Exempted Income: Meaning, and Types

Exempted Income refers to the income of any person not subject to tax under the provisions of a country’s Taxation Law or by the country’s government and does not form a part of a total income. Every country has its own Central and State Taxation Law that differentiates the income of individuals and other entities into different groups and also reveals the taxable and non-taxable income groups. In India, all the income earned by an individual or other entity is liable to taxation under the provisions of the Income Tax Act 1961. The provision of Section 10 of this Act provides for certain types of income that are exempt from taxation, however, some types of income are exempt from Central or state income tax, or both. The purpose of exempting income is to encourage specific types of economic activity or to provide relief to certain categories of taxpayers. It shall be noted that any income that is taxed at a rate lower than a normal tax rate is also considered exempted income.

As per Chapter III Section 10 of the Income Tax Act, 1961, there is various income that has been exempted, however, some of the such exempted income includes:

1. Agricultural Income: Any income earned from agricultural activities like farming, horticulture, and animal husbandry, is exempt from income tax. [Section10(1)]

2. Income of a HUF member: Any earning received by a member of the Hindu Undivided Family is exempted, where such sum has been paid out of the family income or property belonging to the family. [Section10(2)]

3. Income of Partner: The share of a partner of a partnership firm is exempted in a hand of a partner individually.  [Section10(2A)]

4. Dividend Income: A dividend received from a resident company is exempted in the hands of a shareholder up to a limit of ₹10,00,000 in the case of a resident individual, HUF, or a firm. [Section10(34)]

5. Long-term Capital Gains on the Sale of Equity Shares: If a person holds equity shares for more than one year before selling them, any gain on the sale of such shares is subject to an exemption of up to ₹ 1 Lakh.  The provisions will be applicable to the transfers made on or after 1 April 2018. [Section112A]

6. Income from International Sporting Event: Any specified income arising from any international sporting event held in India is exempted in a hand of a person or persons notified by the Central Government in the Official Gazette if such international sporting event:

(a) is approved by the international body regulating international sport relating to such events;
(b) has participation by more than two countries;
(c) is notified by the Central Government in the Official Gazette for the purpose of this clause. [Section10(39)]

7. Minor’s Income: Exemption up to ₹1,500 per minor child is available to the assessee in whose income the minor’s income is clubbed.  [Section10(32)]

8. Income of a Co-operative Society: Any income of a Co-operative Society formed for promoting the interests of the members of either the Schedule Castes or Schedule Tribes or both is exempted, provided that the membership of such society consists of only other co-operative societies formed for similar purposes and the finances are provided by the Government or by such other societies. [Section10(27)]

9. Income received by a citizen outside India: Any allowances or perquisites allowed or paid by the Government outside India to a citizen of India for rendering services outside India is exempted.  [Section10(7)]

10. Death-cum Retirement Gratuity: Maximum Exemption of ₹ 20 Lakhs is applicable to the employees [in case of employees covered by the
Payment of Gratuity Act, 1972] on the event of receiving death-cum-retirement gratuity on or after 29 March 2018. [Section10(10)]

11. Commutation of Pension: Any accumulated pension received by a Government employee is subject to full exemption from tax. No exemption is applicable in the case of a monthly pension. For Non-Government Employees, exemption on commuted pension shall be:

• If the employee receives a gratuity, one-third of the full value of a commuted pension will be exempt from tax.
• If the employee does not receive gratuity, one-half of the full value of a commuted pension will be exempt from tax. [Section10(10A)]

12. Leave Encashment: Leave Encashment received on retirement by a Government employee is fully exempted from tax. However, for Non-Government Employees maximum exemption as per the budget 2023, shall be ₹ 25 Lakhs. [Section10(10AA)]

13. Statutory Provident Fund: Different component of the Statutory Provident Fund has different treatment:  [Section10(11)]

Employers Contribution	Not a part of the employee’s income
Interest on SPF	Fully exempted in the hands of the employee.
The amount received at the time of termination	Lump-sum amount received is fully exempted in the hands of the employee.

14. Interest and Withdrawal from Sukanya Samriddhi Account: Any interest and withdrawals from an account opened in accordance with the Sukanya Samriddhi Account Rules, 2014 made under the Government Savings Bank Act, 1873 is exempt from tax.  [Section10(11A)]

15. Recognised Provident Fund:   [Section10(12)]

Employers Contribution	Employer’s contribution up to 12% of a salary is not a part of the employee’s income
Interest on PF	Interest up to 9.5% per annum is exempted in the hands of the employee.
The amount received at the time of termination	Lump-sum amount received is fully exempted in the hands of the employee [subject to certain conditions]

16. House Rent Allowances (HRA): HRA received is exempted upto certain limit:  [Section10(13A)]

Resident in Mumbai, Kolkata, Delhi, Chennai (Metro)	Residents in other cities (Non-metro)
50% of salary (basic pay + D.A + fixed commission on turnover)	40% of the salary
Actual HRA received	Actual HRA received
Rent paid − 10% of salary	Rent paid − 10% of salary
The lowest of the above is an exempted amount	The lowest of the above is an exempted amount

Note: If an employee lives in his own house, then HRA is fully taxable.

17. Allowances of M.Ps, MLAs, and MLCs:  [Section10(17)]

• Daily Allowances are fully exempted.
• Any other allowances received by MPs are fully exempted.
• Any constituency allowances received by members of the State Legislature under any Act or Rule made by that State Legislature are exempted.

18. Educational Scholarships: Any amount received as a scholarship to meet the cost of education from the Government or other organization is fully exempted.  [Section10(16)]

19. Family Pension to Members of the Armed Forces: Family pension received by the widow or children of members of the armed forces of the Union, where the death of such member has occurred in the course of operational duties, is fully exempted. [Section10(19)]

20. Income of Scheduled Tribes: Income of a member of a Scheduled Tribe residing in tribal areas or in any area in the State of Nagaland, Manipur, Tripura, Arunachal Pradesh, Mizoram or district of North Cachar Hills, Mikir Hills, Khasi Hills, Jaintia Hills, and Garo Hills or in the Ladakh region of the State of Jammu and Kashmir is fully exempted if,

• Such income accrues/arises from any source in such areas.
• Income by way of dividends/interest on securities wherever it accrues/arises. [Section10(26)]