The Income Tax, 1961, which is a general law, also has a number of exemptions and allowances so that the people and businesses can limit their tax liability. This is mainly with regard to Section 10 of Income Tax Act, which provides for exemptions and allowances that may largely reduce the value of taxable income.
In this article, you will find an analysis of the significant sections, which explain when the exemptions can be applied and give many tips to taxpayers, enabling them to make the best of these conditions.
Why Claim Exemptions & Allowances?
You can claim tax exemptions and allowances that are stipulated under Section 10 of Income Tax Act which will lead to lower taxable income and consequently less tax liability. These exemptions promote savings through obvious ways such as investing in provident funds, buying life cover and spending on education, medical facilities and apartments.
By utilising these provisions, taxpayers are able to correlate their financial planning process with national plans and, despite the fact that they are trying to minimise taxes legally, they do so in the way prescribed by the law. Also, this includes exemptions such as HRA and LTA, which provide relief for essential expenditure types. This strategic move is vital to the viability of individuals or firms as it creates room for better distribution of finances and thus, promotes financial health.
Exemptions under Section 10 of Income Tax Act
The amount of tax payable is varied with different types of income like businesses and investments, all under Section 10 which explicitly states the income which is exempted from tax.
Section 10 of Income Tax Act contains certain exemptions that a company and individual can claim to pay lower taxes on their income. These exemptions help to offer tax breaks and even stimulate particular financial behaviour.
| Section | Description | Eligibility/Conditions |
| Section 10(13A) of Income Tax Act | House Rent Allowance (HRA) | – Actual HRA received- 50% of Basic + DA (metros) or 40% (others)- Rent paid – 10% of Basic + DA |
| Section 10(5) of Income Tax Act | Leave Travel Allowance (LTA) | – Travel expenses for domestic travel only- Limited to LTA provided in CTC |
| Section 10(26) of Income Tax Act | Scheduled Tribe Income Exemption | – Members of Scheduled Tribes in specified northeastern states- Income from sources within these states |
| Section 10(14)(i) of Income Tax Act | Business-Related Allowances | – Specific allowances like travel, conveyance and research allowances- Must be directly related to the employer’s business |
| Section 10(11) of Income Tax Act | Provident Fund Interest | – Interest earned on provident funds upon resignation or retirement |
| Section 10(34) of Income Tax Act | Dividend Income | – Dividends up to Rs. 10,000 from Indian companies- Exemption until March 31, 2020 |
| Section 10(26AAA) of Income Tax Act | Sikkimese Individual Exemption | – Income earned from sources in Sikkim or through dividends and securities |
| Section 10(38) of Income Tax Act | Long-Term Capital Gains | – Gains from sale of equity shares or equity-oriented mutual funds- STT must be paid- Exemption until March 31, 2018 |
| Section 10(23C) of Income Tax Act | Educational and Medical Institutions | – Institutions with annual receipts under Rs. 5 crore- Income must be used for educational or medical purposes |
| Section 10(37) of Income Tax Act | Urban Agricultural Land | – Capital gains from compulsory acquisition of urban agricultural land- Land must have been used for agriculture for 2 years |
| Section 10(10A) of Income Tax Act | Accumulated Pension | – Government employees receive tax exemption on lump-sum amounts from accumulated pensions |
| Section 10(10D) of Income Tax Act | Life Insurance Policy | – Income from life insurance policy or bonus- Excludes policies for specially-abled dependents, keyman insurance or high premiums |
| Section 10(35) of Income Tax Act | Mutual Fund Units | – Income from specified mutual fund units- Exemption until March 31, 2020 |
| Section 10(10) of Income Tax Act | Gratuity Income | – Government employees receive full exemption- Private employees receive exemption depending on Payment of Gratuity Act |
| Section 10(14) of Income Tax Act | Internet and Food Allowance | – Internet allowance provided by the employer- Food allowance up to Rs. 26,400 annually |
1. House Rent Allowance (HRA) – Section 10(13A)
House Rent Allowance is a company contribution to salary which addresses employees’ real estate expenses. Among the most common exemptions is Section 10 (13A) that offers tax exemptions on HRA. The exemption is the lesser of:
- Actual HRA received: The actual HRA received by the employee.
- Rent paid minus ten percent of [Basic Salary + DA]: The difference between actual rent paid and 10% of salary.
2. Section 10 (5) – Leave Travel Allowance (LTA)
Exemptions for domestic travel expenditures – LTA. However that exemption only applies to travel expenses including flights, train or bus fare and not accommodation or meals.
The key points are:
- The exemption is available for travel undertaken with family members, as defined under the rules.
- The LTA should be a part of the employee’s Cost to Company (CTC).
- The exemption is limited to the actual amount spent and any unused LTA is taxed.
- For example, if an employee is given LTA of Rs. 30,000 but spends only Rs. 20,000 on travel, the balance of Rs. 10,000 becomes taxable.
3. Scheduled Tribe Income Exemption – Section 10(26)
This subsection provides income tax exemptions to Scheduled Tribe members residing in specific northeastern states (Tripura, Nagaland, Mizoram, Manipur and Arunachal Pradesh). The exemption applies to:
- Income earned from any source within the specified states.
- Dividends and interest on securities.
- The purpose of this exemption is to support economic development among the tribal population in these regions.
4. Business-Related Allowances – Section 10(14)(i)
This section covers business-related allowances provided by the employer for work-related expenses. These include:
- Travel and conveyance allowance: Reimburses travel expenses related to official duties.
- Research Allowance: Covers research expenses directly related to employment.
5. Provident Fund Interest – Section 10(11)
Section 10(11) of Income Tax Act provides tax exemptions on interest earned from provident funds upon resignation or retirement. Provident funds aim to support employees financially after retirement. The exemptions apply to:
- Statutory Provident Funds
- Recognised Provident Funds
- Public Provident Funds
The entire interest amount is exempted from tax, providing significant relief for retirees.
6. Dividend Income – Section 10(34)
Section 10(34) of Income Tax Act provides tax exemptions on dividends received from Indian companies, with changes effective from March 31, 2020. The exemption applies to dividends up to Rs. 10,000.
7. Sikkimese Individual Exemption – Section 10(26AAA)
This exemption provides tax relief to individuals of Sikkimese descent. The exempted income includes:
- Income earned from any source in Sikkim.
- Income from dividends and interest on securities.
8. Long-Term Capital Gains – Section 10(38)
Long-term capital gains from the sale of equity shares or equity oriented funds were formerly exempt under Section 10 (38) of Income Tax Act. However this exemption is just good through March 31, 2018. To be eligible:
- The sale needs to be via a recognised stock exchange.
- The STT is a Tax imposed on the Transaction.
9. Educational and Medical Institutions – Section 10(23C)
Educational and medical institutions with annual receipts not exceeding Rs. 5 crore can benefit from exemptions under this section. The exempt income must be used for:
- Educational purposes, by institutions set up for education.
- Healthcare, by hospitals and medical research facilities.
- This exemption helps non-profit institutions by reducing their tax liability.
10. Urban Agricultural Land – Section 10(37)
This section provides exemptions on capital gains earned from the compulsory acquisition of urban agricultural land. Conditions for this exemption include:
- The land must have been used for agricultural purposes for at least two years before the sale.
11. Accumulated Pension – Section 10(10A)
Government employees receive exemptions on the lump-sum amounts from accumulated pensions upon retirement. The exemption can offer significant tax relief for those relying on pensions for post-retirement income.
12. Life Insurance Policy – Section 10(10D)
This section provides exemptions on amounts received from life insurance policies, including any bonuses. However, it excludes policies:
- Taken for a specially-abled dependent.
- Keyman insurance policies.
- Policies where the premium is above 10% of the sum assured.
13. Mutual Fund Units – Section 10(35)
Income from the sale of specified mutual fund units was previously exempt until March 31, 2020. This exemption provided relief for investors but is no longer applicable after this date.
14. Gratuity Income – Section 10(10)
Gratuity income is tax-exempt for government employees. For private-sector employees, exemptions depend on whether they are covered under the Payment of Gratuity Act.
15. Internet and Food Allowance – Section 10(14)
Employers often provide allowances for specific purposes like internet usage and food expenses. Section 10(14) of Income Tax Act provides exemptions for:
- Internet Allowance: The amount provided by the employer for internet usage is exempt from taxation.
- Food Allowance: Up to Rs. 26,400 annually is exempt for meals provided by the employer.
Claiming Section 10 Exemptions
Taxpayers can claim Section 10 exemptions by filing an income tax return and disclosing their eligible income. Proper documentation and compliance with specific conditions are essential for availing the benefits.
Leave Encashment and Taxation
Leave encashment is taxable when received during employment. However, government employees enjoy complete exemptions on encashment received upon resignation or retirement. Private sector employees receive partial exemptions under Section 10(10AA) of Income Tax Act and the remaining amount is taxed according to the income slab.
Closing Thoughts
Section 10 of Income Tax Act offers an important tool for taxpayers to lessen tax liability effectively and legally. The allowances and exemptions under this section offer substantial monetary relief since they include retirement, travel and housing.
They also promote economic behaviours like investment in provident funds, life insurance and housing. Understanding and utilising these provisions can help in planning for compliance and savings.
Since tax laws can be complicated and change often, you need to definitely consult a tax expert regarding these exemptions. Strategic use of Section 10’s exemptions ensures people and companies get the tax system’s incentives.
FAQs
What are the purposes of Section 10 exemptions?
Section 10 exemptions lower taxable income for individuals and companies, encourage good financial behaviour and offer tax relief on essential expenses.
Who can claim HRA under Section 10?
Salaried people receiving HRA as part of their compensation may claim HRA tax exemption in case-specific circumstances regarding rent paid and location.
Are there LTA exemptions for Foreign Travel?
No, LTA exemptions are available only for domestic travel – transportation costs for air, train or bus travel within India.
What conditions apply to provident fund interest being exempt from taxation?
Provident fund interest is taxable when withdrawn upon retirement or resignation in case the individual meets requirements under Section 10 (11) of Income Tax Act.
Are all dividends exempt under Section 10?
Dividends coming from Indian corporations – up to Rs. 10,000 were exempt through March 31, 2020. For dividends received after that, various tax laws apply.
Are Sikkimese individuals tax-exempt?
Yes, Section 10 (26AAA) offers Sikkimese people exemptions on income earned within Sikkim or via securities and dividends.
Can non-government workers claim gratuity income exemption under Section 10?
Yes, private sector employees may receive partial exemptions on Gratuity earnings under conditions defined by the Payment of Gratuity Act or other specified rules.
