Exempted Incomes (Tax-Free) [Section-10(D) to Section 10(14)]

1. Any sum received under a Life Insurance Policy [Section 10(10D)]

Any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy, is wholly exempt from tax. However, the following sum received are not exempt under this section:

  1. any sum received from a policy under section 80DD(3) or section 80DDA(3); or
  2. any sum received under a Keyman Insurance Policy; or
  3. any sum received, under an insurance policy issued on or after 1.4.2003 but on or before 31.3.2012 in respect of which the premium payable for any of the years during the terms of the policy exceeds 20% of the actual capital sum assured. However, such sum received on the death of a person shall be exempt; or
  4. any sum received under an insurance policy issued on or after 1.4.2012 in respect of which the premium payable for any of the years during the terms of the policy exceeds 10% of actual capital sum assumed; or
  5. any sum received under an insurance policy issued on or after 1.4.2013 for insurance on the life of any person, who is
    • a person with disability or a person with severe disability as referred to in section 80U; or
    • suffering from disease or ailment as specified in the rules made under section 80DDB in respect of which the premium payable for any of the years during the terms of policy exceeds 15% of the actual capital sum assumed.
Keyman insurance policy means a life insurance policy taken by a person on the life of another person who is or was the employee of the first mentioned person or is or was connected in any manner whatsoever with the business of the first mentioned person and includes such policy which has been assigned to a person, at any time during the term of the policy, with or without any consideration.

2. Payment from Statutory Provident Fund [Section 10(11)]

Statutory Provident Fund

Employer’s Contribution

Employer’s contribution to such fund is not treated as income of the employee

Interest

Interest credited to such fund is exempt in the hands of the employee.

Amount received at the time of termination

Lump sum amount received from such fund, at the time of termination of service is exempt in the hands of employees.

3. Payment from Recognised Provident Fund [Section 10(12)]

The accumulated balance due and becoming payable to an employee participating in a recognised provident fund, is exempt to the extent provided in rule 8 of part A of the Fourth Schedule.

Recognised Provident Fund

Employer’s Contribution

Employer’s contribution to such fund, up to 12% of salary is not treated as income of the employee (see Note 1).

Interest

Interest credited to such fund up to 9.5% per annum is exempt in the hands of the employee, interest in excess of 9.5% is charged to tax in the hands of the employee.

Amount received at the time of termination

If certain conditions are satisfied, then lump sum amount received from such fund, at the time of termination of service, is exempt in the hands of employees. (see Note 2)

 

Un-Recognised Provident Fund

Employer’s Contribution

Employer’s contribution to such fund is not treated as income of the employee.

Interest

Interest credited to such fund is exempt in the hands of the employees.

Amount received at the time of termination

(See note 3)

                                                

Public  Provident Fund

Employer’s Contribution

Employers do not contribute to such fund

Interest

Interest credited to such fund is exempt.

Amount received at the time of termination

Lump sum amount received from such fund at the time of termination of service is exempt from tax

.Notes:

1. Salary for this purpose will include basic salary, dearness allowance, if the terms of service so provide and commission based on fixed percentage of turnover achieved by the employee.

  1. Accumulated balance paid from a recognised provident fund will be exempt from tax in following cases:

 (a)       If the employee has rendered a continuous service of 5 years or more. If the accumulated balance includes amount transferred from other recognised provident fund maintained by previous employer, then the period for which the employee rendered service to such previous employer shall also be included in computing the aforesaid period of 5 years.

 (b)       If the service of employee is terminated before the period of 5 years, due to his ill health or discontinuation of business of the employer or other reason beyond his control.

 (c)        If on retirement, the employee takes employment with any other employer and the balance due and payable to him is transferred to his individual account in any recognised fund maintained by such other employer, then the amount so transferred will not be charged to tax.

 Except above situations, payment from a recognised provident fund will be charged to tax considering such fund as un-recognised from the beginning (See note 3 given below for tax treatment of un-recognised provident fund).

  1.        Treatment of payment (at the time of termination) from un-recognised provident fund:

Payment on termination will include 4 things, viz., employee’s contribution and interest thereto and employer’s contribution and interest thereto, the tax treatment of such payment is as follows:

        Employee’s contribution is not chargeable to tax; interest on employee contribution is taxed under the head “Income from other sources”.

        Employer’s contribution and interest thereon are taxed as salary income, however, an employee can claim relief under section 89 in respect of such payment.

4. Payment from Superannuation Fund [Section 10(13)]

Like Provident Fund, Superannuation fund is also a scheme of retirement benefits for the employee. These are funds, usually established under trusts by an undertaking, for the purpose of providing annuities, etc., to the employees of the undertaking on their retirement at or after a specified age, or on their becoming incapacitated prior to such retirement, or for the widows, children or dependents of the employees in case of the any employee’s earlier death. The trust invests the money contributed to the fund in the form and mode prescribed. Income earned on these investments shall be exempt, if any such fund is an Approved Superannuation Fund.

Tax treatment: The tax treatment as regards the contribution to and payment from the fund is as under:

Employee’s contribution: Deduction is available under section 80C from gross total income.

Employer’s contribution: Contribution by the employer to the approved superannuation fund is exempt upto ₹1,50,000 per year per employee. If the contribution exceeds ₹1,50,000 the balance shall be taxable in the hands of the employee.

Interest on accumulated balance: It is exempt from tax.

Payment from the fund: Any payment from an approved superannuation fund shall be exempt if it is made:

  1. on the death of a beneficiary; or
  2. to any employee in lieu of or in commutation of an annuity on his retirement at or after a specified age or on his becoming incapacitated prior to such retirement; or
  3. by way of refund of contributions on the death of a beneficiary; or
  4. by way of refund of contributions to an employee on his leaving the service in connection with which the fund is established otherwise than by retirement at or after a specified age or on his becoming incapacitated prior to such retirement, to the extent to which such payment does not exceed the contributions made prior to the commencement of this Act and any interest thereon; or
  5. by way of transfer to the account of the employee under a pension scheme referred to in section 80CCD and notified by the Central Government.

5. House Rent Allowance-HRA [Section 10(13A) Read with Rule 2A]

Quantum of Exemption: Minimum of following Three limits:

 

Mumbai/Kolkata/Delhi/Chennai

Other Cities

(i)

Allowance actually received

Allowance actually received

(ii)

Rent paid in excess of 10% of Salary

Rent paid in excess of 10% of Salary

(iii)

50% of Salary

40% of Salary

The exemption in respect of HRA is based upon the following factors:

  1. Salary
  2. Place of residence
  3. Rent paid
  4. HRA received.

Since there is a possibility of change in any of the above factors during the previous year, exemption for HRA should not always be calculated on annual basis. As long as there is no change in any of the above factors it can be calculated together for that period. Whenever there is a change in any of the above factors, it should be separately calculated till the next change.

6. Any Allowance given for meeting Business Expenditure [Section 10(14)]

As per section 10(14), read with rule 2BB following allowances granted to an employee are exempt from tax subject to certain limit:

Allowances

Exemption Limit

Children Education Allowance

Up to Rs. 100 per month per child up to a maximum of 2 children is exempt

Hostel Expenditure Allowance

Up to Rs. 300 per month per child up to a maximum of 2 children is exempt

Transport Allowance granted to an employee to meet expenditure on commuting between place of residence and place of duty

Up to Rs. 1,600 per month (Rs. 3,200 per month for blind and handicapped employees) is exempt

Allowance granted to an employee working in any transport business to meet his personal expenditure during his duty performed in the course of running of such transport from one place to another place provided employee is not in receipt of daily allowance

Amount of exemption shall be lower of following:

a)  70% of such allowance; or

b)  Rs. 10,000 per month

Conveyance Allowance granted to meet the expenditure on conveyance in performance of duties of an office

Exempt to the extent of expenditure incurred for official purposes

Travelling Allowance to meet the cost of travel on tour or on transfer

Exempt to the extent of expenditure incurred for official purposes

Daily Allowance to meet the ordinary daily charges incurred by an employee on account of absence from his normal place of duty

Exempt to the extent of expenditure incurred for official purposes

Helper/Assistant Allowance

Exempt to the extent of expenditure incurred for official purposes

Research Allowance granted for encouraging the academic research and other professional pursuits

Exempt to the extent of expenditure incurred for official purposes

Uniform Allowance

Exempt to the extent of expenditure incurred for official purposes

Special compensatory Allowance (Hilly Areas) (Subject to certain conditions and locations)

Amount exempt from tax varies from Rs. 300 to Rs. 7,000 per month.

Border area, Remote Locality or Disturbed Area or Difficult Area Allowance (Subject to certain conditions and locations)

Amount exempt from tax varies from Rs. 200 to Rs. 1,300 per month.

Tribal area allowance in (a) Madhya Pradesh (b) Tamil Nadu (c) Uttar Pradesh (d) Karnataka (e) Tripura (f) Assam (g) West Bengal (h) Bihar (i) Orissa

Up to Rs. 200 per month

Compensatory Field Area Allowance. If this exemption is taken, employee cannot claim any exemption in respect of border area allowance(Subject to certain conditions and locations)

Up to Rs. 2,600 per month

Compensatory Modified Area Allowance. If this exemption is taken, employee cannot claim any exemption in respect of border area allowance(Subject to certain conditions and locations)

Up to Rs. 1,000 per month

Counter Insurgency Allowance granted to members of Armed Forces operating in areas away from their permanent locations. If this exemption is taken, employee cannot claim any exemption in respect of border area allowance (Subject to certain conditions and locations)

Up to Rs. 3,900 per month

Underground Allowance to employees working in uncongenial, unnatural climate in underground mines

Up to Rs. 800 per month

High Altitude Allowance granted to armed forces operating in high altitude areas (Subject to certain conditions and locations)

a)  Up to Rs. 1,060 per month (for altitude of 9,000 to 15,000 feet)

b)  Up to Rs. 1,600 per month (for altitude above 15,000 feet)

Highly active field area allowance granted to members of armed forces (Subject to certain conditions and locations)

Up to Rs. 4,200 per month

Island Duty Allowance granted to members of armed forces in Andaman and Nicobar and Lakshadweep group of Island (Subject to certain conditions and locations)

Up to Rs. 3,250 per month