What Is Exempt Income?

Exempt income is defined as any income that is not subject to income tax. According to Section 10 of the Income Tax Act of 1961, some types of income are subject to income tax within a financial year if they meet certain criteria and circumstances.

Income tax is a tax that is levied on income earned by any individual or entity that exceeds the exemption limit set by the Income-tax department. However, many people are unaware that certain types of income are exempt from income tax under Section 10 of the Income Tax Act of 1961.

As you prepare to file your income tax returns, it is a good idea to check to see whether any of your earnings are tax-free.

Income Exempted From Tax:

Types Of Income Exempted From Income Tax In India

The following are the types of income that are tax-free:

Agricultural Income Under Section 10(1)

Since India is an agrarian economy, and to support the agricultural sector, the government has incorporated a provision for tax exemption on any agricultural revenue. According to the Agricultural Income Exemption, people who earn a living through agriculture and agricultural operations are eligible for tax exemptions. Tax breaks will be granted to taxpayers who receive specific income from sources related to farmhouses under specified conditions.

Share Of Profit From Partnership Firm Under Section10(2A)

A firm’s partners enjoy a plethora of advantages. Profit earned by a co-owner in a partnership firm is exempt from tax, according to Section 10(2A). Similarly, any profit earned by a partner in an LLP is exempt from taxation. Other money, salary, interest, and so on, on the other hand, constitute taxable income. Any interest or pay received by a partner on capital or remuneration is tax-free.

Compensation On Account Of Any Disaster Under Section10(10BC)

According to Section 10(10BC), a taxpayer receives tax-free compensation from the Central Government when he or she receives compensation for a natural disaster.

Educational Scholarships Under Section 10(16)

Section 10(16) specifies that any money received by a taxpayer as an educational scholarship, i.e. a scholarship that assists in meeting educational expenses, is free from tax. The phrase education scholarship relates to the amount of fellowship, stipends, scholarships for travel for educational purposes, and so on. All of the items listed under educational scholarship are tax-free. This tax-exempt scholarship could have been provided by the government, university, trust or board, etc.

Pension To Gallantry Award Winners Under Section 10(18)

Individuals who have obtained gallantry honors such as the ‘Param Vir Chakra,’ ‘Mahavir Chakra,’ or ‘Vir Chakra,’ or any other such bravery awards and have provided services to the State Government or the Central Government are not required to pay taxes on the pension they get.

Family Pension Received By A Family Member Of Armed Force Under Section 10(19)

According to Section 10(19), if a member of the Armed Forces is killed while on duty, his widow is entitled to a family pension. Or children, or any other selected heir, are excused from paying taxes.

Income Of Minor Under Section 10(32)

The income of the minor child and the income of his parents are combined under Section 64(1A). Assume that an individual’s income includes the income of his minor child as well. In such a circumstance, the individual is eligible to claim a tax exemption on the minor child’s income. Individuals can claim a tax exemption of Rs.1500 per minor child or the amount of income earned by each child, whichever is less.

Section 10(38) Long-Term Capital Gain from the Transfer of Listed Securities

According to Section 10(38), long-term capital gains derived from the transfer of listed securities are not taxed. Certain conditions must be met in order for the long-term capital gain to be tax-free. The assets that are transferred should be corporate stock shares, mutual fund units, or business trust units. Long-term capital assets should be used. The securities should have been transferred on or after October 1, 2004.

Declaration Of Exempt Income

Every assessment year, taxpayers can declare their excluded income when filing their ITR.

Disclosure Of Exempted Income For Salary Allowances

Individuals or taxpayers who receive salary income are entitled to several non-taxable allowances. When filing tax returns under ITR-2, this type of exempted income must be disclosed under “Schedule S – Details of Income from Salary.”

A salaried individual is expected to disclose exemptions available under the following heads when filing his or her income tax returns:

  • House Rent Allowance
  • Leave Travel Allowance
  • Pension Amount
  • Gratuity Amount
  • Leave Encashment Amount

Disclosure Of Exempted Income For Non-Salary Allowances

Some categories of Exempt Income must be revealed by self-employed or non-salaried individuals. Some of these excluded earnings are listed below.

  • Agricultural Income.
  • Capital Gains. 
  • Interest on Funds.

Non-disclosure Of Exempted Income

There may be circumstances where the taxpayer does not declare exempt income because he believes it is immaterial because exempt income plays no role in taxation. It is strongly advised that everyone disclose their exempt income, as failing to do so may bring them to the attention and suspicion of the Income-tax Department.

Conclusion

As a result, as previously stated, the government has included the provision of exempt income in the taxation system in order to improve the perspective of regular taxpayers about taxation. This provision may give taxpayers the impression that their tax burden has been decreased to some extent. As a responsible taxpayer, you should always mention your exempt income when completing your income tax return.