Tax exemption refers to excluding some or all income from taxation. While such exemptions come in many forms, what they all share in common is that they either bring down or completely eliminate an individual’s obligation to pay tax. It can therefore be said that tax exemption is a statutory exemption to a general rule, rather than the absence of taxation altogether.
Tax exemptions are offered to encourage and promote certain economic activities. Investments in avenues where tax exemptions can be claimed are very attractive, especially for investors who fall in high tax brackets.
Section 10 of the Income Tax Act, 1961, provides an extensive list of tax exemptions that can be claimed for reducing the tax burden. Some of them include House Rent Allowances, Hostel Allowance, Children Education Allowance, Leave Travel Allowances, Gratuity, etc.
The following tables lists certain types of incomes that are fully exempt from tax.
| Section | Nature of Income |
|---|---|
| Section 10(1) | Agriculture Income |
| Section 10(2) | Amount received by an individual as a member of HUF, where such sum has been paid from the family’s income, or, in the case of any impartible estate, where such sum has been paid from the income of the family’s estate. |
| Section 10(2a) | Share of profit from Partnership Firm |
| Section 10(4) | Certain Interest to Non-Residents |
| Section 10(4)(ii) | Interest to Non-Resident on Non-Resident Account |
| Section 10(5) | Leave Travel Concession |
| Section 10(6) | Remuneration received by a person who is not an Indian citizen. |
| Section 10(7) | Perquisites and Allowances paid to government employees for rendering service outside the country |
| Section 10(10CC) | Tax on Perquisites paid by employer |
| Section 10(10d) | Proceeds from a life insurance policy |
| Section 10(11) | Payment from Statutory Provident Fund |
| Section 10(14) | Special Allowance |
| Section 10(15) | Interest income |
| Section 10(16) | Scholarships given to meet education expense |
| Section 10(18) | Pension received by those who are awarded "Param Vir Chakra" or "Maha Vir Chakra" or "Vir Chakra" or such other gallantry award |
| Section 10(19) | Family pension received by family members of armed forces (including para-military forces) of the Union. |
| Section 10(19A) | Income from one palace of a former ruler |
| Section 10(20) | Income of a local authority |
| Section 10(23BB) | Income of an authority established in a State by or under a State or Provincial Act for the development of khadi or village industries in the State |
| Section 10(23BBB) | Income of European Economic Community |
| Section 10(23BBC) | Income of SAARC fund |
| Section 10(23BBD) | Income of Secretariat of Asian Organisation of Supreme Audit Institutions |
| Section 10(23BBE) | Income of IRDA |
| Section 10(23BBF) | Income of North-Eastern Development Financial Corporation Limited |
| Section 10(23BBG) | Income of Central Electricity Regulatory Commission |
| Section 10(23BBH) | Income of the Prasar Bharati |
| Section 10(23C) | Income received by a person on behalf of the Prime Minister's National Relief Fund or the Prime Minister's Fund (Promotion of Folk Art); or the Prime Minister's Aid to Students Fund or the National Foundation for Communal Harmony, among others. |
| Section 10 (34A) | Exemption of income to a shareholder on buyback of shares of unlisted company |
| Section 10(35) | Income received in respect of the units of a Mutual Fund specified under clause (23D) or in respect of units from the Administrator of the specified undertaking or in respect of units from the specified company |
| Section 10(23D) | Tax free mutual funds |
| Section 10(23DA) | Exemption of income from securitization trust |
| Section 10(36) | Income arising from the transfer of a long-term capital asset |
| Section 10(37) | Capital gains arising from the transfer of agricultural land |
| Section 10(38) | LTCG on transfer of securities and shares covered under Security Transaction Tax (STT) |
| Section 10(39) | Income from international sporting event |
| Section 10(40) | Income of a subsidiary company by way of grant or otherwise received from an Indian company |
| Section 10(41) | Income arising from transfer of a capital asset of an undertaking involved in the business of generation, transmission or distribution of power |
| Section 10(43) | Reverse mortgage |
| Section 10(44) | Income received by any person for, or on behalf of, the New Pension System Trust |
| Section 10 (45) | Allowance or perquisite paid to the Chairman or a retired Chairman or any other member or retired member of the Union Public Service Commission |
| Section 10(47) | Income of an infrastructure debt fund, which is notified by the Central Government in the Official Gazette |
| Section 10(49) | Income of National Financial Holdings Company |
Source: Income Tax Department
Section 197 / 197A of the Income Tax Act, 1961, states the provisions of lower tax rate to be deducted at source or no tax to be deducted at source (TDS exemption).
While filing returns, if a taxpayer finds out that his or her tax liability is much below what has actually been paid, then the individual can claim refund of the excess TDS already paid during the financial year. However, should the taxpayer feel that the final tax liability is going to be nil or less than the TDS rate applicable on certain income, then he or she can apply for a lower rate of TDS or no TDS under Section 197 / 197A. The individual will have to submit an application to the assessing officer in form 13 (Application by a person for a certificate under section 197 and/or sub-section (9) of section 206C of the Income-tax Act, 1961, for no deduction of tax or deduction or collection of tax at a lower rate). It must be noted that TDS exemption or lower TDS is not applicable under Sections 194DA, 194E, 194B, 194BB and 194IA.
House Rent Allowance forms an essential component of a salaried individual's salary. It reflects the amount allotted towards an employee's accommodation as rent by the employer. Now, although it is a part of one’s salary, HRA is not fully taxable. Subject to specific conditions, part of HRA is exempted from tax under Section 10(13A) of the Income-tax Act, 1961.
The exemption available is the least of the following amounts:
a. Actual HRA received b. 50% of [basic salary plus Dearness Allowance] for those residing in metro cities (40% in case of non-metros) or c. Actual rent paid less 10% of basic salary + Dearness Allowance
To understand how this works, consider the following example:
Mr. Sajith lives in Mumbai and earns a basic salary of Rs. 40,000 each month. The HRA component of his salary comes to Rs 15,000. However, the actual rent paid by him is Rs 12,000. The deduction available to Mr. Sajith is the least of the below three
a) Actual HRA received - Rs 1,80,000 (Rs. 15,000 x 12) b) 50% of basic salary - Rs 2,40,000 [(Rs 40,000 x 12) x 50%] c) Actual rent paid less 10% of basic salary - Rs. 96,000 ([Rs. 12,000 x 12] - 10% x {40000 x 12})
Given that option (c) contains the lowest figure of the above three, the tax exemption that Mr. Sajith can claim is Rs. 96,000.
Leave Travel Allowance is a kind of allowance given to an employee from his or her employer to cover travel expenses when the individual is on leave from work. The amount that is paid in the form of Leave Travel Allowance is exempted from tax. Rules pertaining to LTA exemption can be found under Section 10(5) of the Income Tax Act, 1961.
LTA exemption is only allowed for travel of an employee alone or with his or her family. Here, the family would include the employee’s spouse, children and wholly dependent parents, sisters and brothers. The exemption will not be for more than two children of an employee born after October 1998. There is no such restriction in case of children born prior to October 1998.
An essential point to be noted is that the exemption available is only on the actual travel costs i.e. rail, air or bus fare borne by the employee. The individual cannot claim any exemption on other expenses such as hotel accommodation, local conveyance, sightseeing, etc. Additionally, the exemption that is allowed is limited to LTA provided by the employer. For example, Ms. Ankita was granted an LTA of Rs. 35,000 by her employer, however, her actual travel expense came to Rs. 30,000. Therefore, exemption available to her is only to the extent of Rs 30,000 and balance amount, which is Rs. 5,000, would be included in taxable salary income.
Are there any tax benefits for donations made to charitable organizations?
Yes. Individuals can claim tax exemption for contributions made to specific relief funds and charitable institutions under Section 80G of the Income Tax Act, 1961.
Can I get tax exemption for life insurance?
Income received from life insurance policy is exempted from tax under Section 10(10D) of the Income Tax Act, 1961. Any pay-out from a life insurance policy - be it on maturity or death - is exempted from income tax under this section.
How much exemption is allowed under Section 54 of the Income Tax Act?
The exemption available under Section 54 of the Income Tax Act for LTCG will be the lower of the following:
Capital gains from transfer of residential property or
Investment made towards acquiring or constructing new residential property. The balance capital gains (if any) shall be taxable.
How is tax exemption calculated from HRA?
The exemption available is the least of the following amounts:
a. Actual HRA received b. 50% of [basic salary plus Dearness Allowance] for those residing in metro cities (40% in case of non-metros); or c. Actual rent paid less 10% of basic salary + Dearness Allowance
What is the tax exemption available on gratuity?
The tax exemption allowed to individuals on gratuity is as follows:
For employees covered under the Payment of Gratuity Act, the least of the following three is tax exempt:
For employees not covered under the Payment of Gratuity Act, the least of the following three is tax exempt:
For gratuity paid by the government to its employees, the whole amount is fully exempt from tax.
