Incomes Exempt from Tax – Important Sections Overview
Getting ₹5 lakh but paying ZERO tax? Some incomes are fully exempt! Let's explore these tax-free treasures under Section 10.
Why Exemptions?
Reasons for tax exemptions:
- Social welfare: Encourage savings, education
- Administrative ease: Avoid taxing small amounts
- Constitutional: Agricultural income (state subject)
- Policy goals: Promote specific sectors (startups, rural development)
Major Exemptions under Section 10
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Section 10(1) - Agricultural Income
Fully exempt (covered in detail in separate chapter)
Example:
- Farmer earns ₹15 lakh from crops → Tax: NIL
Section 10(2) - Family Income from HUF
Member's share in HUF income → Exempt
Logic: HUF already paid tax as separate entity
Example:
- HUF earns ₹10 lakh (taxed at HUF level @ 30%)
- Distributed ₹2.5 lakh each to4 members
- Members' tax on this: ₹0 (already taxed!)
Section 10(5) - Leave Travel Allowance (LTA)
Exemption: Travel expenses for employee + family (India only)
Conditions:
- 2 journeys in block of 4 years (2022-25 current block)
- Actual travel cost OR allowance received (whichever less)
- Shortest route by air/rail (economy class)
Not exempt:
- Hotel, food, local travel
- Foreign travel (even if company pays!)
Example:
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Section 10(10) - Gratuity
Exemption for government employees: Fully exempt
Exemption for private employees: Least of:
- Actual gratuity received
- ₹20 lakh
- 15/26 × Last salary × Years of service
Example:
Mr. Sharma (private employee):
- Last drawn salary: ₹80,000/month
- Years of service: 25 years
- Actual gratuity received: ₹18,00,000
Calculation:
- Actual: ₹18,00,000
- Limit: ₹20,00,000
- Formula: 15/26 × ₹80,000 × 25 = ₹11,53,846
Exempt: ₹11,53,846 (lowest) Taxable: ₹18,00,000 - ₹11,53,846 = ₹6,46,154
Section 10(10AA) - Leave Encashment on Retirement
Government employees: Fully exempt
Private employees: Least of:
- Actual leave encashment
- ₹3,00,000 (max limit)
- Cash equivalent of unavailed leave (max 30 days × average last 10 months' salary)
- 10 months' average salary
Example:
Mrs. Kapoor:
- Leave encashment: ₹5,00,000
- Cash for leaves: ₹4,50,000
- 10 months' avg salary: ₹6,00,000
Exempt: ₹3,00,000 (limit!) Taxable: ₹2,00,000
Section 10(10D) - Life Insurance Proceeds
Death benefit: Fully exempt (any amount!)
Maturity benefit: Exempt if premium ≤ 10% of sum assured
Example:
- Sum assured: ₹10 lakh
- Annual premium: ₹80,000 (8% of sum assured) ✅
- Maturity amount: ₹15 lakh
- Tax: NIL (exempt!)
But if premium = ₹1.5 lakh (15%) → Taxable! (exceeds 10%)
Exception: Premium up to ₹2.5 lakh/year exempt (Budget 2023)
Section 10(13A) - House Rent Allowance (HRA)
Exemption: Least of:
- Actual HRA received
- Rent paid - 10% of salary
- 50% of salary (metro: Mumbai, Delhi, Kolkata, Chennai) 40% of salary (non-metro)
Salary = Basic + DA (if forms part of retirement benefits) + Commission (% of turnover)
Example:
Rahul (Mumbai):
- Basic: ₹50,000/month (₹6L/year)
- HRA: ₹25,000/month (₹3L/year)
- Rent paid: ₹2,80,000/year
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Section 10(14) - Various Allowances
Fully exempt allowances:
1. Foreign Allowance (Govt employees posted abroad)
2. Sumptuary Allowance (Judges, High Court/Supreme Court)
3. Transport Allowance:
- Specially-abled persons: ₹3,200/month
- Others(for commuting): ₹1,600/month (earlier, now standard deduction covers)
4. Children Education Allowance:
- ₹100/month per child (max 2 children) = ₹2,400/year
5. Hostel Allowance:
- ₹300/month per child (max 2) = ₹7,200/year
Section 10(15) - Interest on Securities
Partially exempt based on type
Section 10(17) - Allowances to MPs & MLAs
Daily allowance: Fully exempt
Section 10(32) - Minor Child Income
Exemption: ₹1,500 per child per year (max 2 children)
Example:
- Child's FD interest: ₹10,000/year
- Exempt: ₹1,500
- Clubbed with parent's income: ₹8,500
Section 10(34) - Dividend Income
Dividend from domestic companies: Exempt (but TDS @ 10% if > ₹5,000)
Wait! From April 1, 2020:
- Dividend taxable as "Income from Other Sources"
- Earlier it was exempt (company paid DDT)
- Change: Now shareholder pays tax, not company
Other Important Exemptions
Section 10(10B): Compensation to ESOPs Section 10(10BC): VRS compensation (₹5 lakh) Section 10(16): Scholarships Section 10(19): Family pension (₹15,000 or 1/3rd, whichever less) Section 10(23C): Educational/medical institutions
Comparison Table
| Section | Exemption | Limit |
|---|---|---|
| 10(1) | Agricultural income | Fully exempt |
| 10(5) | LTA | Actual travel cost |
| 10(10) | Gratuity (pvt) | ₹20 lakh max |
| 10(10AA) | Leave encashment | ₹3 lakh max |
| 10(10D) | Life insurance maturity | If premium ≤ 10% sum assured |
| 10(13A) | HRA | Least of 3 conditions |
| 10(14) | Transport (disabled) | ₹3,200/month |
| 10(14) | Children education | ₹100/month (max 2 kids) |
| 10(32) | Minor's income | ₹1,500/child/year |
Practical Tips
Maximize exemptions:
- HRA: Rent receipt from landlord (PAN if rent > ₹1L/month)
- LTA: Use both trips in 4-year block
- Gratuity: Ensure proper calculation at retirement
- Life insurance: Keep premium < 10% of sum assured
Documentation:
- HRA: Rent receipts
- LTA: Travel tickets (air/rail)
- Children allowances: School fee receipts
New Regime Impact
Old regime: Can claim all exemptions New regime: Most exemptions NOT available
Exceptions in new regime:
- Transport allowance (specially-abled): ₹3,200
- Conveyance: Actual
- Other very limited exemptions
HRA, LTA: NOT allowed in new regime!
Trade-off: Lower tax rates vs exemptions
Summary
- Section 10: Lists all tax-exempt incomes (agriculture, HRA, LTA, gratuity, etc.)
- Agricultural income (10(1)): Fully exempt, no limit
- HRA (10(13A)): Least of actual, rent-10% salary, 50%/40% salary
- LTA (10(5)**: 2 trips in 4 years, India travel only
- Gratuity (10(10)): Pvt sector ₹20L max, based on formula
- Leave encashment (10(10AA)): ₹3L max for private employees
- Life insurance (10(10D)): Exempt if premium ≤ 10% sum assured (or ≤ ₹2.5L/year)
- New regime: Most exemptions not available (trade-off for lower rates)
Quiz Time! 🎯
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Next Chapter: Scope of Total Income Based on Residential Status! 🌍