14 Exempt or Tax free incomes for salaried employees

Section 10 of the Income Tax Act provides tax exemptions to salaried professionals by excluding certain income sources from their total income. These exemptions aim to reduce the tax burden on individuals and promote specific activities or categories of income. Common exemptions under Section 10 include house rent allowance (HRA), leave travel concession (LTC), medical allowances, gratuity, pension, and allowances provided by the employer. By excluding these income sources, Section 10 allows salaried professionals to avail tax benefits and enjoy higher take-home pay, thus promoting savings and financial well-being

Exemptions Allowed under Section 10 for Salaried Employees

Section 10(5) Leave travel concession

Leave Travel Concession, as stated in Section 10(5), allows employees to claim exemption for their travel expenses while on leave. This exemption applies to both Indian and foreign employees. It covers the value of any travel concession or assistance received from the employer for the employee and their family members, when traveling within India.

• For air travel, the exemption amount will be either the economy class air fare of the National Carrier by the shortest route or the actual amount spent, whichever is lower.
• For rail travel, the exemption amount will be either the air-conditioned first class rail fare by the shortest route or the actual amount spent, whichever is lower. The same rule applies if the journey is performed by any other mode of transport, as long as the place of origin and destination are connected by rail. 
• If there is recognized public transport available, the exemption amount will be either the first class or deluxe class fare by the shortest route or the actual amount spent, whichever is lower. If there is no recognized public transport, the exemption amount will be either the air-conditioned first class rail fare by the shortest route (considering the journey as if it were performed by rail) or the actual amount spent, whichever is lower.

Section 10(10A) Pension

Pension, as mentioned in Section 10(10A), has certain tax exemptions for government and non-government employees.

For government employees, if they receive a lump sum amount as commuted pension instead of monthly payments, the entire amount is exempt from tax. However, this exemption only applies to the commuted pension, not the monthly pension.

For non-government employees, the exemption for commuted pension varies based on whether they receive gratuity or not:

• If a non-government employee receives gratuity along with the commuted pension, one-third of the total commuted pension amount is exempt from tax.
• If a non-government employee does not receive gratuity, half of the total commuted pension amount is exempt from tax.

Section 10(10C) Payment at the time of voluntary retirement 

Under Section 10(10C), if you receive compensation during voluntary retirement or termination of service, you may be exempt from paying taxes on it. Certain conditions apply, including a maximum exemption amount of Rs. 5,00,000.

Section 10(11A) Payment from account opened in accordance with the Sukanya Samriddhi Account Rules, 2014

According to Section 10(11A), any payment from an account opened under the Sukanya Samriddhi Account Rules, 2014, is exempt from tax. This means that both the interest earned and the withdrawals made from this account are not subject to taxation under Section 10(11A).

Section 10(12B) Partial withdrawal from NPS 

Section 10(12B) allows for tax-free partial withdrawals from the National Pension System (NPS). To qualify, the withdrawn amount must not exceed 25% of the employee’s total NPS contribution and must comply with the specified terms and conditions.

Section 10(10D) Amount paid on life insurance policy

Under Section 10(10D), money received from a life insurance policy, including bonuses, is tax-exempt. The exemption applies to policies issued before March 31, 2003, and for policies issued after that date, the premium must not exceed a certain percentage of the sum assured. Additional benefits received beyond the sum assured are not considered. Money received upon the insured person’s death remains tax-exempt without conditions.

Section 10(13A)

House Rent Allowance (HRA), as mentioned in Section 10(13A), has certain exemptions based on different factors.

The exemption for HRA will be the lower of the following:

• 50% of the salary if the residential house is in Mumbai, Kolkata, Delhi, or Chennai. If it’s in any other place, the exemption will be 40% of the salary.
• The actual HRA received by the employee during the time they stayed in the rented accommodation in the previous year.
• Rent paid that exceeds 10% of the salary.

The salary considered includes the basic salary, dearness allowance for retirement benefits, and commission based on a fixed percentage of the employee’s achieved turnover. Other allowances and perquisites are not included.

The salary is calculated based on the period of occupancy in the previous year. Any payments not related to that year or the duration of staying in the accommodation are not included.

Section 10(14)

According to Section 10(14), certain allowances or benefits provided to employees are exempt from tax, subject to specific limits. Here are the details:

Section 10(16) Educational scholarship

Under Section 10(16), any amount received as an educational scholarship, specifically meant to cover the cost of education, is exempt from tax for the recipient. This means that the scholarship amount does not need to be included as taxable income for the recipient.

Section 10(23C) Income of Educational Institutions and Hospital

According to Section 10(23C)(iiiad), if a university or educational institution operates solely for educational purposes and not for profit, its income will be tax-exempt. However, this exemption only applies if the institution’s total annual receipts do not exceed Rs. 5 crore.

Section 10(26) Income of a member of a Scheduled Tribe

As per Article 366(25) of the Constitution, if a person belongs to a Scheduled Tribe and meets the following conditions, their income will be exempt from tax:

• The person resides in certain areas, which include the states of Nagaland, Manipur, Tripura, Arunachal Pradesh, Mizoram, or specific districts in North Cachar Hills, Mikir Hills, Khasi Hills, Jaintia Hills, and Garo Hills, or in the Ladakh region of Jammu and Kashmir.
• The exemption applies to income earned in these areas or income derived from dividends or interest on securities from any area.

Section 10(26AAA) Income of a “Sikkimese” individual 

As per Section 10(26AAA), the income of an individual from Sikkim is exempt from tax. This includes any income earned within the state of Sikkim itself. Additionally, any income in the form of dividends or interest on securities, whether generated in Sikkim or elsewhere, is also exempt from tax for Sikkimese individuals.

Section 112A exempts long-term capital gains from the transfer of equity shares, mutual fund units, or business trust units subject to securities transaction tax.

Section 112A of the Income Tax Act was announced in Budget 2018 to replace the exemption previously provided under section 10(38). This section applies to the sale of listed equity shares, equity-oriented mutual funds, and units of a business trust, and imposes a tax on long-term capital gains crossing Rs. 1 lakh at a rate of 10%. This provision became effective from the financial year 2018-19.

Before the Amendment of Section 112A

Before the Assessment Year 2018-19, Section 10(38) of the Income Tax Act, 1961 granted an exemption from the tax applicable on long-term capital gains resulting from the transfer of either of the following:

• equity shares
• units of equity-oriented funds
• units of business trusts.

After the Amendment of Section 112A

Post April 1, 2018, the provisions of Section 10(38) of the Income Tax Act do not apply to income generated from the sale of equity-oriented fund units, equity shares, and units of business trusts. Instead, income that is a result of the transfer of these assets are subject to the provisions of Section 112A of the Income Tax Act, and tax is calculated accordingly.

Exceptions to Section 112A of Income Tax Act

Below are the exceptions to Section 112A:

• Gains made from mutual funds are currently exempt from taxation.
• Section 112A of the Income Tax Act does not apply if Section 112 is applicable.
• Non-Resident Indians (NRIs) are not subject to this provision.
• Securities listed in the recognized Stock Exchange within the International Financial Service Center (IFSC) are not subject to Securities Transaction Tax (STT) when transferred.
• If an assessee can show that the securities they possess are capital assets and not stock-in-trade, they will not be subject to this provision.
• Foreign Institutional Investors (FIIs) are also exempt as the securities they hold are considered capital assets and the authorities do not need any proof of that.

Section 10(37) Capital gains in case of compulsory acquisition of urban agricultural land 

Under Section 10(37), individuals or Hindu Undivided Families (HUFs) can be exempt from paying capital gains tax when their agricultural land in an urban area is compulsorily acquired, and they receive compensation on or after April 1, 2004. This exemption applies if the taxpayer (or their parents, in the case of an individual) used the land for agricultural purposes for at least 2 years before the transfer.

How to file Income Tax Return for Salaried persons:

What are the deductions allowed under Income tax:

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