Exempted Incomes (Tax-Free) [Section-10(1) to Section 10(7)]

1. Agriculture Income [Section 10(1)]

As per section 10(1), agricultural income earned by the taxpayer in India is exempt from tax. Agricultural income is defined under section 2(1A) of the Income-tax Act. As per section 2(1A), agricultural income generally means:

  1. Any rent or revenue derived from land which is situated in India and is used for agricultural purposes.
  2. Any income derived from such land by agriculture operations including processing of agricultural produce so as to render it fit for the market or sale of such produce.
  3. Any income attributable to a farm house subject to satisfaction of certain conditions specified in this regard in section 2(1A). Any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income.

2. Any sum received by a Co-parcener from Hindu Undivided Family (H.U.F.) [Section 10(2)]

As per section 10(2), amount received out of family income, or in case of impartible estate, amount received out of income of family estate by any member of such HUF is exempt from tax.

Example-1. HUF earned Rs.. 5,00,000 during the previous year and paid tax on its income. Mr. A, a co-parcener is an employee and earns a salary of Rs.20,000 p.m. During the previous year Mr. A also received Rs.1,00,000 from HUF. Mr. A will pay tax on his salary income but any sum of money received from his HUF is not chargeable to tax in Mr. A’s hands.

Example-2. HUF earned Rs.90,000 during the previous year 2016-17 and it is not chargeable to tax. Mr. A, a co-parcener is earning individual income of Rs. 20,000 p.m. Besides his individual income, Mr. A receives Rs.30,000 from his HUF.

Mr. A will pay tax on his individual income but any sum of money received by him from his HUF is not chargeable to tax in the hands of co-parcener whether the HUF has paid tax or not on that income.

3.  Share of Income from the Firm [Section 10(2A)]

As per section 10(2A), share of profit received by a partner from a firm is exempt from tax in the hands of the partner. Further, share of profit received by a partner of LLP from the LLP will be exempt from tax in the hands of such partner. This exemption is limited only to share of profit and does not apply to interest on capital and remuneration received by the partner from the firm/LLP.

4.  Interest paid to Non-Resident [Section 10(4)(i)]

As per section 10(4)(i)in the case of a non-resident any income by way of interest on certain notified securities or bonds (including income by way of premium on the redemption of such bonds) is exempt from tax.

As per section 10(4)(ii)in the case of an individual, any income by way of interest on money standing to his credit in a Non-Resident (External) Account in any bank in India in accordance with the Foreign Exchange Management Act, 1999, and the rules made thereunder is exempt from tax.

Exemption under section 10(4)(ii) is available only if such individual is a person resident outside India as defined in clause (q) of section 2 of the said Act or is a person who has been permitted by the Reserve Bank of India to maintain the aforesaid Account.

5. Interest to Non-Resident on Non-Resident (External) Account [Section 10(4)(ii)]

Any income by way of interest on moneys standing to his credit in a Non-Resident (External) Account in any bank in India shall be exempt from tax in case of an individual who is a person resident outside India or is a person who has been permitted by the RBI to maintain the aforesaid account. The person residing outside India shall have the same meaning as defined under Foreign Exchange Regulation Act, 1973, FEMA, 1999. This exemption shall not be available on any income by way of interest paid or credited on or after 1-4-2005.

6.  Interest paid to a person of Indian Origin and who is Non-Resident [Section 10(4 B)]

In case of an individual, being a citizen of India or a person of Indian origin, who is nonresident, any income from interest on such savings certificates issued by the Central Government, as Government may specify in this behalf by notification in the Official Gazette, shall be fully exempt. The exemption under this section shall not be allowed on bonds or securities issued on or after 1-6-2002.

This exemption shall be allowed only if the individual has subscribed to such certificates in Foreign Currency or other foreign exchange remitted from a country outside India in accordance with the provisions of the Foreign Exchange Act, 1973, FEMA, 1999 and any rules made there under.

For this purpose, a person shall be deemed to be of Indian origin if he or either of parents or any of his grandparents, was born in India or in undivided India.

7.  Leave Travel Concession or Assistance (LTC/LTA) to an Indian Citizen Employee [Section 10(5)]

The employee is entitled to exemption under section 10(5) in respect of the value of travel concession or assistance received by or due to him from his employer or former employer for himself and his family, in connection with his proceeding—

  1. on leave to any place in India.

  2. to any place in India after retirement from service or after the termination of his service.

The exemption shall be allowed subject to the following:

  1. where journey is performed by air — Maximum exemption shall be an amount not exceeding the air economy fare of the National Carrier by the shortest route to the place of destination;

  2. where places of origin of journey and destination are connected by rail and the journey is performed by any mode of transport other than by air — Maximum exemption shall be an amount not exceeding the air-conditioned first class rail fare by the shortest route to the place of destination; and

  3. where the places of origin of journey and destination or part thereof are not connected by rail and the journey is performed between such places — The amount eligible for exemption shall be:

    1. where a recognised public transport system exists, an amount not exceeding the 1st class or deluxe class fare, as the case may be, on such transport by the shortest route to the place of destination; and

    2. where no recognised public transport system exists, an amount equivalent to the air-conditioned first class rail fare, for the distance of the journey by the shortest route, as if the journey had been performed by rail.

Exemption will, however, in no case exceed, actual expenditure incurred on the performance of journey.

HOW MANY TIMES CAN EXEMPTION BE CLAIMED?

  • The assessee can claim exemption in respect of any two journeys in a block of 4 years. For this purpose, the first block of 4 years was calendar years 1986-89, second block was 1990-93, third block was 1994-97, fourth block was 1998-2001, fifth block was 2002-05 sixth block was 2006-09, seventh block is 2010 to 2013, eight block is 2014-2017 and ninth block will be 2018-2021.

  • If the assessee has not availed of the exemption of LTC in a particular block, whether for both the journeys or for one journey, he can claim the exemption of first journey in the calendar year immediately succeeding the end of the block of four calendar years. In other words, maximum one journey can be carried forward and that too only for the first journey in the following calendar year unless the period is otherwise extended. Such journey undertaken during the extended period will not be taken into account for determining the tax exemption of two journeys for the succeeding block.

Exemption available only in respect of two children

The exemption relating to LTC shall not be available to more than two surviving children of an individual after 1.10.1998.

Exception: The above rule will not apply in respect of children born before 1.10.1998 and also in case of multiple birth after one child.

IMPORTANT NOTES :

  1. In case the LTC is encashed without performing the journey, the entire amount received by the employee would be taxable.
  2. Family for this purpose includes:
    1. the spouse and children of the employee;
    2. parents, brothers & sisters of the employee, who are wholly or mainly dependent upon him.
  3. The exemption can be availed for the journey undertaken while on leave during the tenure of service or even after retirement/termination from service. 
  4. The exemption is allowed only in respect of fare. Expenses incurred on porterage, conveyance from residence to the railway station/airport/bus stand and back, boarding and lodging or expenses during the journey will not qualify for exemption.
  5. Exemption is available in respect of shortest route. Where the journey is performed from the place of origin to different places in a circular form or in any other manner, the exemption for that journey will be limited to what is admissible for the journey from the place of origin to the farthest point reached, by the shortest route.

8.  Remuneration or Salary received by an individual who is not a citizen of India [Section 10(6)]

The following incomes are exempt when received by an individual who is not a citizen of India:

(i) Remuneration [U/s 10(6)(ii)].

    1. The remuneration received by an ambassador or other officials of the Embassy, High Commission or Legation of a foreign State in India. 

    2. The remuneration by a consular officer of a foreign State in India. 

    3. The remuneration received by a trade commissioner or other official representative in India of a foreign State, provided corresponding officials of the Government of India in that country are given a similar concession. 

    4. The remuneration received by a member of the staff of any of the officials referred to in (a), (b) and (c) above.

If the person mentioned above in (a) to (d) is a subject of the country represented, is not engaged in any business, profession or employment in India (otherwise than as a member of such staff), and the country represented gives similar concession to the members of the staff of corresponding officials of the Government of India.

(ii) Remuneration received by him as an employee of foreign enterprise [U/s 10(6)(vi)]

(e.g., technician deputed by a foreign firm to work in India), for service rendered by him during his stay in India provided the following conditions are fulfilled—

  1. the foreign enterprise is not engaged in any trade or business in India ;

  2. his stay in India does not exceed in the aggregate a period of 90 days in such previous year ; and

  3. such remuneration is not liable to be deducted from the income of the employer chargeable under the Act.

(iii) Employment on a foreign ship [U/s 10(6)(viii)].

Any income chargeable under the head “Salaries” received by or due to any such individual being a non-resident, as remuneration for service rendered in connection with his employment on a foreign ship where his total stay in India does not exceed in the aggregate of a period of 90 days in the previous year.

(iv) Remuneration received by an employee of foreign govt. during his stay in India for his training in India [U/s 10(6)(xi)].

Such remuneration shall be fully exempted if he is taking training in any of the following concern : 

  1. Institution owned by govt 

  2. A company wholly owned by Central or State govt. or partly owned by Central and partly by State govt 

  3. A subsidiary Co. of company referred at point (b) above 

  4. Any corporation established by or under Central, State or Provincial Act 

  5. Any society registered under Societies Registration Act; 186Q and which is wholly financed by Central or State govt.

9.    Tax paid by Government or Indian concern on Income of a Foreign Company [Section 10(6A), (6B), (6BB) and (6C)]

(6A) :

  1. Where a foreign company renders technical services to Government of India or to a State Government or to an Indian enterprise and for such services a foreign company is paid income by way of royalty or fees.

  2. Such fees or royalty is paid by an India concern in pursuance of an agreement entered into before 1-6-2002 and such agreement is approved by Government of India and it is in accordance with the Industrial Policy of the Government of India.

  3. Since royalty or fees paid to a foreign company accrues in India, so such income is liable to be taxed in India and as per agreement the payer of income in India pays tax liability of the foreign company.

  4. Tax so paid by Government of India or a State Government or an Indian enterprise will be exempted i.e., it will not be grossed up with the income of the foreign company.

Example.      A foreign company renders technical services to an Indian company and as per agreement, foreign company is to be paid a fees of Rs. 1,00,000. Tax of Rs. 30,000 on such fees is also paid by the Indian company. Tax paid by Indian company will be exempt and so it will not be grossed up with the income of the foreign company and such foreign company’s income will be only Rs. 1,00,000.

(6B) :

The tax liability of a non-resident (Not being a company) or a foreign company if paid by an Indian concern or Government of India or a State Government the same will be exempted and so will not be grossed up with the income of the foreign entity.

(6BB) :

Tax paid on income received by foreign government or a foreign enterprise on leasing aircraft.

In case any income is received by a foreign government or a foreign enterprise from an Indian company which is engaged in the operation of aircraft and such income is by way of consideration of acquiring an aircraft or an engine of aircraft (other than payment for providing spares or services in connection with the operation of leased aircraft) on lease under an agreement entered into after 31-3-1996 but before 1-4-2007 and approved by the Central Government in this behalf, and the tax on such income is payable by such Indian company under the terms of agreement, the tax so paid shall be fully exempted.

This benefit shall be available only to that foreign enterprise which is non-resident.

(6C) :

Any income derived by a foreign company (so notified by Central govt.) by way of royalty or fees for technical services under an agreement for providing services in or outside India in projects connected with security of India shall be fully exempted.

10.  Perquisites and Allowances paid by Government to its Employees serving outside India [Section 10(7)]

Any allowances or perquisites paid or allowed, as such, outside India by the Government to a citizen of India, for rendering services outside India, are exempt.

The following conditions have to be satisfied before such income is treated as deemed to accrue or arise in India:

  1. Income should be chargeable under the head ‘Salaries’;

  2. The payer should be Government of India;

  3. The recipient should be an Indian citizen — whether Resident or Non-Resident;

  4. The services should be rendered outside India.

While salary of Indian citizen in the above case shall be deemed to accrue or arise in India but all allowances or perquisites paid outside India by the Government to the above Indian citizens for their rendering services outside India are exempt under section 10(7).