Income Tax Exemptions under Section 10 Income tax Act

While computing total income, the following incomes shall not be included

Agricultural Income

  • Income from Family

  • any sum received by an individual of the family as the member of a Hindu Undivided family, where such sum has been paid out as part of income of the family and if it is an impart-able estate, out of the income of the estate belonging to the family.
  • Partnership

  • in case of a partner of a firm which is separately assessed, his share of the total income in the firm.
  • Leave Travel Allowance IT Act- Sec 10(5)

  • Leave Travel Allowance forms part of salary to cover the personal expenses of the employee incurred during travel. The exemption is as follows:
    In case of an individual, the value of Leave Travel Assistance received by or due to him from his -
    • employer for himself and his family for undertaking a trip to any place within India and who is on leave during the period of trip.
    • current or previous employer for himself and his family for undertaking a trip to any place in India after retirement from service or after termination of service.
    The exemption is admissible towards the actual expenditure incurred for journeys performed not only by the individual but also by his family. In this case family means:-
    • the spouse and children of the individual and
    • the parents, brothers and sisters of the individual if they are wholly dependent on the individual.
    The rules relating to LTA are spelt out in the Central Civil Service Leave Travel Concession Rules. Some of the key points in this rule are as follows:

    i) The exemption is applicable only to two journeys in a block of four calendar years. The first four year block commenced with the calendar year 1986. The four year blocks were 1986-89, 1990-93, 1994-97, 1998-2001, 2002-05, 2006-09 and the current block is 2010-13.
    ii) If no travel concession has been availed in any of the four block periods in one or both the occasions, then he can claim concession for one journey in the first year of the next block of years immediately following that block. This is also known as ‘carry-over’ concession.

    Amount Eligible for Exemption:-

    The basic rule is that the exempted amount can not be greater than the actual expense incurred during the journey. Also, depending upon the mode of transport, there is limit in the exemption that can be granted.
    The Mode of journey is bifurcated into three parts – by air, by rail or by any other mode.
    • By air:- If the journey is performed by air, then the economy fare of the national carrier (Indian airlines or Air India) by the shortest route to the destination is allowed as exemption.
    • By rail:- This is applicable when the place of origin of journey and destination are connected by rail and the journey is performed by any mode of transport other than by air. The maximum amount of exemption is the air-conditioned first class rail fare by the shortest route to the destination.
    • By any other mode:- This is applicable when the place of origin of journey and destination are not connected by rail. In such a case two more conditions will come to the picture
      • When there exist a recognized public transport system, the first class or deluxe class fare on such transport by the shortest route to the place of destination.
      • When there is no such recognized public transport system, the air conditioned first class rail fare, for the distance of the journey by the shortest route,as if the journey has been performed by rail.
    Note: Restricted concession for children
    Exemption is limited to two children born on or after 01-10-1998. While reckoning this limit of two children, children born out of multiple birth after the first child will be treated as ‘one child’ only. Child includes a step-child and an adopted child also.

  • House Rent Allowance(HRA)

  • HRA forms part of salary and is actually an allowance. For the purpose of calculating HRA, salary means basic plus dearness allowance plus any commission received which is based on turnover achieved. The amount of exemption is taken to be the least of the following:
    • Allowance actually received
    • Rent paid in excess of 10% of salary.
    • 50% of salary in case of metro cities and 40% of salary in case of other cities.

  • Gratuity [Income Tax Act - Section 10 (10)]

  • As per Income Tax Act, three scenarios arise for the purpose of calculating the taxable Gratuity.
    1. Any death-cum-retirement gratuity received by employees of the Central / State Government and Local Bodies is fully exempted without any limit.
    2. For employees covered under the Payment of Gratuity Act, 1972, gratuity exempt from taxation is subject to the following limits:
      • for every completed year of service and part thereof, gratuity shall be exempt to the extent of fifteen days salary. Here salary refers to the last drawn salary by the employee and it include basic and Dearness Allowance.
      • the amount of gratuity calculated should not exceed Rs.10,00,000.00 (ten lakhs)
    3. For employees who are not covered under the Payment of Gratuity Act, the exemption will be subject to following limits:
      • exemption is limited to half month salary for each completed year of service. Here salary means the average of last ten months salary.
      • the above calculated gratuity should not exceed Rs.10,00,000.00 (ten lakhs).
    This limit of Rupees ten lakhs (in both (b) and (c ) above is a lifetime limit, which means that if you have claimed any exemption at any point of time in your career then the exemption to be allowed during the current year gets reduced to the extent of exemption already allowed. Exemption in respect of gratuity is permissible even in case of resignation. Also, gratuity received by a widow or legal heirs of any employee who dies while in active service shall not be taxed. The taxable portion of gratuity will qualify for relief under section 89.

  • Commutation of Pension [ Income Tax Act - Section 10 (10A) ]

  • For an employee of the Central / State Government and Local Bodies, the full amount received as commutation pf pension is an exempted income.For any other employee, the exemption will depend upon whether or not he is receiving gratuity or not. If he receives any gratuity, the commuted value of one-third of the pension which he is normally entitled to receive will be exempt. If the employee does not receive any gratuity, the commuted value of one-half of such pension will be exempted.
    Also, any payment in commutation of pension received from a fund established by the Life Insurance Corporation of India or any other insurer under section 10 (23AAB) will be exempt.This type of fund is set up by LIC or any other insurer and is approved by the Controller of Insurance or IRDA (Insurance Regulatory and Development Authority). Individuals contribute to this fund to receive pension at a later time.

  • Encashment of earned leave (leave surrender) [Income Tax Section 10 (10AA) ]

  • Amount received as encashment of leave during service is fully taxable irrespective of whether you are a Government employee or not.If a Government employee leaves the organization, his leave salary will be fully exempt from tax. For non-government employees, the amount of exemption from leave encasement will be the least of the following:
    • cash equivalent of leave salary in respect of earned leave at the time of retirement. (Balance of earned leave at the time of retirement * average salary). Earned leave entitlements should not exceed 30 days for each year of actual service
    • ten month’s average salary
    • leave encasement actually received
    • Rs.3,00,000.00
    Salary means last drawn salary and includes basic salary and dearness allowance if terms of employment so provide and also includes commission based on a fixed percentage of turnover.
    Average Salary is calculated on the basis of average salary for the 10 months immediately preceding the retirement or superannuation.

  • Retrenchment Compensation [Income Tax Section 10(10B)]

  • Retrenchment compensation received by a workman under the Industrial Disputes Act, 1947 or under any other Act or Rules is exempt, subject to the following limits:
    • Compensation equivalent to fifteen days average pay for every completed year of continuous service or part thereof in excess of 6 months.
    • Rs.5,00,000.00 where retrenchment is on or after 01-01-1997.
    Compensation received by a workman at the time of closing down of the undertaking in which he is employed shall be considered as Retrenchment compensation.
    In case of a transfer of ownership or management and the employee takes up employment with the transferee, the consideration received by the workman at the time of transfer will also be termed as retrenchment compensation, if it meets the following criteria:
    • if the service of the workman has been interrupted by the transfer of the management.
    • if the terms and conditions applicable to the workman after such transfer are in any way less favorable to the person than those applicable to him immediately before the transfer.
    • if the new management has entered into an agreement with the old management that only the old management will be liable to pay the retrenchment compensation.

  • Voluntary Retirement Compensation[Income tax Section 10(10C)]

  • Payment received by an employee of the following organization at the time of voluntary retirement or termination of service is exempt subject to certain conditions.
    • Public Sector company or any other company
    • Central or any State Government
    • An authority established under a Central, State or Provincial Act
    • A local authority
    • A co-operative societies, Universities, IITs and Notified Institutes of management.
    The conditions for providing exemptions are as follows:
    • the maximum exempted amount is Rs.5,00,000.00 (five lakhs).
    • this exemption can be claimed only once
    • the voluntary retirement scheme should have been framed in accordance with the guidelines prescribed in Rule 2BA. This Rule is as follows:
      1. The scheme applies to an employee who has completed ten years of service or completed 40 years of age. This condition is not applicable in case of an employee of a public sector company under scheme of voluntary separation framed by the said company.
      2. It applies to all employees , including workers and executives of the organization
      3. The scheme of voluntary retirement/separation has been drawn to result in overall reduction in the existing strength of the employees.The vacancy caused by voluntary retirement/separation is not to be filled up, nor, the retiring employee is to be employed in another company or concern belonging to the same management.
      4. The amount receivable on account of voluntary retirement/separation of the employees, does not exceed the amount equivalent to three months’ salary for each completed year of service or salary at the time of retirement multiplied by the balance months of service left before the date of his retirement on superannuation.

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