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Incomes Completely Exempt From Income Tax

 
Some of the important items of income, which are fully exempt from income tax and which can be utilised by an assessee for the purpose of tax planning, are described below:

(A) AGRICULTURAL INCOME


Under the provisions of Section 10(1) of the Income Tax Act, agricultural income is frilly exempt from income tax. However, for individuals or HUFs when agricultural income is in excess of 5,000, it is aggregated with the total income for the purposes of computing tax on the total income in a manner which results into “no” tax on agricultural income but an increased income tax on the other income.


“Agricultural income” as per Section 2(1 A) means : (A) any rent or revenue derived from land which is situated in India and is used for agricultural purposes; (B) any income derived from such land by (i) agriculture i.e., by actual cultivation of land and by means of

certain basic operations in agriculture; or (ii) by the performance of some agricultural process ordinarily employed by the cultivator, etc. to render the produce fit to be taken to market; or (iii) by the sale of the produce in respect of which no other process other than the one mentioned above has been employed; and (C) any income derived from any building owned and occupied by the receiver of the rent or revenue of any such land or kept by the cultivator or the receiver of rent-in-kind, of any land in respect of which, any process as mentioned above is carried on, subject to certain conditions about the building being on or in the vicinity of the land, etc.
The Finance Act, 2000 inserted a new Explanation in Section 2(1A) to clarify that any income from such building or land arising from the use of the building or land for any purpose other than agriculture, would not be included in the definition of “agricultural income”. For example, if a person has income from using such building or land for purposes, such as letting it out for residential purposes or for the purposes of any business or profession, then such income is not treated as agricultural income from the AY 2001-
2002.


Income from saplings and seedlings in a nursery to be exempt Section 2 (IA)


Any income derived from saplings and seedlings grown in a nursery
would be agricultural income and thus be fully exempt from tax.
This is as per the Finance Act 2008 w.e.f. the AY 2009-20 10.

Illustration:
For the assessment year 201 3-2014 a male individual has a total income from trading in cloth amounting to `2,02,000. Besides, he has earned 40,000 as income from agriculture.

 

The income tax payable by him will be computed as under:


On the first
`2,00,000 of taxable non-agricultural income                            Nil
On the next
`40,000 of agricultural income
        (falling under 10% slab)                                                            Nil
On the next
` 2,000 of taxable non-agricultural
        income@10%                                                                            
`200
IT on aggregated income of
`2,02,000 + ` 40,000 = `2,42,000 =      `200

 

 

Agricultural income which fulfils the above conditions is completely exempt from tax. The manner of calculating tax on total income and agricultural income, is explained in Illustration

 

(B) RECEIPTS FROM HUF


Any sum received by an individual as a member of a Hindu Undivided Family, where the said sum has been paid out of the income of the family, or, in the case of an impartible estate, where such sum has been paid out of the income of the estate belonging to the family, is completely exempt from income tax in the hands of an individual member of the family under Section 10(2).
 

(C) SHARE FROM A PARTNERSHIP FIRM


Under the provisions of Section 1 0(2A), in the case of a person being a partner of a firm which is separately assessed as such, his share in the total income of the firm is completely exempt from income tax since the AY 1993-94. For this purpose, the share of a partner in the total income of a firm separately assessed as such would be an amount which bears to the total income of the firm the same share as the amount of the share in the profits of the firm in accordance with the partnership deed bears to such profits. The share of profit from a Limited Liability Partnership (LLP) is also exempt from tax.
 

(D) CASUAL INCOME


From the AY 2005-2006 casual income has been made fully taxable.
 

(E) CERTAIN INCOMES OF A NON-RESIDENT


Any income by way of interest (including premium on the redemption of such bonds) on such securities or bonds, as the Central Government may notify in Official Gazette, is fully exempt from tax. Similarly, the interest on moneys standing to the credit of persons resident outside India in respect of a Non-Resident (External) Account in a bank is exempt under Section 10(4).
 

(F) CERTAIN INCOMES OF NON-CITIZENS OF INDIA


In the case of an individual who is not a citizen of India, i.e. a foreigner, the passage money or value of any free or concessional passage received by or due to such an individual from his employer for himself, his spouse, or children, in connection with his proceeding on home leave out of India or after retirement or termination of service, is fully exempt from tax. Similarly, the remuneration received by a foreigner as an official of an embassy, etc. or as a member of staff of the aforesaid office, etc., is completely exempt from tax u/s 10(6).
 

(G) ALLOWANCE FOR FOREIGN SERVICE


Any allowances or perquisites paid or allowed as such outside India by the Government to a citizen of India, rendering service outside India, are completely exempt from tax under Section 10(7). This provision can be taken advantage of by the citizens of India who are in government service so that they can accumulate tax-free perquisites and allowances received outside India.
 

(H) GRATUITIES


Under the provisions of Section 10(10) of the IT Act, any deathcum-retirement gratuity of a government servant is completely exempt from income tax. However, in respect of private sector employees gratuity received on retirement or on becoming incapacitated or on termination or any gratuity received by his widow, children or dependants on his death is exempt subject to certain conditions.


The maximum amount of exemption is
` 10,00,000;. Of course, this is further subject to certain other limits like the one half month’s salary for each year of completed service, calculated on the basis of average salary for the 10 months immediately preceding the year in which the gratuity is paid or 20 months’ salary as calculated. Thus, the least of these items is exempt from income tax under Section 10(10).
 

(I) COMMUTATION OF PENSION


The entire amount of any payment in commutation of pension by a government servant or any payment in commutation of pension from LIC pension fund is exempt from income tax under Section 10(1 OA) of IT Act. However, in respect of private sector employees, only the following amount of commuted pension is exempt, namely:


(a) Where the employee received any gratuity, the commuted value of one-third of the pension which he is normally entitled to receive; and (b) In any other case, the commuted value of half of such pension.
It may be noted here that the monthly pension receivable by a pensioner is liable to full income tax like any other item of salary or income and no standard deduction is now available in respect of pension received by a tax payer.
 

(J) LEAVE SALARY


Under Section 10(10AA) the maximum amount receivable by the employees of Central Government as cash equivalent to the leave salary in respect of earned leave at their credit upto 10 months’ leave at the time of their retirement, whether on superannuation or otherwise, would be ` 3,00,000.
 

(K) VOLUNTARY RETIREMENT OR SEPARATION PAYMENT


Under the provisions of Section 10(1 OC), any amount received by an employee of a public sector company or of any other company or of a local authority or a statutory authority or a cooperative society or university or lIT or TIM at the time of his voluntary retirement (VR) or voluntary separation in accordance with any scheme or schemes of VR as per Rule 2BA, is completely exempt from tax. The maximum amount of money received at such VR which is so exempt is `5 Lakh. An assessee cannot enjoy both the exemption in respect of VRS upto `5 Lakh and also a deduction under Section 89.
 

(L) LIFE INSURANCE MONEYS


Under Section 10(1 OD), any sum received under a Life Insurance
Policy (LIP), including the sum allocated by way of bonus on such policy, other than u/s 8ODDA or under a Keyman Insurance Policy, or under an insurance policy issued on or after 1.4.2003 in respect of which the premium payable for any of the years during the term of the policy exceeds 2O°/o of the actual capital sum assured, is fully exempt from tax. However, all moneys received on death of the insured are fully exempt from tax Thus, generally moneys received from life insurance policies whether from the Life Insurance Corporation or any other private insurance company would be exempt from income tax.
 

(M) PAYMENT RECEIVED FROM PROVIDENT FUNDS


Under the provisions of Sections 10(11), (12) and (13) any payment from a government or recognised provident fund (Pf or approved superannuation fund, or PPF is exempt from income tax.
 

(N) ANY SPECIAL ALLOWANCE OR BENEFIT


In the case of an employee who is in receipt of any special allowance or benefit, not being in the nature of a perquisite u/s 17(2), specifically granted to meet the expenses wholly, necessarily and exclusively incurred in the performance of duties of an office or employment or profit, which the Central Government may, by notification in the Official Gazette, specify till 30.6.1995 and in the IT Rules from 1 July 1995, to the extent to which such expenses are actually incurred for that purpose, the same is fully exempt from tax u/s 10(14). The provisions of Section 10, relating to the exemption of house rent allowance, children’s education allowance, DA, TA, conveyance allowance, have been described in the chapter dealing with salary income and hence have not been repeated in this chapter.
 

(0) CERTAIN TYPES OF INTEREST PAYMENT


There are certain types of interest payments which are fully
exempt from income tax u/s 10(15). These are described below:

 

(i)      Income by way of interest, premium on redemption or other payment on such securities, bonds, annuity certificates, savings certificates, other certificates issued by the Central Government and deposits as the Central Government may, by notification in the Official Gazette, specify in this behalf.

 

(iia)   In the case of an individual or a Hindu Undivided Family, interest on such capital investment bonds as the Central Government may, by notification in the Official Gazette, specify in this behalf (i.e. 7% Capital Investment Bonds);

 

(iib)   In the case of an individual or a Hindu Undivided Family, interest on such Relief Bonds as the Central Government may, by notification in the Official Gazette, specify in this behalf (i.e., 9% or 8.5% or 8% or 7% Relief Bonds); (iid) Interest on NRI bonds;

 

(iiia)   Interest on securities held by the issue department of the Central Bank of Ceylon constituted under the Ceylon Monetary Law Act, 1949;

 

(iiib)   Interest payable to any bank incorporated in a country outside India and authorised to perform central banking functions in that country on any deposits made by it, with the approval of the Reserve Bank of India or with any scheduled bank;

 

(iv)    Certain interest payable by Government or a local authority on moneys borrowed by it, including hedging charges on currency fluctuation (from the AY 2000-200 1), etc.;


(v)     Interest on Gold Deposit Bonds;


(vi)    Interest on certain deposits are: Bhopal Gas victims;


(vii)   Interest on bonds of local authorities as notified, and

 

(viii)   Certain new Tax Free Bonds and Tax Free Infrastructure Bonds to be notified from time to time.

 

(ix)    From the financial year 2012-13 the saving bank account interest upto ` 10,000 is exempted as per Section 80 TTA.
 

(P) SCHOLARSHIP AND AWARDS, ETC.


Any kind of scholarship granted to meet the cost of education is exempt from tax under Section 10(16). Similarly, certain awards and rewards, etc. are completely exempt from tax under Section 10(17A), for example, Lakhotia Puraskar of ` 1,00,000 awarded to

 

 

the best Rajasthani author, every year under Notification No. 199/28/95-IT (A-I) dated 22-4-1996. Any daily allowance received by a Member of Parliament or by an MLA or any member of any Committee of Parliament or State legislature is also exempt from tax under Section 10(17).
 

(Q) GALLANTRY AWARDS, ETC. - SECTION 10(18)


The Finance Act, 1999 has, with effect from AY 2000-2001, provided for complete exemption for the pension and family pension of Gallantry Award Winners like Paramvir Chakra, Mahavir Chakra, and Vir Chakra and also other Gallantry Award winners notified by the Central Government.
 

(R) EXEMPTION FOR BUSINESS ENTERPRISES

There are innumerable tax exemptions in Section 10 relating to various business activities. For example, the income of infrastructure development funds and companies as also the income of certain specified venture capital companies is fully exempt from income tax. Similarly, the incomes of newly established 100% export oriented undertakings, the industries set up in Free Trade Zones (only 90% exemption of income for AY 2005-2006), industries in NorthEastern Region, etc., are fully exempt from income tax. Similarly, as per Section 10BA certain incomes of exporters of hand-made articles using wood as main raw material is exempt from income- tax. The income of units in SEZ is also fully exempt from tax.
 

(5) DIVIDENDS ON SHARES AND UNITS - SECTION 10(34) & (35)

As per Finance Act, 2003 from the Assessment Year 2004-05, the dividend income and income of units of Mutual Funds would be completely exempt from income tax.
 

(T) CAPITAL GAINS FROM TRANSFER OF AGRICULTURAL LAND SECTION 10(37)


As per the Finance (No.2) Act, 2004 capital gains received on transfer of agricultural land (used in the past 2 years for agricultural purposes) by way of compulsory acquisition would be fully exempt from tax.
 

(U) LONG-TERM CAPITAL GAINS OF TRANSFER OF SECURITIES SECTION 10(38)


With effect from FY 2004-05, any income arising to a taxpayer on account of sale of long-term capital asset being securities is completely outside the purview of tax liability especially when the transaction has been subjected to Securities Transaction Tax (STT). Thus, if the shares of any company listed in the stock exchange are sold after holding it for a minimum period of one year then there will be no liability to payment of capital gains. This provision would even apply for the old shares which are held by an assesse and are sold after the Finance (No.2) Act, 2004 came into force.
 

(V) AMOUNT RECEIVED BY WAY OF GIFT, ETC SECTION 10(39)

 

As per the Finance (No.2) Act, 2004, gift, etc. received after 1-9- 2004 by individual or HUF in cash or by way of credit, etc. is being subjected to tax if the same is not received from relative, etc. However, Section 56(2) provides that the amount received to the extent of `50,000 will, however, be exempt from the purview of income tax. In case the gift received from non-relatives is in excess of `50,000 in a financial year then the entire amount would be taxable as income. Similarly, amount received on the occasion of marriage from a non-relative, etc. would also be exempted. It may be noted that the gift from relatives, as mentioned in the Section can be received without any upper limit. As per the Finance (No.2) Act, 2009 various items have beerf included in the list of items liable to be included as income from other sources if received from non- relatives on or after 1-10-2009 including immovable properties, shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures and any work of art. As per the Finance Act, 2010 even “Bullion” received from a non-relative would be taxed as income of the assessee.
 

(W) TAX EXEMPTION REGARDING REVERSE MORTGAGE SCHEME
SECTIONS 2(47) AND 47(X)


Any transfer of a capital asset in a transaction of reverse mortgage for senior citizens under a scheme made and notified by the Central Government would not be regarded as a transfer and therefore would not attract Capital Gains Tax. The loan amount would also be exempt from Tax.
 
 
 
 
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