Exempt Income


Exempt Income

There are various deductions, rebates and other benefits available in the Income Tax Act. 1961 although the simplest to understand and take benefit of is Section 10 of the Income Tax Act 1961 which primarily deals with most of the Exempt Incomes. These Incomes are directly exempt and are not considered at all while computing the tax liability. However these incomes are required to be disclosed in the Income Tax Return filled by the assessee. Here is a list of the most common exempt incomes :

Long-term capital gains

Any long-term capital gains received on stocks and equity oriented mutual funds are exempt from tax provided the transaction is done on a recognized stock exchange and Securities Transaction Tax (STT) is paid on the same. In other words, any income you may generate on account of sale of these instruments are exempt from income tax obligation as per Section 10(36) of the Income Tax Act. But, for this, the equity instrument should be held for more than a year. Please note that this is not applicable to debt mutual funds. Since Long Term Gain is exempt you can not set off or carry forward Long Term capital Loss as well. As per Income Tax Act, equity oriented fund (EO fund) refers to units of Unit Trust of India or a fund wherein investible funds invested by way of equity shares in domestic companies exceed 65%of the total proceeds of such fund and which has been set up under a scheme of a mutual fund specified under Section 10(23D) of the Act. The percentage of equity shareholding of the fund is computed with reference to the annual average of the monthly averages of the opening and closing amounts.

Income from gratuity

Gratuity is paid by the employer as part for gratitude for acknowledging the employee's long-standing meritorious service. Gratuity received by any government employee is fully exempted from income tax. For non-government employees covered by the payment of Gratuity Act of 1972, the least of the three is exempted from income tax

  • 15 days salary based on the last drawn salary * No of Completed Years of Service
  • Rs. 10,00,000
  • Total gratuity received.

The gratuity received by an employee is not taxable if it is received on his retirement, his becoming incapacitated prior to such retirement, termination of employment or if such gratuity is received by his widow, children or dependants on his death.



Agriculture Income

India is primarily an agrarian economy where a large part of its GDP comes from Agriculture. The constitution of India does not allow the Central Govt. to tax Agricultural Income and the exclusive power to tax it, is with the state legislatures therefore the Indian Income Tax Act of 1961 exempts any income one generates through agriculture from tax liability. However, agriculture income is included, for the limited purpose of determining the tax rate, in computing the income tax liability if the net agricultural income exceeds Rs 5,000 for, say, FY15 and total income, excluding net agricultural income, exceeds applicable basic income exemption of Rs 2,50,000.

Is Dividend Income exempt from tax?

Although dividend distribution is taxable in the form of DDT (Dividend Distribution Tax), still the income is exempt in the hands of the receiver upto10 lacs per year u/s 10(34) of the Income Tax Act 1961. Also For equity oriented Schemes Dividend is exempt in the hand of the recipient and no DDT is payable by the Scheme since DDT was already paid by the company while distribution of dividend to its shareholders. Although on dividend from other than equity oriented Schemes such as Money Market & Liquid Schemes and Debt Schemes DDT is required to be paid @ 25% + Surcharge + Education Cess if distribution is done to an Individual or HUF ( Hindu Undivided Family) .

Interest on Public Provident Fund

The PPF is one of the most useful tax saving investment opportunity and is open to all. Besides the best part is that when you invest in it you get exemption u/s 80C, when you earn interest it is again exempt u/s 10(11), and the end when the money is withdrawn (lock in period of 5 years) it is again exempt thus keeping it EEE or Exempt Exempt Exempt at all the three stages.

Allowances received from Employer

There are various allowances received from your employer which are exempt u/s 10 of the Income Tax Act 1961 subject to certain monetary limitations and conditions. These include House Rent Allowance, LTA, Transport Allowance, High Altitude, Island Allowance, Allowance to High Court Judges, Allowance from United Nation Organization etc.

Allowance for foreign service

Any allowances or perquisites paid or allowed as such outside India by the Government to a citizen of India, rendering service outside India, are completely exempt from tax under Section 10(7). This provision can be taken advantage of by the citizens of India who are in government service so that they can accumulate tax- free perquisites and allowances received outside India.

Tax exemption regarding reverse mortgage scheme u/s 10(43)

The Reverse Mortgage scheme is for the benefit of the senior citizens, who own a residential house property. In order to supplement their current income, they can mortgage their house with a scheduled bank or a NBFC in return of a regular monthly/quarterly/annual income. The beauty of this scheme is that the senior citizen can continue to stay in the house property and also receive regular income from the same

throughout their lifetime.

The Bank or NBFC recovers the loan along with interest by selling the house property after the death of the borrower and returns the excess amount to the legal heirs of the borrower. Although before sale preference is given to the legal heirs to repay the loan and get the property released. Any transfer of a capital asset in such a transaction of reverse mortgage for senior citizens under a scheme made and notified by the Central Government is not regarded as a transfer and therefore does not attract capital gains tax. The loan amount received is also exempt from tax.

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