Maximizing your income tax exemptions: Tips and strategies for saving money
This article focuses on the Exempted Income in Income Tax in India, Income Exempt from Tax under Section 10, and list of exemption.
Table of Contents
This article discusses Exempted Income in Income Tax in India, Income Exempt from Tax Under Section 10, and Exempted Income List.
Income tax is a tax levied on any individual or business who earns more than the Tax exemption limit. However, few people are aware that under Section 10 of the Income Tax Act of 1961, certain types of income are exempt from income tax.
As you prepare to file your income tax returns, it is a good idea to check to see if any of your earnings are tax-free. The income types listed below are exempt from paying income taxes.
Before we get into the Income Tax Exemption in India, let's take a quick look at "What is Income Tax Deduction?" And the fundamental concept of Income Tax Exemption.
What is Income Tax Deduction?
Individuals can reduce their taxable income for the year by taking advantage of Income Tax Deductions. In other words, IT deductions are investments made during a fiscal year that are deducted from gross annual income when filing your ITR (Income Tax Return). Tax deductions were created to encourage people to save and help them build a secure financial future.
Income Tax Deductions are commonly used for National Pension Scheme (NPS), Public Provident Fund (PPF), investments made under Section 80 of the IT Act, 1961, in ELSS (Equity Linked Saving Scheme) funds, principal repayment of a home loan, and so on.
Information on Income Tax Exemptions
Income tax exemptions/allowances are components of your gross income that, as the name implies, are not counted toward your total taxable income. Because of these exemptions, individuals can keep a significant portion of their earnings. The Income Tax Act of 1961 requires income tax exemptions/allowances in order for people to save more.
Why is it necessary to report exempt income on the ITR?
Many taxpayers believe that exempt income does not need to be reported under Income Tax laws. That, however, is not the case. The department requires taxpayers to file the appropriate ITRs in either of the following classes,
If the taxpayer is exempt from taxation because their income exceeds the basic exemption limit under the applicable tax laws, or
- If their income is exempt from taxation under any provision of the Act.
- This assists the Department in gaining clarity on exempt income and its source, even if no tax revenue is generated.
Some of the most important reasons for reporting exempt income on the ITR are discussed below.
- Transparency
- Clarity of intention of taxpayers
- Completion of the ITR
- Curbing any possibility of black money
List of Income Exempt from Income Tax in India
The following income is exempt from taxation under Section10 of the Income Tax Act:
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1. Agriculture income is exempted from Tax under Section 10
Section 2 (1A) of the IT (Income Tax) Act defines what constitutes agricultural income in India. –
- Any income or rent derived from land used for agricultural purposes in India.
- Income from agricultural operations, such as agricultural produce processing for market sale.
- Any income generated by the farmhouse is subject to the fulfilment of the specific conditions outlined in section 2.
- Income from nursery saplings or seedlings is included in agricultural income.
2. Income earned in a form of Gratuity
Any gratuity paid to a government employee due to death or retirement is tax-free. Gratuities received by private-sector employees upon retirement, disability, or termination are tax-free up to ten lakh rupees. The exemption is subject to additional constraints imposed by the Income Tax Act. The stated limitations are half a month's salary for each year of completed service, calculated based on the average wage for the ten months immediately preceding the year in which the gratuity is paid, or the actual gratuity paid.
3. Income of Hindu Undivided Family (HUF)
Income Tax is not levied on any member of the Hindu undivided family (HUF) who receives income from family or income from the impartial family estate/property.
4. Non-Resident Interest Income
Non-residents receive tax-free income in the form of interest on specified notified securities or bonds, including income received as a premium on redemption.
Following the implementation of FEMA, 1999, an individual's income derived from interest on funds held in a Non-Resident (External) Account in any bank in India is tax-free.
Note: Section 4(2) exemption is only available if a person is a resident outside India as defined by FEMA, 1999, or if the RBI has granted permission to keep the above-mentioned account.
Interest on registered savings certificates is tax-free for a single Indian citizen or person of Indian descent who is a non-resident.
5. Remuneration Received by Diplomats and their Staff
Section 10(6) (ii) provides that remuneration received by an official of a foreign embassy, high commission, consulate, or trade representative, or their staff, is tax-free if the corresponding Indian official enjoys a similar exemption in the foreign country.
6. Profit-sharing from a firm/LLP is tax-deductible
A partner's profit share from a firm is tax-free in the partner's hands. Similarly, the profit share of an LLP (Limited Liability Partnership) from the LLP will be tax-free in the hands of the partner.
This tax exemption only applies to profit-sharing; it does not apply to capital interest or pay received from the LLP/Firm by the partner.
7. Technical fees as a source of income for a foreign company
Royalties or fees for technical services received under an agreement between a designated foreign business and the government for providing services in or outside India in projects related to India's security are tax-free.
8. Leave Travel Concession
Section 10 allows an employee (whether an Indian or a foreign citizen) to claim travel concessions or assistance received or due from his employer in connection with leave proceedings to anywhere in India (5).
9. Any income in a form of Scholarships and Awards
Section 10 of the Internal Revenue Code exempts from income tax monetary assistance in the form of prizes or scholarships. There is no maximum amount, and the total amount received as a scholarship is tax-deductible.
10. Received from the Provident Fund
The amount received from a public provident fund, a statutory provident fund, or an unrecognized provident fund is tax deductible.
Other exempted income under Income Tax Act
- A Category-III AIF can earn capital gains on the sale of capital assets, rupee-denominated bonds, or derivatives (Alternative Investment Fund).
- A government employee's monthly pension is completely tax-free.
- To some extent, an employee's pay received during a layoff is tax-free.
Conclusion
Salaried workers make up the vast majority of taxpayers in the country, and their contribution to tax collection is significant. Income tax deductions offer a variety of ways for salaried workers to save money on taxes. A person's tax liability can be significantly reduced with the help of these Income Tax deductions and exemptions.
FAQs
Q: How much can I save under Income Tax Act Section 80C?
Ans: Section 80C of the Income Tax Act provides for an exemption of up to 1.5 lakhs. The new tax regime, however, provides no exemption.
Q: What is the distinction between tax exemption and tax deduction?
Ans: It is stated in Chapter VI A of the act that exemptions and deductions are distinct. Exemption means exclusion, so if a certain income is tax-free, it does not contribute to a person's total income. A deduction is a subtraction, i.e. an amount that can be used to reduce taxable income. The exemption is a relaxation, whereas the deduction is a concession.
Q: What is exempt income? Differences between exempt income and taxable income.
Ans: Exempt income is income that is not subject to taxation because the Income Tax Act expressly exempts it from taxation. Taxable income is defined as income that is subject to taxation.
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