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All the citizens in India and entities having taxable income are required to pay taxes, according to the Income Tax Act, 1961. They are also entitled to the provisions given under various sections of the I-T Act to get tax benefits. These provisions provide the taxpayers, particularly salaried individuals, relief from the tax burden.
The Section 10 of the Income Tax Act allows tax exemptions on the different allowances and benefits salaried individuals receive with their regular income. That is, these allowances and benefits will not be included when the individuals calculate taxable income.
What is Section 10 of the Income Tax Act?
Section 10 of the Income Tax Act is a provision that highlights different incomes that are partially or entirely exempt from taxation. This section is intended for multiple types of taxpayers, including salaried individuals, self-employed professionals, companies, trusts, and non-resident Indians (NRIs).
These exemptions are designed to:
- Promote specific activities like agriculture or investment in insurance,
- Provide relief to employees for allowances and benefits, and
- Eliminate double taxation in certain cases.
What are the Features of Section 10 of Income Tax Act?
Given below are the features of Section 10 of Income Tax Act that can benefit eligible individuals:
Diverse Applicability
Section 10 exemption is applicable to individuals–like employees–corporates, associations, trusts, and foreign nationals or companies under defined conditions.
Special Allowances for Salaried Employees
Provisions as per Section 10—such as conveyance allowance and HRA–allow salaried individuals to minimise their taxable income. For instance, HRA exemption is calculated on the basis of salary, rent paid, and HRA received.
Support for Welfare Schemes
Exemptions in Section 10 of Income Tax Act also offer incentives for welfare measures like education allowances for children or benefits offered to employees in specific roles like armed forces or officials in remote locations.
Encouraging Investments
Section 10 encompasses incentives like dividends, life insurance policy maturity proceeds, and not to mention, interest on bonds. This paves the way for financial management and long-term savings.
Non-Taxable Status of Certain Incomes
There are several income streams, spanning allowances, gratuity payments, and more, that are tax-free. However, taxpayers must meet specific eligibility requirements to benefit from these exemptions.
What are the Tax Exemptions under Section 10
Incomes under the following categories are not calculated as part of the total income of a previous year and are exempt from tax.
Special Allowance
Many individuals receive various special allowances or benefits apart from their basic salary to meet certain expenses. Special allowances are classified into personal allowances and official allowances. The tax exemptions of the special allowance are classified into the following two sub-sections:
Section (14) (i): Allowances granted to meet expenses a person incurs in the performance of duties of an office or employment of profit are tax exempt. The various allowances that qualify for tax exemption include:
- Travel Allowance: Cost incurred from travelling on tour or transferring an employee on duty
- Daily Allowance: The daily charges a government employee incurs during a tour
- Uniform Allowance: The expenses incurred on purchase or maintenance of uniform by an employee on duty
- Academic/ Research Allowance: The allowance is granted pertaining to encouragement for academic research and training pursuits in research institutions
- Helper Allowance: The allowance is granted for expenses incurred on a helper hired for the performance of duties of an office or employment of profit
Section (14) (ii): Section 10 allows tax exemption under the sub-section (14) (ii) on allowances granted to meet personal expenses. The various allowances that qualify for tax exemption include:
- Children’s Education Allowance: The allowance is given for government employees for the education of children. The maximum tax exemption is up to Rs 100 per month per child for two children.
- Hostel Allowance: The maximum tax exemption for hostel allowance is Rs 300 per month per child for two children.
- Transport Allowance: The expense one incurs during official travelling is exempt from tax up to a maximum limit of Rs 1,600 per month and Rs 3,200 per month in case of handicapped employees.
- Climate Allowance: People working in hilly areas of Himachal Pradesh, Jammu & Kashmir, Uttar Pradesh, and North East Regions are entitled to special climate allowance and get tax exemption up to Rs 800. Those in the regions of Siachen are eligible for tax exemption up to Rs 7,000.
- Border Area Allowance: The maximum tax exemption varies from Rs 200 per month to Rs 1,300 per month.
- Tribal Area Allowance: People residing in hilly, scheduled areas and agency areas of Uttar Pradesh, Madhya Pradesh, Karnataka, Odisha, Assam, Tamil Nadu, and Tripura get maximum tax exemption up to Rs 200 per month.
- Compensatory Field Area Allowance: The maximum tax exemption is Rs 2,600 per month. An employee taking this exemption cannot claim any exemption in respect of border area allowance, subject to certain conditions and locations.
- Compensatory Modified Area Allowance: The maximum tax exemption is Rs 1,000 per month. An employee taking this exemption cannot claim any exemption in respect of border area allowance, subject to certain conditions and locations.
- Counter Insurgency Allowance: The members of armed forces operating in areas away from their permanent location are entitled to get tax exemption, maximum up to Rs 3,900. An employee taking this exemption cannot claim any exemption in respect of border area allowance, subject to certain conditions and locations.
- Underground allowance: Employees working in underground mines get tax exemption up to Rs 800 per month
- Island duty allowance: Members of armed forces in Andaman and Nicobar and Lakshadweep group of Island get tax exemption up to Rs 3,250 per month
The exemption depends on the amount authorised or the actual amount utilised for the specific purpose, whichever amount is lower.
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Sum received as Life Insurance Benefit
As per the sub-section (10D) under Section 10, tax exemption is allowed for a person receiving an amount under a life insurance policy by way of bonus.
Compensation Received on Voluntary Retirement
According to sub-section (10C) of Section 10 of the I-T Act, the amount an employee receives upon voluntary retirement or termination of service qualifies for tax exemption up to a limit of Rs 5 lakh.
Income from Interest
Section 10(15) mentions various sub-sections that allow tax exemption for a person earning different interest incomes.
Agricultural Income
Taxpayers earning income from agriculture are allowed tax exemptions under Section 10 (1) of the I-T Act.
Provident Fund
The sub-section (11) of Section 10 mentions that any payment from a provident fund qualifies for tax exemption. The accumulated provident fund balance due and payable to an employee is not taxable, as per sub-section (12).
House Rent Allowance (HRA)
The house rent allowance a person receives from an employer qualifies for tax exemption under Section 10 (13A).
The Income of Member of a Hindu Undivided Family (HUF)
Section 10 (2) provides a tax exemption on the income an individual earns as a member of the HUF.
Profit Sharing from Partnership Firm
The share of profit a person earns being a partner in the total income of a partnership firm/LLP is exempt from tax in the hands of the partners. Additionally, the share of profit, earned by a partner in the total income of Limited Liability Partnership (LLP) is exempt from tax in the hands of the partner.
This provision helps in preventing double taxation. The tax exemption does not apply to the amount of interest on capital and remuneration the partner of the firm/ LLP receives.
How to Claim Exemption Under Section 10?
Here are the steps that you need to know about in order to claim exemption under Section 10 of Income Tax Act:
Step 1: Check Eligibility
Review the specific exemption clauses in Section 10 to understand the eligibility. Make sure you meet all the eligibility requirements, covering employment and income type–as prescribed.
Step 2: Manage Documents
The next step is to get all the supporting documents in order. This may include rent receipts, bills for travel, insurance claim papers, or employment certificates.
Step 3: Submit Declarations to Employer
Salaried individuals can submit declarations to the employer to claim exemptions such as HRA and LTA. The employer then adjusts taxable income before calculating TDS.
Step 4: Verify While Filing ITR
Mention exempt income in your ITR under the relevant head (for example, HRA exemption or gratuity amount). Make sure exemptions claimed are within the applicable limit; This will help you avoid rejection during evaluation.
That’s all you need to do to claim exemption under Section 10 of Income Tax Act. Note, you can also seek expert assistance from a tax advisor to ensure compliance as well as maximise the benefits under the section.
Taxpayers look for various ways to reduce their tax liabilities. The provisions given in the Income Tax Act help you to save tax and increase your savings. Invest in health insurance which makes you eligible for the Section 80D tax benefits, according to the Income Tax Act.
Disclaimer: The tax exemptions are subject to rules and regulation of the Income Tax Act. Please refer to them before filing the I-T return.
