Exempted income refers to the amount a person earns in a financial year and is non-taxable. According to the Income-Tax Act (I-T Act), certain income sources, if adhere to the rules mentioned in the act, are exempted from taxation. Note, these are different from income tax deduction (deduction amount is removed from the total income.) Income exempted from taxation is listed under Section 10 of the I-T Act.
Income exempted from tax is listed under Section 10A of the I-T Act. The primary exemptions offered to tax payers include:
Exempted income in Income Tax
For salaried people in India
Standard deduction
Taxpayers are eligible for a standard deduction of Rs 50,000 in both old and new tax regimes. Earlier it was meant only for those who have opted for the old tax regime.
House Rent Allowance (HRA)
If you are a tenant, you will receive House Rent Allowance as part of your pay package. For this, you can claim tax exemption on part of the rent paid. One calculates the exemption amount by considering things, such as HRA, rent, and salary.
Leave Travel Allowance (LTA)
You can claim tax exemption on domestic travel expenses along with your family members. The exemption will be based on the actual travel cost.
Leave encashment
You can claim tax exemption on leave that you have not taken and encashed.
- Pension
- Gratuity
- Voluntary Retirement Scheme
It is necessary to disclose this type of exempted income under Schedule S, details of income from salary, when you file the Income Tax Returns under ITR-2.
Exempted income in Income Tax
For non-salaried people
People, who fall under this category, can also apply for tax exemption. The I-T Act additionally lists specific non-salary income categories exempted from tax. Earnings in this category include:
Income from farming
Income from farming, poultry, dairy, and bee keeping is exempted from income tax. All other income from agricultural actives are taxable.
Educational scholarship
Educational scholarships are exempted from Income Tax under Section 10(16) of the I-T Act, 1961.
Rent received from property
You can avail of income tax exemption on rent received from your property if the Gross Annual Value (GAV) is less than Rs 2.5 Lakh. All other rent received are taxable.
Provident Fund withdrawal
Once the lock-in period of 15 years of continuous service is over, withdrawal from the Pension Provident Fund (PPF) is exempted from income tax. However, if you withdraw before the completion of the lock-in period, then it is taxable.
Life insurance policy proceeds
All proceeds received from purchase of life insurance policies before April 1, 2023, are exempted from Income Tax under Section 10(D) of the I-T Act.
Savings account interest
Interest earned on savings account up to Rs 10,000 is exempted from income tax under Section 80TTA of the I-T Act.
These incomes should be disclosed under Schedule EI-details of exempt income, while filing Income Tax Returns using ITR-1.
Eligibility for tax exemption
- A person should be an Indian resident. NRIs and foreign residents cannot avail of tax exemption.
- Incomes falling under specific categories of Section 10 of the I-T Act are eligible for tax exemption.
- You should support the income tax exemption with proper documents.
- To claim income tax exemption, a person should follow all tax rules.
FAQs
What is the tax exemption limit for FY2023-24?
Those whose taxable income is not more than Rs 7 Lakh are exempted under the new income tax regime.
What is tax-free salary?
A tax-free salary is one, in which the employee doesn’t have to pay taxes on income earned, but the employer has to pay.
How is income tax calculated?
Income tax = (Taxable income x Applicable tax rate) - Tax rebate where taxable income will be calculated as gross salary – deductions.
Which state in India is exempted from Income Tax?
Sikkim is exempted from paying income tax.
Which section deals with tax exemptions under the I-T Act?
Section 10A lists all avenues under which tax exemptions can be availed by following terms and conditions.
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