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Guide on Exempt Income AY 2018-19

Different types of exempt incomes

Exempt income is not chargeable to tax or the income that doesn't form part of TOTAL INCOME.

This is to be noted that there's a difference between Exemptions and Deductions (Chapter VI A of act). In simple words, Exemption means exclusion, i.e. if certain income is exempt from tax then it will not contribute to the total income of a person. Deduction means subtraction i.e. an amount that is eligible to reduce taxable income. The deduction is a concession, but Exemption is relaxation.

Income from Agriculture:

  1. Income earned from agricultural operations is not taxed.
  2. Computing tax on non-agricultural income agricultural income is also taken into consideration.
Agriculture income:
  1. Income derived from the sale of seeds.
  2. Income derived from the sale of flowers and creepers.
  3. Rent received from the land used for grazing of cattle required for agriculture activities.
  4. Income from the growing of bamboo.
Non-agriculture income:
  1. Income from breeding of livestock
  2. Income from poultry forming
  3. Income from fisheries
  4. Income from dairy farming
Eaxmple:
  1. Suppose, tax payer earn
  2. Salary income: Rs.3,00,000
  3. Agricultural income: Rs.50,000 for a year.

Step 1: Income tax on Rs.3,50,000 i.e. Rs.5,000, (Income exempt up to 2,50,000 and taxable @5% on 1,00,000/-)

Step 2: Income tax on 3,00,000 [2,50,000 + 50,000] i.e. 2,500, (Income exempt up to 2,50,000 and taxable @5% on 50,000/-). The tax liability in this case shall be 2,500 and there’s no extra tax payable owing to the extra income of agricultural income.

But, you might have to pay some tax on agriculture income in certain cases. Say, you’ve earned salary income of 2, 80,000 and agricultural income of 3,50,000 .

Step 1: Income tax on 6,30,000 i.e. 38,500 (Income exempt up to 2,50,000, tax @5% on next 2,50,000 and @20% on the remaining 1,30,000).

Step 2: Income tax on 6, 00,000 [2,50,000 + 3, 50,000] i.e. 32, 500, Income exempt up to 2,50,000, tax @5% on next 2, 50,000 and @20% on the remaining 1,00,000.

Thus, in the above case, final tax liability comes up to 5,000 (38,500-32,500). Therefore, even though agricultural income is exempt, you’ll have to pay some tax on agricultural income.


Income from Hindu Undivided Family (HUF) or partnership firm

Any sum received by an individual as a member of a Hindu Undivided Family, where the income of the family, or, income of the impartible estate belonging to the family, is completely exempt from income tax in the hands of an individual member of the family.

A tax payer being a partner of a firm which is separately assessed as such, tax payer share in the total income of the firm is completely exempt from income tax.

Income from Gratuity, leave encashment, voluntary retirement compensation etc.

Gratuity:

Gratuity is a defined benefit plan and is one of tax payer retirement benefits offered by tax payer employer.

Gratuity is payable on:
  • Superannuation (or) Retirement
  • Resignation (or) Termination.
  • Death or Disablement due to accident or disease.
  • Retrenchment (or) Layoff.
  • VRS (Voluntary Retirement Scheme).

20 Lakh is the maximum gratuity amount that tax payer can receive

Leave encashment

Maximum amount receivable by the employees as cash equivalent to the leave salary in respect of earned leave at their credit up to 10 months' leave at the time of their retirement, whether on superannuation or otherwise, would be Rs.3,00,000.

Voluntary retirement compensation

The maximum amount of money received at such VR which is so exempt is Rs.5,00,000. Amount received by an employee of a public sector company or of any other company at the time of voluntary retirement (VR) or voluntary separation is exempted from tax.

Amounts received via claims and bonuses from insurance policies

Any amount received under the Life Insurance Policy (LIP), including the amount allocated by way of bonus on policy, other than u/s 80DDA or under a Key man Insurance Policy, or under an insurance policy issued on or after 01.04.2003 in respect of which the premium payable for any of the years during the term of the policy exceeds 20 per cent of the actual capital amount assured, is fully exempt from tax.

And, the entire amount received on death of the insured are fully exempt from tax.

Income from capital gain shares, bonds & other such debt instruments

The amount received from sale of shares and other security transaction, which is long term then up to Rs.1,00,000 is exempted from tax from the financial year 2018-19 (above 1 lakh is 10% tax).

But up to financial year 2017-18 entire amount received from the long term security transactions is exempted from tax.

Income from dividend’s via mutual funds or shares

The amount received from dividends on mutual funds or shares is exempted from tax up to Rs.10,00,000. And above 10 lakhs is 10% tax

Income from Provident funds

If the tax payer withdraws the amount in PF account after 5 years continuous service then the entire amount including the principal and interest withdrawn by tax payer is tax free.

Interest amount is up to 9.5 % is exempt from tax above 9.5 % is taxable.

For more exemptions under section 10 or any questions please visit

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