All you need to know about income tax exemption in India

Introduction

This article explains income tax exemptions in India, specifically income that is not taxed under Section 10. Income tax is charged on individuals or businesses earning above a certain limit. However, many people don’t know that some types of income are exempt from this tax under Section 10 of the Income Tax Act of 1961.

It is a good idea to examine if any of your earnings qualify for tax-free status as you prepare to file your income tax returns. The following are the types of income that are exempt from paying income taxes.

What are Income Tax Deduction?

People can use income tax deductions to lower the amount of money they have to pay taxes on for the year. These deductions are investments or expenses made during the year that you can subtract from your total income when filing your income tax return. Tax deductions are meant to encourage saving and help people build a secure financial future.

National Pension Scheme (NPS),  Public Provident Fund (PPF), investments made under Section 80 of the IT Act, 1961, in ELSS (Equity Linked Saving Scheme) funds, principal repayment of a home loan, and so on are some common examples of Income Tax Deductions.

Information on Income Tax Exemption

Income tax exemptions or allowances are parts of your income that are not included in the amount you have to pay tax on. This means you get to keep more of your money. These exemptions are required by the Income Tax Act of 1961 to help people save more.

Children’s Education Allowance, House Rent Allowance (HRA), Leave Travel Allowance (LTA), as well as the exemptions provided under Section 24, are some well-known examples of Income Tax Exemptions.

Related Read: Income Tax Rates Slab for FY 2022-23 or AY 2023-24

List of Income soure for Income tax exemption in India

Below is the list of exempted income from tax under Section 10 of the Income Tax Act:

Agriculture income is exempted income from Tax under Section 10

The IT (Income Tax) Act’s Section 2 (1A) establishes what constitutes agricultural income in India. –

1. Any income or rent generated from land in India that is used for agricultural purposes.

2. Income from agricultural operations, such as the processing of agricultural produce for market sale.

3. Any income from the farmhouse is contingent on the fulfillment of specific conditions outlined in section 2.

4. Agricultural income includes income from nursery saplings or seedlings.

Income earned in a form of Gratuity

Any gratuity received by a government employee due to death or retirement is exempted income and not subject to tax. For private-sector employees, gratuities are also exempted income up to a maximum of ten lakh rupees if received upon retirement, becoming incapacitated, or termination. However, there are additional rules under the Income Tax Act. Specifically, for each year of completed service, the exemption limit is either half a month’s salary (based on the average wage of the last 10 months before the gratuity is paid) or the actual gratuity amount received, whichever is lower.

Income of Hindu Undivided Family (HUF)

Any member of the Hindu undivided family (HUF) who receives income from family or income from the impartial family estate/property is free from paying Income Tax.

Non-Resident Interest Income

1. Any income received by non-residents in the form of interest on specified notified securities or bonds, including income received as a premium on redemption, is tax-free.

2. Following FEMA, 1999, an individual’s income derived from interest on funds held in a Non-Resident (External) Account in any bank in India is free from income tax.

Note: Section 4(2) exemption is allowed only if a person is a resident outside India as defined by FEMA, 1999, or if the RBI has granted permission to keep the account stated above.

In the event of a single person, Interest on registered savings certificates is tax-free for an Indian citizen or a person of Indian descent who is a non-resident.

Remuneration received by diplomats and their staff

According to Section 10(6) (ii), remuneration received by an official of an embassy, high commission, consulate, or trade representative from a foreign country, or the staff of those officials, is tax-free if the corresponding Indian official enjoys a similar exemption in the foreign country.

Profit-sharing from a firm/LLP is tax-deductible

The profit share that a partner receives from a firm is tax-free in the partner’s hands. Similarly, in the hands of the partner, the profit share of an LLP (Limited Liability Partnership) from the LLP will be tax-free.

Note: This tax exemption only applies to profit-sharing; it does not apply to capital interest or pay paid by the partner from the LLP / Firm.

Technical fees as a source of income for a foreign company

Income derived from royalties or fees for technical services received under an agreement between a designated foreign business and the government for providing services in or outside India in projects related to India’s security is tax-free.

Leave Travel Concession

An employee (whether an Indian or a foreign citizen) can claim to leave travel concessions or assistance received or due from his employer concerning leave proceedings to anywhere in India under section 10(5).

Any income in a form of Scholarships and Awards

Section 10 of the Internal Revenue Code exempts monetary assistance in the form of prizes or scholarships from income tax. There is no upper limit, and the total amount of money received as a scholarship is tax-deductible.

Received from the Provident Fund

The sum received from the public provident fund, statutory provident fund, or unrecognized provident fund is tax-deductible.

Other income exempt from tax

1. Capital gains on the sale of capital assets, rupee-denominated bonds, or derivatives by a Category-III AIF (Alternative Investment Fund).

2. A monthly pension paid to a government employee is totally tax-free.

3. To a certain extent, an employee’s pay received at the time of lay-off is tax-free.

Conclusion

Most taxpayers are salaried employees, and they contribute a lot to the country’s tax revenue. For these employees, there are several ways to reduce their tax bill through income tax deductions and exemptions. By taking advantage of these deductions and exemptions, which include certain types of exempted income, people can lower the amount of tax they need to pay.