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Home > Income Tax > Help Center > A Guide on Exempt Income

Guide on Exempt Income from IT Perspective

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
  • Any expenditure incurred in relation to any exempt income is not allowed as deduction for computing income under 5 heads of income


Guide on Exempt Income from IT Perspective

NOTE :

It is recommended for all taxpayers to report Exempt income in corresponding schedules while filing Income Tax Returns

Different types of exempt incomes

  1. Income from Agriculture
  2. Income from Hindu Undivided Family
  3. Income from Gratuity
  4. Income from insurance policies
  5. Income from capital gain shares
  6. Income from dividend’s via mutual funds
  7. Income from Provident funds
  8. Disaster Compensation / Relief
  9. Scholarships received for Education
  10. Amounts received by MP's and MLA's
  11. Pension received by Gallantry awards recipient
  12. Income of member of Scheduled Tribe
  13. Specified Income of Sikkimese Individual
  14. Awards for literary, scientific and artistic works and other awards by Government
  15. Any amounts received from Sukanya Samriddhi Account
  16. Interest on Public Provident Fund
  17. Allowances or Perquisites paid outside India
  18. Remuneration received by officials of Embassies etc of Foreign states
  19. Remuneration received for services rendered in India as an employee of Foreign enterprise
  20. Salary received by a non-citizen non-resident for services rendered in connection with employment on foreign ship
  21. Exemption from withdrawals from National Savings

1. 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.
1a. 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.
1b. Non-agriculture income:
  1. Income from breeding of livestock
  2. Income from poultry forming
  3. Income from fisheries
  4. Income from dairy farming
Example

Suppose, taxpayer earn Salary income of Rs.3,00,000, Agricultural income of 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.

2. Income from Hindu Undivided Family (HUF) or partnership firm

  • Amounts received from HUF:
    • Any amount received by a member of HUF from HUF is exempt u/s 10(2).
    • However the amount paid by HUF should be our of income from family or income of the impartible estate belonging to family.
  • Amounts received from Firm/LLP:
    • Share of profit received by partner from Partnership Firm /LLP in the corresponding profit sharing ratio is exempt u/s 10(2A).
    • The share of profit is exempt in the hands of partners even if firm/LLP has not paid any taxes due to deductions or exemptions.

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

3a. Gratuity:
  • Gratuity is a voluntary payment made by an employer in appreciation of the services provided by the employee and is one of the retirement benefits offered by employer.
  • Gratuity is available to the employees who has completed 5 years of employment.
  • Gratuity received during the time of retirement or death is exempt u/s 10(10). The exemption limits differs for different types of employees.
  • Exemption under these sections applicable under both old and new tax regime

Refer Tax on Retirement Benefits for more information


3b. Leave encashment
  • Generally, employees are allowed leaves during the period of service. Employees may avail such leaves or the leaves may either lapse or accumulated for future or allowed to be encashed every year or at the time of retirement/termination.
  • Leave Encashment received at the time of retirement is fully exempt from tax u/s 10(10AA)
  • W.e.f 01st April 2023, the exemption under Leave Encashment at the time of retirement for Non-Government employees is increased to Rs 25,00,000 from Rs 3,00,000.
  • Exemption under these sections applicable under both old and new tax regime

Refer Tax on Retirement Benefits for more information


3c. Voluntary retirement compensation
  • Lumpsum Payment or otherwise received by an employee at the time of voluntary retirement is taxable.
  • Exemption of maximum Rs 5,00,000 u/s 10(10C) is applicable only if the amount is received from the employers of public sector company, any other company, local authority, cooperative society, IIT, State Government, Central Government.
  • Exemption under these sections applicable under both old and new tax regime

Refer Tax on Retirement Benefits for more information

4. 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.

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

Upto FY 2017-18 : The long term capital gains on sale of listed equity shares or equity mutual funds on which STT is paid is exempted from Income Tax
From FY 2018-19 to 23rd July 2024 : The Long-term capital gains on sale of listed equity shares or equity mutual funds on which STT is paid is taxable @ 10%. However, there is a exemption of Rs 1 lakhs capital gains
W.e.f FY 2024-25 : W.e.f 23rd July 2024, the long term capital gains on sale of listed equity shares or equity mutual funds on which STT is paid is taxable @ 12.5%. The long term capital gain exemption is increased to Rs 1.25 lakh from Rs 1 lakh

6. Income from dividend’s via mutual funds or shares

Until 31st March 2020 : 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
W.e.f 01st April 2020 : Budget 2020 has withdrawn the Dividend Distribution Tax. Hence the exemption upto Rs 10 lakhs has been removed and the entire dividend is taxable in the hands of shareholder from FY 2020-21. The dividend is taxable as per slab rates of taxpayer

7. Income from Provident funds, Super Annuation Funds and Gratuity Funds

  • Any income received from recognized provident fund (RPF) and of an approved superannuation fund or gratuity fund is exempt from tax u/s 10(25)
  • If the taxpayer withdraws the amount in PF account after 5 years continuous service then the entire amount including the principal and interest withdrawn by taxpayer is tax free.

8. Disaster Compensation / Relief

  • Any amount received or receivable by a individual or his legal heir as a compensation from Central Government or State Government or Local authority on account of disaster is exempted from income tax u/s 10(10BC)
  • Compensation Types
    • Financial compensation from the government or other organizations
    • Donations from individuals or organizations
    • Payments from insurance policies
    • The value of products or services received (typically from relief efforts)
  • Disaster
    • Disaster means a catastrophe, mishap, calamity or grave occurrence in any area arising from natural or manmade causes , accident or negligence. It should have the effect of causing
      • Substantial loss of life of human suffering
      • Property destruction or damage
      • Environment degrade or damage

9. Scholarships received for Education

  • Any amount of money received as scholarship to meet the cost of education is exempt from Income Tax u/s 10(16)
  • The source of scholarship is irrelevant and amount received from anyone for above purpose is exempt

10. Amounts received by MP's and MLA's

  • Daily Allowance received by MP's and MLA's is exempt from tax u/s 10(17)
  • Constituency Allowance received by MP's and MLA's is exempt from tax u/s 10(17)

11. Pension received by Gallantry awards recipient

  • During the Life: Pension received by an individual is exempt from Income tax if such person is an employee of Central or State Government and has been awarded "Param Vir Chakra" or "Maha Vir Chakra" or "Vir Chakra" or such other award
  • Post Death: Family pension received by the family of individual in case of death of such individual, the total pension received is exempt
NOTE :

Disability Pension received by armed forces personnel (Naval, Military or Air Forces) who have been invalidated from service on account of bodily disability attributable to or aggravated by such service is exempt from Income tax. However this exemption is not applicable if such personnel have been retired on superannuation or otherwise

12. Income of member of Scheduled Tribe

Refer Income Tax applicability on North Eastern States for more information

13. Specified Income of Sikkimese Individual

Refer Income Tax applicability on North Eastern States for more information

14. Awards for literary, scientific and artistic works and other awards by Government

Any amount received in cash or in kind as a award or reward by Central or State Government is exempted from Income tax u/s 10(17A)

15. Any amounts received from Sukanya Samriddhi Account

The interest received and Principal amount received from Sukanya Samriddhi Account is exempt from Income tax u/s 10(11A)

16. Interest on Public Provident Fund

Interest received on Public Provident Fund is exempt from Income Tax u/s 10(11)

17. Allowances or Perquisites paid outside India

  • Allowances or perquisites paid outside India by the Government to citizen of India for rendering services outside India will be fully exempt
  • This deduction is allowed under Old and New tax regime

18. Remuneration received by officials of Embassies etc of Foreign states

  • The remuneration received by a individual as an official of embassy, high commission, legation, commission, consulate or the trade representation of a foreign state or as a member of the staff of any of these officials is exempt
  • This deduction is allowed under Old and New tax regime

19. Remuneration received for services rendered in India as an employee of Foreign enterprise

  • Remuneration received by a foreign national as an employee of a foreign enterprise for services rendered by him during his stay in India is exempt from tax. However the following conditions needs to be satisfied
    • The Foreign enterprise is not engaged in any business or trade in India
    • The employee's stay in India does not exceed 90 days during the previous year
    • The remuneration is not liable to be deducted from the employer’s income chargeable to tax under Income tax
  • This deduction is allowed under Old and New tax regime

20. Salary received by a non-citizen non-resident for services rendered in connection with employment on foreign ship

  • Salary received by non-citizen, non-resident of India for the services rendered in connection with his employment on a foreign ship is exempt from Income tax. However the total stay in India should not exceed 90 days
  • This deduction is allowed under Old and New tax regime

21. Exemption from withdrawals from National Savings (NSS)

An individual or HUF can claim deduction u/s 80CCA for any amount deposited in NSS Scheme (National Savings Scheme)

  • Before Budget 2025: Any amount deposited is withdrawn along with interest during the lifetime of depositor, it is taxable if deduction was claimed earlier. However no tax if the same is withdrawn after the death.
  • Post Budget 2025:
    • No interest would be paid on the balances in the NSS after 01.10.2024
    • Tax Exemption to any amounts withdrawn by individual on or after 29th Aug 2024
    • The exemption has been provided only in respect of NSS deposits for which deduction u/s 80CCA was allowed earlier
For more exemptions under section 10 or any questions please visit

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Disclaimer: This article provides an overview and general guidance, not exhaustive for brevity. Please refer Income Tax Act, GST Act, Companies Act and other tax compliance acts, Rules, and Notifications for details.