All you need to know about Exempted Income under Income Tax Act in India

Introduction

This article focuses on the Exempted Income in Income Tax in India, Income Exempt from Tax under Section 10, and list of exempted income. Income tax is a tax levied on any individual or business who earns more than the exemption limit set by the Internal Revenue Service. However, few people are aware that certain forms of income are exempt from income tax under Section 10 of the Income Tax Act of 1961.
 

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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.
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Before going through the Income exemption under Income Tax in India, Let’s have a quick look at “What are Income Tax Deduction?” And basic Idea on Income Tax Exemption.

What are Income Tax Deduction?

Individuals can use Income Tax Deductions to reduce their taxable income for the year. IT deductions, in other words, are investments made throughout a fiscal year that are deducted from gross annual income when completing your ITR (Income Tax Return). The provision of tax deductions was made in order to encourage people to save and help them 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 Exempted Income in Income Tax

Income tax exemptions/allowances are components of your gross income that are not counted toward your total taxable income, as the name implies. Individuals can keep a considerable portion of their earnings thanks to these exclusions. Income tax exemptions/allowances are mandated by the Income Tax Act of 1961 so that people can 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 Exemption limit: The biggest good news for salaried clauses! 

List of Exempted Income in Income Tax in India

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

• Agriculture income is exempted 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.(ads2)

Income earned in a form of Gratuity

Any gratuity received by a government employee as a result of death or retirement is tax-free. Gratuities received by private-sector employees on retirement, becoming incapacitated, or termination are tax-free up to a maximum of ten lakh rupees. The exemption is subject to further limitations imposed by the Income Tax Act. For each year of completed service, the stated limitations are half a month’s salary, determined based on the average wage for the 10 months immediately preceding the year in which the gratuity is paid, or the actual gratuity paid.

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.

Related Read: New Bank Locker Rules To Take Effect On January 1, 2023: Know Details.

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 exempted income under Income Tax Act

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

Salaried employees account for the majority of all taxpayers in the country, and their contribution to tax collection is substantial. For the salaried class, income tax deductions provide a variety of ways to save money on taxes. With the help of these Income Tax deductions and exemptions, a person’s tax liability can be significantly reduced.