Exemptions and Deductions Under Section 10 of Income Tax Act

What Is Section 10 of the Income Tax Act?

Section 10 of the Income Tax Act, 1961 provides tax-saving benefits to a salaried professional. This section focuses on such income which falls under the exempted category and is not included in the total income for the year.

In this article, you will learn about the various clauses, sub-clauses, and exemptions under Section 10.

Exemptions Under Section 10 of Income Tax Act

Section 10 offers exemptions under various sub-clauses as follows:

1. Section 10(1)
2. Section 10(2)
3. Section 10(2A)
4. Section 10(3)
5. Section 10(4)
6. Section 10(5)
7. Section 10(6
8. Section 10(7)
9. Section 10(10CC)
10. Section 10(10C)
11. Section 10(10D)
12. Section 10(11
13. Section 10(10BC)
14. Section 10(13A)
15. Section 10(14)
16. Section 10(15)

Let us now take a closer look at each.

1. Section 10(1): Exemption for Income From Agricultural Activities

Section 10(1) offers tax relief to India’s farmers and those who make a living from agriculture. The section further clarifies and lists down the type of incomes from agriculture that would be eligible for tax exemption under Section 10(1). They are:

• Income from sale of farm produce
• Rent or income generated through agricultural land holding in India
• Income derived from agricultural operations, such as cultivation, ploughing, and tilling
• Income made from subsequent operations for preservation and to increase the yield of the produce, such as cutting, weeding, pruning, irrigation, use of compost, manure, and fertiliser, etc.
• Income made from renting out buildings required for preserving farm produce or for carrying out other agricultural operations

Let us understand this subclause better with an example:

Let us say that Mr. Bhupinder owns 5 acres of agricultural land in Chandigarh. He rents it out to marginal farmers every month and receives a rent of ₹1,000 per 0.01 acres of land. This means, each month, he earns a rent of ₹(100*1000*5)= ₹5,00,000. Multiple it by 12 and his annual income from rent of his farmland is ₹60 Lakh. As per Section 10(1), the entire amount will be exempt from income tax.

2. Section 10(2): Tax Exemption on Income Made as a Member of a HUF

This section states that any income or profit made from businesses or investments as a member of a Hindu Undivided Family (HUF), will be tax-exempt in the hands of any member or shareholder in the family. As per this clause, income for a member of a HUF will only be eligible for tax exemption in the following situations:

• Where the income or the profit share has been paid to the member from the total income made by the family
• Where, in case of an impartible estate, the income is generated through business activities carried out by the estate belonging to the family

To understand it better, let’s consider an example. Mr. Kartik is part of an HUF in Himachal Pradesh. As a member of the estate owned by the family, he receives an annual income  of ₹1 Crore. He also receives an interest income of ₹6 Lakh per year. As per Section 10 (2), his annual income of ₹1 Crore will not be taxable since this is the money he made as a member of a valid HUF in India, but ₹6 Lakh is his personal income from interest earnings. This amount will be fully taxable as per his income tax slab rate.

3. Section 10(2A): No Tax on Profit Share Made as a Co-Owner of a Partnership Firm

Section 10(2A) offers tax exemptions on profit shares received by each member as co-owners of a partnership firm. However, the following conditions must be satisfied to be eligible for this tax exemption:

• The partnership firm must be taxed as per the provisions of Income Tax Act, 1961
• Each shareholder must receive profit shares in the same proportion as mentioned in the partnership deed
• The applicable tax exemption for each partner will be limited to their income as co-owners or shareholders of the firm in question

The following example will further simplify the provisions of this clause for you.

Let’s say Ms. Rekha is a partner in a limited liability partnership (LLP) firm. The firm’s income from agricultural activities for FY 21-22 was ₹8 Crore. As per the partnership deed of the firm, Ms. Rekha is 1/5th owner of the firm, which means she is eligible to receive 20% of the profit made by the firm. So, Rekha’s income from the firm, which is 20% of ₹8 Crore i.e. ₹1.6 Crore, is fully tax-exempt under Section 10(2A). She also makes ₹25 Lakh each year from her bank savings and investments. This amount will be fully taxable as per the rate applicable for the income tax slab to which Ms. Rekha belongs.

Another important point to note is that if instead of 20% of the company’s profit share, she received a smaller or a larger share, say 30%, her entire profit share from the LLP for the year would have been taxable.

4. Section 10 (3): Income From Eligible Awards Due to Outstanding Contribution to Literature, Science, Arts, or Sports

In accordance with the changes stipulated under Direct Taxes Amendment Act (1974), Section 10 (3) offers full tax exemption to monetary awards and grants received from the Central Government or State Governments for outstanding contributions to literary, arts, scientific, and sports fields.

Let’s say Ayusha has won a gymnastics competition organised by the State Government of Madhya Pradesh. As first prize, she received a gold medal and a cash prize of ₹5 Lakh. As per Section 10 (3), the entire prize amount of ₹5 Lakh will be tax-exempt.

5. Section 10(4): Tax Exemption on Income Made by an NRI From India

This section pertains to the income made by a non-resident Indian (NRI) from their investments or savings accounts in India. They can claim full tax exemption for income from the following:

• From interest income from rupee-denominated bonds and securities specified by the Government of India
• From premiums or income earned from redemption of such securities or bonds
• From interest income on deposits made in a non-resident (external) savings account i.e. an NRE account as per Section 2 of Foreign Exchange Management Act (FEMA), 1999
• From interest income earned outside India by an NRI from their deposits in an NRE account

Let’s say Mr. Suraj has invested ₹5 Lakh in a rupee-denominated short-term bond specifically targeted towards NRIs. It falls in the government-specified list, income from which is exempt under Section 10(4). Let’s say he earns an interest income of ₹1 Lakh for the year from this bond and upon maturity redeems the bond and makes a profit of ₹7 Lakh that year. So, his entire income from these bonds i.e. ₹(1 Lakh + 7 Lakh) = ₹8 Lakh, will be tax-free as per the provisions of Section 10(4).

6. Section 10(5): Tax Exemption Available on Leave Travel Concession Offered to Salaried People in India

This is an income tax exemption available to individual taxpayers. Section 10(5) of I-T Act, 1961 states that an employee can claim full tax exemption on the LTA component of their salary. This is applicable to both Indian and foreign employees. The section also states that the benefit will be extended to the employee’s dependent family members, including:

• Spouse
• Children
• Parents
• Siblings

However, in order to be eligible for tax exemption, the following conditions must be satisfied:

• On LTA received from an employer for the employee and their dependents in a financial year
• For upcoming travel of employees (current or former)
• The exemption limit will depend on the actual amount spent in a financial year on travel by an eligible employee and their dependents
• The exemption will not be available if the employee is not travelling with their family

Let’s understand this with an example. Let’s say Mr. Prakash receives a leave travel allowance of ₹40,000 per year as part of his salary. He takes his family for two vacations. In the first, the cost of air travel (up and down) comes to ₹21,000. In the second, it comes up to ₹15,000. The total is ₹(21,000+15,000)= ₹36,000. According to this section, Mr. Prakash can claim tax exemption on his travel expenses of up to ₹36,000 for the year, even though the leave travel allowance (LTA) component in his annual salary is ₹40,000.

7. Section 10(6): Exemption on Income Received by an Individual Working Abroad as a Representative of India

This section pertains to individuals, who are working outside India and representing India in their official capacity or a dignitary/employee visiting India as a representative of a foreign state/company. The individual can only claim income tax exemption under this section if:

• They work at an:
  • Indian embassy
  • An Indian high commission
  • An Indian mission or a legation
  • A consulate or commission
• They work as a representative of a foreign state or company and are currently visiting India on official business

The tax benefits under this section will be available, subject to the following limits:

• The foreign entity or employer, paying the remuneration, should not be involved in any business or trade activities in India
• The tenure of stay in India of a foreign employee should not exceed 90 days
• The remuneration received by the employee must not have been deducted from the income of the foreign employer in India

To understand this better, here’s an example:

Let’s say Mr. Gopinath worked as a Defence and Air Attache at an Indian embassy abroad for 295 days in 2021. Let’s say his remuneration was ₹27 Lakh per annum. After the end of his stint, he returned to India and moved to a new job in the Ministry of Defence.

So, as per provisions of Section 10(6) of I-T Act, 1961, Mr. Gopinath’s income for 295 days during his stay abroad, will be fully tax-exempt, which in this case comes up to ₹27,00,000/365*295= ₹21,82,192 (Approx.)

8. Section 10(7): Exemption on Perquisites or Allowances Paid by the Government of India to an Indian Citizen Working Abroad

This section offers tax exemption to an employee of the Indian Government stationed abroad on perquisites or allowances earned by them for rendering their services.

Let’s say Mridula, who works as a secretary at an Indian high commission, is eligible to claim ₹45,000 every year for medical treatments at an outdoor facility. She uses the full amount allocated to her for the year. According to this section, this perquisite will be fully tax-exempt.

9. Section 10(10CC): Exemption on Tax Paid by an Employer on Perquisites

As a practice, some employers bear the tax applicable on certain non-monetary benefits or perquisites offered to their employees. While the perquisite is taxable in the hands of the employees, since the tax is paid by the employer, effectively it becomes tax-free in the hands of the employees. Section 10(10CC) details this.

Let’s say company A pays a gym membership fee of ₹5,000 per month for its managers. So, while the employee receives a non-monetary benefit worth ₹60,000 every year, the employer pays the tax on this amount, and under Section 10(10CC), this amount becomes fully tax-exempt in the hands of the eligible employees.

10. Section 10(10C): Exemption on Money Received by an Employee Under a Voluntary Retirement Scheme

This section stipulates that any money received by an employee as part of a voluntary retirement or golden handshake arrangement will be fully tax-exempt. This will also include an employee’s termination of service, provided the relevant conditions are satisfied. To receive tax exemption under this scheme, an individual must be an employee of one of the following organisations:

• A central or state government department
• A public sector company
• A cooperative society
• A company specified by notification in the Official Gazette of the Government of India
• An Indian Institute of Technology, as defined within Section 3 of the Institutes of Technology Act, 1961
• An Institute of Management specified by notification in an Official Gazette of the Government of India
• A university set up by a provisional, state or central government act
• An authority set up under a central, state, or provisional act
• Any other company

Let’s assume that Mr. Mundra was working as an Assistant Professor in a University funded by the Central Government. For some particular reason, the university terminated his service contract, However, they offered him a severance package equal to 3 months of his salary. Let’s say Mr. Mudra’s monthly salary was ₹78,000. Then, the entire amount of ₹2,34,000, will be tax-exempt under this section.

11. Section 10(10D): Exemption on Payouts From a Life Insurance Policy

The maturity amount i.e. the sum insured, death benefit received and bonus payouts, if any, from a life insurance policy are fully tax-exempt under Section 10(10D) of I-T Act, 1961. However, in order to claim tax exemptions under this section, a policyholder must satisfy the following conditions:

• On life insurance policies issued after 1st April, 2012, the premium paid shouldn’t exceed 10% of the sum insured
• On life insurance policies issued before 1st April, 2012, the premium shouldn’t exceed 20% of the sum insured
• Only applicable on a life insurance policy held by a policyholder, who is disabled or ill as specified by the provisions under Sections 80U and 80DDB
• This section is also applicable to payouts received from an ULIP (full form: Unit Linked Insurance Plan) and all other forms of life insurance schemes

Budget 2023 Update

As per Union Budget 2023, a policyholder can claim tax exemptions under this section, provided:

• The total premium paid on life insurance policies, other than ULIPs, cannot exceed ₹5 Lakh
• For ULIPs, the total premium paid cannot exceed ₹2.5 Lakh

Let’s understand it better with an example. Let’s say Sonu gets a ULIP for 15 years. He has to contribute ₹45,000 per year for the next 5 years. So, in all, he pays ₹2,25,000. He is assured a sum of ₹7,50,000 on maturity. As per this section, the entire return from his ULIP investment will be tax-exempt.

12. Section 10(11): Exemption on Returns From a Retirement Fund Like EPF and Sukanya Samriddhi Account

Any amount received by an employee from the savings and interest payment from a retirement savings scheme, such as Employees’ Provident Fund, after retirement is tax-free. Also, the principal and interest payments received from Sukanya Samriddhi Yojana are fully exempt from income tax.

Example: Ms. Ray retired as an employee of a private company in Kolkata. Upon retirement, she received ₹10,00,000 from her provident fund savings. As per Section 10(11), she will not have to pay income tax on this entire amount.

13. Section 10(10BC): Tax Exemption on Any Amount Received to Cope With a Disaster

Under this section, any amount received from the central government, a state government, or a local authority by an individual or their legal heirs on account of a natural or man-made disaster, will not be considered while calculating the income tax liability of the individual (or their legal heirs) for the year.

However, it must be noted that only an amount received as compensation for a disaster, as defined in Section 2(d) of the Disaster Management Act, 2005, will be considered for exemption under this particular Income Tax section. The disaster could be natural, man-made, a massive accident, or result from negligence and lead to substantial human loss, suffering, environmental degradation or severe damage to property.

Let’s now understand this better with a simple example. Let’s say 60 victims lose their lives due to a train accident in Orissa. The Government of Orissa announces a compensation of ₹1 Crore for the dependent family members of each dead victim. Rakhi Singh passed away in the train accident and is survived by an unmarried, dependent daughter, Rekha. This compensation of ₹1 Crore will be fully tax-exempt and won’t be counted towards Rekha’s annual income.

14. Section 10(13A): Exemption on House Rent Allowance

In India, the standard salary structure usually receives a component called the house rent allowance (HRA), which employees can use to meet their house rental expenses. The portion of the salary which can be used towards rent and accommodation is fully exempt under Section 10(13A). The HRA tax exemption will be the minimum of the following:

• The actual amount the employee receives as HRA
• 40% of the basic salary for employees residing in non-metro cities and 50% for employees residing in metro cities
• The amount paid as rent over 10% of the basic salary

Let’s now consider an example. Neha pays a rent of ₹10,000 per month for a studio apartment in Bangalore, India. She receives an HRA amount of ₹12,000, while her basic salary is ₹20,000. So, her HRA exemption will be the minimum of:

• ₹12,000
• 40% of ₹20,000 (since Bangalore is a non-metro city) i.e. ₹8,000
• ₹(10,000-10% of ₹20,000) = ₹(10,000-2,000) i.e. ₹8,000

Therefore, Neha can claim a tax exemption of ₹8,000 on the HRA component of her salary even though she pays a monthly rent of ₹10,000.

15. Section 10(14): Exemption on Special Allowances Received as Part of Salary

An employer can offer their employees certain special allowances as part of their salary. While there is no upper limit on the amount the employer can designate as special allowance, an employee must utilise the special allowance only for specified purposes. Section 10(14) states that a special allowance will not be considered while calculating an employee’s tax liabilities for the year. In addition, the special allowances have been divided into two broad categories as follows:

Section 10(14)(i):

1. Daily Allowance

Employees receive this allowance to meet their daily expenses when they are not in the actual place of work.

2. Travel Allowance

This type of allowance is paid to an employee for the travel expenses incurred during an official visit. 

3. Uniform Allowance

If you are associated with a company where it is mandatory to wear a uniform while you are on duty, its purchase or maintenance costs are covered under this allowance. 

4. Helper Allowance

This is provided to the employees who need an assistant or helper for carrying out official duties. The exemption is available under Section 10 of the IT Act for the salary that the helper is paid.

5. Conveyance Allowance

This helps in meeting the expenses of transportation incurred while you are travelling for official work.

6. Research or academic allowance

This is granted mainly to encourage training, research, and other academic activities.

Section 10(14)(ii)

You are liable to pay taxes on these special allowances only if they exceed the prescribed limit. The following are some of the allowances under this subsection and their respective limits: 

1. Allowance for Children’s Education

A special grant of ₹100 is provided for the education of an employee’s child. However, this allowance is limited to 2 children per employee. This allowance is fully tax-exempt under Section 10 of I-T Act, 1961.

2. Allowance Awarded for High Active Field Area

The armed forces may award such an allowance to its members under specific conditions. The tax exemption limit is set at ₹4,200 per month.

3. Border area

This allowance is also limited to armed forces personnel. It can range from ₹200 to ₹1,300, depending on whether one is working in a difficult area, remote locality, or a disturbed area.

4. Special Compensatory Payment

If you work in a snowbound area, hilly or high-altitude location, you are eligible for this allowance. The prescribed limit can range between ₹300 and ₹7,000, based on certain conditions.

5. Allowance for Island Duty

Armed forces personnel posted on the Andaman & Nicobar Island regions or the Lakshadweep can claim this allowance. The limit is set at ₹3,200 per month.

6. Allowance for Counter-Insurgency

A defence personnel, forced to stay away from their permanent residence, is eligible for such pay. The limit is ₹3,900 per month. However, an individual cannot claim border area pay and counter-insurgency pay simultaneously, which also means that they cannot claim income tax exemption simultaneously for both categories.

7. Compensatory Field Area Allowance

Certain employees, who are ineligible for border area pay, may qualify for this particular allowance. However, they must meet certain conditions. The monthly limit under this pay is ₹2,600.

8. Tribal Area Pay

If you are posted in agency areas, tribal areas or scheduled areas, you can get up to ₹200 per month in additional pay under this category.

16. Section 10(15): Exemption on Income From Interest Payments

This section states that interest earned from investments are exempt from income tax for certain taxpayer entities. It has various sub-sections, each of which offer exemptions to specific taxpayers as follows:

Also Read

5 Heads of Income Under Income Tax Act

What is Section 10AA of Income Tax Act?

Maximum Tax Exemption Under Section 10 of Income Tax Act

Based on an individual’s age, the maximum exemption available under Section 10 of Income Tax Act, 1961 is as follows:

Final Word

Section 10 of Income Tax Act offers tax benefits to individuals, HUFs, and other specified taxpayer entities, subject to fulfilment of conditions. Now that you have gone through the article, hopefully, you will have a better understanding of how to maximise your tax savings.

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