Section 10 of Income Tax Act Explained: Key Exemptions You Must Know

Section 10 of the Income Tax Act lists specific incomes that can be excluded from your total taxable income, providing significant tax exemption opportunities. Understanding these provisions is crucial as they directly reduce your income tax liability and increase your take-home pay. This blog breaks down what Section 10 is and details the key exemptions you can claim to optimise your finances.

Understanding Section 10 of Income Tax Act

Section 10 of the Income Tax Act outlines all income sources that are eligible for tax exemption, designed to lower the tax burden on a range of taxpayers like salaried professionals, retirees, and investors. Instead of reducing the taxable income after calculation (deductions), these exemptions are simply excluded from your gross income, and not considered for tax calculations.

Being able to take advantage of these provisions allows you to reduce your liability when filing your income tax return. For example, allowances you receive from your employer or proceeds from a life insurance policy might be completely tax-free if they fall under a specific clause of Section 10.

Also Read: Tax Concepts in India: System, Structure, and Types

Key Exemptions Under Section 10 of Income Tax

Here's a detailed list of the key exemptions available under Section 10 of the Income Tax Act:

Section 10(1) – Agricultural Income

Under Section 10(1), income from agricultural land in India is exempt from tax. With agriculture contributing about 16% of GDP and employing over 40% of the workforce, this exemption safeguards the earnings of a major part of the population.

Section 10(2A) – Share of Profit from a Firm

Section 10(2A) exempts a partner’s share of profit from a partnership firm, including a Limited Liability Partnership (LLP). Since the firm itself is assessed and taxed separately, the income is not taxed again in the hands of the individual partner.

Section 10(5) – Leave Travel Allowance (LTA)

Under Section 10(5), salaried employees are entitled to an exemption for Leave Travel Allowance (LTA) provided by their employer for themselves and their families, when used for travel within India. The benefit is available for two journeys in a block of four years.

The exemption is restricted to the actual cost of travel fares incurred by the employee and their family members, and doesn't include expenses incurred on food or accommodation. For instance, if your LTA is ₹35,000 and you incur a travel expense of ₹20,000, only the amount you actually spend on travel will be tax exempt. The remaining ₹15,000 will be part of your taxable income.

Section 10(10) – Gratuity

Section 10(10) deals with gratuity payments made to employees at the time of retirement or resignation, provided they have completed at least five years of service. For government employees, the whole amount received as gratuity is exempt from tax. For other employees (both covered and not covered by the Gratuity Act), the exemption is limited to ₹20 lakhs in a lifetime. In case of an employee's death, the entire gratuity amount received by the nominee or legal heir is exempt.

Also Read: Tax Benefits of Different Loan Types in India

Section 10(10A) – Commuted Pension

In case of Section 10(10A), commuted pension received by a pensioner in a lump sum instead of periodic payments may be exempt. For government employees, the entire amount commuted under the scheme remains fully exempted. For others, one-third of commuted pension shall be exempt if gratuity is paid; while one-half shall be exempt if gratuity is not paid.

Section 10(10AA) – Leave Encashment

Section 10(10AA) provides relief for employees who receive payment (encashment) for their unused leaves at the time of retirement or resignation. Government employees are fully exempt, while a non-government employee would be granted an exemption up to the minimum of these four specified amounts:

• Leave salary actually received

• ₹25,00,000

• An average of 10 months' salary

• Cash equivalent of unavailed Leave Credit at the time of retirement

Note that any leave encashment during time of actual service is fully taxable.

Section 10(10B) – Retrenchment Compensation

Section 10(10B) of the Act says that any retrenchment compensation paid to a worker in respect of his being laid off shall be exempted from income tax to the extent of the amount calculated as per the Industrial Disputes Act, 1947, or ₹5 lakhs, whichever is less. This provision is meant to support the workers during periods of loss of employment.

Section 10(10C) – Voluntary Retirement Scheme (VRS) Compensation

Section 10(10C) exempts compensation received by the employees on opting for voluntary retirement under an approved VRS (Voluntary Retirement Scheme). The exemption is limited to ₹5 lakhs and is applicable to employees of public sector companies, statutory corporations, and institutions approved by the Government.

Section 10(10D) – Life Insurance Policy Proceeds

The proceeds of a life insurance policy, i.e. any sum received under a life insurance policy, including bonuses, are exempt under Section 10(10D). The exemption is available to both the policyholder and their nominees.

This is provided that the annual premium paid does not exceed 10% of the sum assured for policies issued after 1 April 2012. Policies issues after April 1 2023 will not benefit from the exemption if the premium exceeds ₹2.5 lakh.

Sections 10(11) and 10(12) – Statutory & Recognised Provident Funds

Payments from a Statutory Provident Fund (SPF), as well as the Public Provident Fund (PPF), are exempt under Section 10(11). Both withdrawals and the interest earned are exempt, provided the conditions, such as the minimum service period for the Employee Provident Fund (EPF), are satisfied. Section 10(12) covers the exemptions for the Recognised Provident Fund (EPF), which in turn is subject to conditions such as completing a minimum of five years of continuous service.

Also Read: 9 Useful Income Tax Saving Tips For Small Businesses

Section 10(13A) – House Rent Allowance (HRA)

Section 10(13A) provides exemption for House Rent Allowance (HRA) received by salaried individuals living in rented accommodation. The exemption is restricted to the least of the actual HRA received, the rent paid minus 10% of salary, or 50% of salary in metro cities (40% in non-metro locations).

If you earn ₹50,000/month in a non-metro city, receive an HRA of ₹20,000/month, and pay ₹18,000/month in rent, your HRA exemption will be the least of the three scenarios:

• Actual HRA = ₹20,000

• Rent paid – 10% of salary: ₹18,000 – (10% of ₹50,000) = ₹18,000 – ₹5,000 = ₹13,000

• 40% of salary (non-metro): 40% of ₹50,000 = ₹20,000

So, your exemption will be ₹13,000, and the remaining ₹7,000 will be taxable income.

Section 10(14) – Special Allowances

Special allowances are covered by Section 10(14). These include allowances granted to meet expenses related to official duties, such as travel or uniform allowances, and those compensating for costs such as children’s education or hostel allowance. The exemption is available up to the actual amount spent or within prescribed limits.

Section 10(15) – Interest Income

Interest earned on specified investments, such as notified bonds, tax-free securities, Post Office savings accounts, and Sovereign Gold Bonds, is exempt under Section 10(15). This provision applies to both individuals and entities holding such investments. The exemption applies up to ₹3,500 for individuals and ₹7,000 for joint account holders.

Section 10(23C) – Income of Educational or Medical Institutions

Section 10(23C) provides exemption for the income of universities, hospitals and other institutions that exist exclusively for educational or medical purposes and not for profit. Approval by the prescribed authority is required for the exemption to apply.

Section 10(26) & 10(26AAA) – Income of Scheduled Tribes & Sikkimese Individuals

Under Section 10(26) and Section 10(26AAA), the income of members of Scheduled Tribes in specified areas and most income earned by Sikkimese individuals is exempt. The scope of exemption depends upon the source of income and the residential status of the taxpayer.

Also Read: Tax Concepts in India: System, Structure, and Types

Section 10(37) – Capital Gains on Compulsory Acquisition

Section 10(37) grants exemption for capital gains arising from compensation received for the compulsory acquisition of urban agricultural land by the government. To qualify, the land must have been used for agricultural purposes for at least two years prior to the acquisition. The exemption is available to individuals and Hindu Undivided Families (HUFs).

Section 10AA – Profits of SEZ Units

Finally, Section 10AA applies to entrepreneurs operating in Special Economic Zones (SEZs). Profits derived from the export of articles or services are exempt in a phased manner: 100% of export profits for the first five years, 50% for the subsequent five years, and a further 50% for the next five years subject to reinvestment conditions.

To Conclude

Section 10 of the Income Tax Act offers a wide spectrum of tax exemption opportunities that significantly reduce taxable income and enhance take-home pay. A thorough understanding of these provisions is an important part of financial planning, enabling you to manage your tax liability more effectively. By maintaining proper documentation and complying with the prescribed conditions, you can maximise these exemptions to support your long-term financial goals.

FAQs

What is Section 10 of the Income Tax Act?

Section 10 of the Income Tax Act specifies various categories of income that are excluded from an individual’s or entity’s total taxable income. These are treated as exempted income, reducing the need to pay tax on them.

What type of income is exempt under Section 10?

Exempted income includes House Rent Allowance (HRA), Leave Travel Allowance (LTA), agricultural income, gratuity, pension, life insurance policy proceeds, and certain interest exemptions on notified investments. Each has separate conditions and limits.

Is there a specific eligibility criteria for income tax exemption under Section 10?

Yes, eligibility varies by exemption. For instance, to claim HRA you must be a salaried individual living in a rented house and the exemption depends on actual rent paid, HRA received, and your basic salary.

Do I need to provide proofs for claiming HRA exemption?

Yes, you must submit rent receipts or a rental agreement to your employer to claim HRA exemption. If your annual rent paid exceeds ₹1 lakh, you must also provide the landlord’s PAN.

Can self-employed professionals claim exemptions under Section 10?

While HRA and LTA apply only to salaried employees, self-employed individuals can benefit from exemptions like agricultural income, life insurance proceeds, and interest exemption on specific notified bonds and deposits.

What are capital investment bonds under Section 10?

Certain notified capital investment bonds qualify for exemption on the interest earned. These instruments are designed to encourage long-term savings while offering tax-free returns.

How does basic salary affect HRA exemption?

The exemption for House Rent Allowance is partly calculated using your basic salary. It is compared with actual rent paid and the HRA received, with the lowest of these figures allowed as the exemption.

Do central and state government employees enjoy different exemptions?

Yes, employees of the central and state government often receive full exemptions on items such as gratuity, leave encashment, and commuted pension, while private sector employees face statutory caps.