Arunachal Pradesh, Manipur Sikkim, Nagaland, H.P., U.P. &

Rs.2600 per month.

J&K.

(viii) Compensatory modified field area allowance available in specified areas of Punjab, Rajsthan, Haryana, U.P., J&K, HP., West Bengal & North East.

Rs.1000 per month

Interest From Certain Investments ( Sec 10 { 15} )

The interest earned from following investment is exempted from Tax

Public Provident Fund

Any individual (other than a non-resident) can make an investment of R500 to R1,00,000 in a financial year in a Public Provident fund (PPF). The rate of interest available is 8.8%. The entire investment is eligible for deduction under Section 80C of the Income Tax Act, 1961, subject to a limit of R1,00,000. Interest earned on this deposit is exempt from tax and the investment is not chargeable to wealth tax.

National Savings Certificates

National savings certificates are more like fixed deposits with the post office wherein you purchase a certificate that is generally redeemable in a specified time. These certificates provide a return of 8.6-8.9%. They are in denominations of R100, R500, R1,000, R5,000 and R10,000. Tax deduction is available up to R1,00,000 under Section 80C of the IT Act. The interest earned every year on NSC gets reinvested and forms part of the capital and also entails deduction under Section 80C, except the final year's interest that does not get reinvested. It is not chargeable to wealth tax.

Post Office Savings Account

Any individual can open a savings account with the post office. It works like a normal savings account opened in a bank and the cheque facility is also available. The savings bank account generally earns a return of 4% per annum. Interest upto R3,500 is exempt from tax under Section 10(15) of the IT Act. Further, a deduction of R10,000 is also available for the interest under Section 80TTA of the IT Act.

Following income the interest earned on the income is taxable but the investment is not chargeable to wealth tax

Monthly Income Scheme

Under the Monthly Income Scheme, an investor is required to make a one-time deposit. The amount of deposit can range from R1,500 to R4,50,000 in a single account and R9,00,000 in a joint account. The rate of interest offered is 8.5% and the scheme yields monthly income on the deposits made. Interest income is liable to tax, but the investment is not chargeable to wealth tax.

Recurring Deposits

Any individual (other than an NRI) can open a recurring deposit account. The minimum investment to be made in such account is R10 with no upper limit. A depositor generally makes 60 deposits over a term of five years. The rate of interest available is 8.4%. The entire amount along with interest can be withdrawn after five years. Interest income is liable to tax, but the investment is not chargeable to wealth tax.

Scholarships (Sec 10 { 16 } )

Under Section 10(16) of the Income-tax Act, any scholarship granted to a person to meet the cost of education is exempt from tax. The term ‘scholarship’ should be interpreted liberally and it would also include within its scope and ambit, amounts of fellowships, stipends, grants for travel and incidental expenses, etc. awarded for acquiring education.

Allowances received by the member of parliament or state legislature ( Sec 10 {17 } )

The following allowances are exempted from tax

10(17)(i) Daily allowance Individual-Member of Parliament/State Legislature/Committee thereof

10(17)(ii) Any allowance received by MP under Members of Parliament (Constituency Allowance) Rules, 1986.

Member of Parliament

10(17)(iii) Constituency Allowance received by MLAs.

Individual Member of State Legislature

Awards/Rewards (Sec 10 { 17A} )

The following awards/ rewards are exempted from tax

10(17A)(i) Amount received in pursuance of award instituted in public interest by Central/State Government or approved award instituted by other body.

Any Assessee

10(17A)(ii) Reward received from Central/State Government for approved purposes in public interest.

Any Assessee

Pension (Sec 10 {18} )

Pension received by an individual who has won specified/notified gallantry awards and family pension received by any family member of such individual. Pension received by an individual who has been in service of Central or state Government and has been awarded, ”Parama Vir Chakra)””Maha Vir Chakra” or Vir Chakra. Family pension received by any member of the family in case of death of the awards is exempted from tax.

Family pension received by the family member of armed forces (Sec 10 {19}]

Family pension of a member of the armed forces/paramilitary forces in case of death in the course of operational duties subject to conditions. Family pension received by the widow or children or nominated heirs, of a member of armed forces including parliament forces of the union , where the said member dies in the course of operation duties shall be exempted from tax.

Income of Minor Child (Sec 10 {32})

As per section 10(32), in case the income of an individual includes the income of his minor child in terms of section 64(1A), such individual shall be entitled to exemption of Rs. 1,500 in

respect of each minor child if the income of such minor as includible under section 64(1A) exceeds that amount. Where, however, the income of any minor so includible is less than Rs. 1,500, the aforesaid exemption shall be restricted to the income so included in the total income of the individual.

A minor’s income is clubbed with that of the parent with the higher income or if the parents of the minor child are separated, then the minor child’s income will be included in the income of the parent who is maintaining the child.

Income from Transfer of units of UTI (Sec 10 {33})

As per section 10(33), any income arising from the transfer of a capital asset being a unit of US 64 is not chargeable to tax where the transfer of such assets takes place on or after April 1, 2002. This rule is applicable whether the capital asset (US64) is long-term capital asset or short-term capital asset. If income from a particular source is exempt from tax, loss from such source cannot be set off against income from another source under the same head of income.

Consequently, loss arising on transfer of units of US64 cannot be set off against any income in the same year in which it is incurred and the same cannot be carried forward.

Income by way of Dividend (Sec 10 {34})

As per section 10(34)/ (35), the following income is not chargeable to tax

any income by way of dividend referred to in section 115-O [i.e., dividend, not being covered by section 2(22) (e), from a domestic company];

In view of this, tax being levied on a company on distributed profits, the dividend income in the hands of the shareholders will now be exempt from tax u/s 10(34).

Income from Mutual Fund etc. {U/S 10(35)}

Income received in respect of Units of a Mutual Fund specified in section 10(23D) or units from Administrator of UTI or units from the specified company, excluding capital gains arising from the transfer of such units. Any income received from mutual fund is entirely exempted from tax

Long Term capital gains or Transfer of Equity Shares in a Company or Units of an Equity oriented fund {u/S 10(38)}

As per section 10 (38), long term capital gains arising out on transfer of equity shares or units of equity oriented mutual fund is not chargeable to tax from the assessment year 2005-06 if such transaction is covered under the securities transaction tax ( STT )

The Securities Transaction Tax is applicable if equity shares or units of equity oriented mutual fund are transferred in recognized stock exchange in India. If the Securities Transaction Tax (STT) is applicable, long term capital gain is not chargeable to tax, short term capital gain is 10% (plus service charge & education cess).