15 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 of tax benefits and enjoy higher take-home pay, thus promoting savings and financial well-being

Here are the exemptions that salaried employees can claim under Section 10.

1. Section 10(5) Leave travel concession

Under Section 10(5) of the Indian Income Tax Act, employees can claim a tax exemption on their travel expenses while on leave. This exemption applies to both Indian and foreign employees and covers any travel concession or assistance received from the employer. It applies to the employee and their family members when travelling within India.

• For air travel, the exemption amount will be either the economy class airfare of the National Carrier by the shortest route or the actual amount spent, whichever is lower.
• If you are travelling by rail, you can claim an exemption amount that is equivalent to either the cost of an air-conditioned first-class ticket for the shortest route or the actual amount spent on your journey, whichever is lower. This rule also applies if you are travelling by any other mode of transport, as long as your place of origin and destination are connected by rail.
• When there is a 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. However, in case there is no recognized public transport, the exemption amount will be either the air-conditioned first-class rail fare by the shortest route (taking into consideration the journey as if it were performed by rail), or the actual amount spent, whichever amount is lower.

Section 10(10C) pertains to the payment received by an individual at the time of his/her 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(10A) Pension

Pension has tax exemptions for government and non-government employees according to Section 10(10A).

Government employees who receive a lump sum amount as a commuted pension are exempt from tax, but only for the commuted pension, not the monthly pension.

For non-government employees, the exemption for commuted pensions 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(11A) Payment from an account opened by 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(10D) refers to the amount paid out on a life insurance policy.

As per Section 10(10D), any money received from a life insurance policy, inclusive of bonuses, is exempted from tax. The exemption applies to policies which were issued before March 31, 2003. For policies issued after that date, the premium amount should not exceed a certain percentage of the sum assured. Any additional benefits received beyond the sum assured are not considered for tax exemption. Money received upon the insured person’s death remains tax-free without any conditions.

Section 10(12B) partial withdrawal from the National Pension System (NPS).

Section 10(12B) of the National Pension System (NPS) allows tax-free partial withdrawals, subject to terms and conditions, not exceeding 25% of the employee’s total NPS contribution.

Section 10(14)

Section 10(14) of the Income Tax Act provides tax exemptions for specific allowances and benefits given to employees, subject to certain limits. Here are the details:

Section 10(13A)

Section 10(13A) of the Income Tax Act provides exemptions for House Rent Allowance (HRA) based on certain factors.

The HRA exemption will be calculated based on the lower value of the 3 options below:

• Residential houses located in Mumbai, Kolkata, Delhi, or Chennai are eligible for a 50% salary exemption. For houses in any other location, the exemption is 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 exceeds 10% of the salary.

The salary considered includes the basic salary, dearness allowance, and commission based on a fixed percentage of the employee’s achieved turnover. Other allowances and perquisites are excluded.

Section 10(16) Educational scholarship

According to Section 10(16) of the tax code, any monetary assistance given to a student for the sole purpose of covering their educational expenses is considered an educational scholarship. Such scholarships are not subject to tax for the recipient. Therefore, the scholarship amount need not be included as taxable income for the recipient.

Section 10(26) income earned by a member of a Scheduled Tribe.

According to Article 366(25) of the Constitution, income of individuals belonging to Scheduled Tribes is tax exempt if they meet certain conditions.

• The individual lives in particular regions, which encompass the states of Nagaland, Manipur, Tripura, Arunachal Pradesh, and 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(37) capital gains that arise when urban agricultural land is acquired compulsorily.

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

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

As per Section 10(23C)(iiiad) of the Income Tax Act, if a university or educational institution is operated exclusively for educational purposes and not for profit, their income will be exempt from tax. However, this exemption is applicable only if the institution’s total annual receipts are less than or equal to Rs. 5 crore.

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

Section 10 (26AAA) of the Income Tax Act exempts the income of individuals from Sikkim from tax. This includes any income earned within the state of Sikkim itself. In addition, 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.

In Budget 2018, Section 112A of the Income Tax Act was introduced to replace the exemption previously provided under Section 10(38). This particular 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%. The provision became effective from the financial year 2018-19.

Before the Amendment of Section 112A

Prior to the Assessment Year 2018-19, the Income Tax Act, 1961 provided an exemption from the tax levied on long-term capital gains that arose from the transfer of any of the following:

1. Equity shares

2. Units of equity-oriented funds

3. Units of business trusts.

After the Amendment of Section 112A

Effective from April 1, 2018, the provisions of Section 10(38) of the Income Tax Act are no longer applicable to the income earned from the sale of equity-oriented fund units, equity shares, and units of business trusts. Instead, the income generated by the transfer of these assets is now governed by the provisions of Section 112A of the Income Tax Act which determines the tax liability.

Exceptions to Section 112A of Income Tax Act

Please find below the exceptions to Section 112A:

1. Gains from mutual funds are currently exempt from taxation.
2. Section 112A of the Income Tax Act does not apply if Section 112 is applicable.
3. Non-resident Indians (NRIs) are not subject to this provision.
4. Securities listed in the recognized Stock Exchange within the International Financial Service Center (IFSC) are not subject to Securities Transaction Tax (STT) when transferred.
5. If an assessee can demonstrate that the securities they possess are capital assets and not stock-in-trade, they will not be subject to this provision.
6. 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.

Transport Allowance

Up to ₹1,600 per month (₹1,920 per month for blind or orthopedically handicapped employees) received as transport allowance is exempt from tax under Section 10(14) of the Income Tax Act.