Section-10-of-the-Income-Tax-Act-–-Complete-Guide

Section 10 of the Income Tax Act – Complete Guide

Income Tax

Welcome to the enthralling world of taxation! Just kidding, we all know tax law can be about as thrilling as watching paint dry. But worry not, dear reader, because we’re here to make this journey as painless, and dare I say enjoyable, as possible. Buckle up because today, we’ll be diving into the thrilling ocean of Section 10 of the Income Tax Act, 1961 – a personal favourite of accountants and tax experts across India.

What is Section 10?

Allow me to start by painting a little picture. Imagine you’re strolling along a beach, the sun is shining, and you spot a treasure chest half-buried in the sand. You open it, expecting to find gold, but instead, you’re faced with a heap of tax exemptions. Not quite the same thrill, right? Well, allow me to introduce you to your treasure chest – Section 10.

At its core, Section 10 is a compilation of provisions under the Income Tax Act, 1961, that describes various forms of income that shall not be included in the total income of a taxpayer. In simpler words, Section 10 is your legal ticket to tax-free income. Now that’s a treasure worth finding!

These exclusions apply to all categories of taxpayers, be it an individual, a Hindu Undivided Family (HUF), a company, or any other type of taxpayer. However, the applicability of each of these exemptions varies depending on the nature and source of income. The best part? There are over 30 types of incomes exempted under Section 10, making it a tax planner’s dream come true.

Key Exemptions Under Section 10

Now that you’re familiar with what Section 10 is, let’s break open that treasure chest and see what kind of tax exemptions it holds for us.

Section 10(1): Exemption of Agriculture Income

According to this section, agricultural income from land situated in India is entitled to get tax exemptions. The income could be in the form of the following:

The income could be in the form of the following:

  • Rent or revenue received from agricultural land situated in India
  • Basic operations such as cultivation, tilling, and sowing
  • Subsequent operations for the growth and preservation of the product, such as weeding, cutting, pruning, etc.
  • Sale of agricultural produce
  • Income derived from farm building required for agricultural operations

Section 10(2): Exemption on the Income of a HUF

As per Section 10(2), those who earn the income of HUF are entitled to get tax exemption, provided:

  • The income received by the individual must be paid out of the family’s income.In the case of an impartible estate, the income must be paid out of the income of the estate belonging to the family.
Please go through the given illustration for a better understanding:

Example: Mr. Mahesh is part of a HUF. Now he earns an income of Rs. 1,00,000 from the HUF and Rs. 10,000 as interest income. The interest income, in this case, becomes his income. The income of Rs. 1,00,000 is not taxable since it is received from the HUF. However, the interest income of Rs. 10,000 is taxable.

Section 10(2A): Exemption of Income from a Partnership Firm

Several benefits are enjoyed by the partner of a firm under Section 10(2A).

Under this section, the profit which a co-owner or the partner earns is exempted from tax. The partnership firm must be classified and taxed as a Partnership Firm under the Income Tax Act of 1961. Such tax exemption is limited to the share of the profit earned by the partners of the LLP/Firm.

Example: XYZ partnership firm’s profit for FY 2021-22 is Rs. 5,00,000. Mr. Sharma’s share in the partnership firm is 40%. Thus, the income from the firm earned by Mr. Sharma is Rs. 2,00,000, which is 40% of Rs. 5 lakh. This amount of Rs. 2 lakh is exempt from tax.

Section 10(4): Exemption of Income Received by an NRI from India:

Those who are Non-Resident Indians (NRI) are entitled to enjoy tax exemptions on certain investments. These include:

Those who are Non-Resident Indians (NRI) are entitled to enjoy tax exemptions on certain investments. These include:

  • Income earned by way of interest on bonds or securities specified by the government for exemption
  • Premium income on redemption of such bonds
  • Interest income from the credited amount in a Non-Resident (External) Account
  • Interest income earned by a resident outside India from the credit in a Non-Resident (External) Account

Section 10(5): Exemption on Leave Travel Concession

According to Section 10(5), an employee can get a tax exemption on his leave travel. Under this section of the Income Tax Act, all the employees (including Indian and foreign citizens) are entitled to enjoy this benefit. 

Conditions for this section are:

  • The travel concession must be received from the existing employer for the travel of the employee/ individual and their family in the particular financial year
  • The existing or previous employer must receive it in connection with their future travel.
  • The employees are entitled to get travel concessions with respect to any amount from their employer on leave across India.

Section 10(6): Exemption on Remuneration to Indian Citizens Who are Working outside India

This is a special package for individuals working outside India and representing India in that country. Individuals who are officials at an embassy, high commission, consulate, or trade representative of a foreign state, or individuals acting as a member of these officials, enjoy the benefits of this section.

The employees of the foreign companies are also entitled to enjoy the tax benefit under this act, subject to the following limitations:

  • The foreign company should not be engaged in any business or trade in India
  • The living tenure of the employees should not be more than 90 days in India
  • Under this act, the remuneration of the employer is not entitled to be deducted

Section 10(7): Exemption on Allowances and Perquisites Paid by the Government

All the allowances and the perquisites that are provided by the Government of India to its employees for furnishing its services outside India are entitled to tax exemptions. Indian citizens who are government employees are entitled to avail of this benefit.

Section 10(10CC): Exemption on Tax on Perquisites Paid by the Employer

Sometimes, employers pay taxes for non-monetary perquisites on behalf of their employees. In such a case, the tax paid by the employer is treated as a tax exemption in the hands of the employee.

Section 10(10D): Exemption on the Tax of Life Insurance Policy Maturity

The maturity amount and the bonus of a LI policy earned by a citizen of India are exempt from tax under Section 10(10D) of the Income Tax Act. However, the following are some of the criteria to receive the benefit:

  • Policies issued before 1st April 2012 and the premium paid on this policy is not more than 20% of the sum assured.
  • Policies issued after 1st April 2012 and the premium paid on this policy is not more than 10% of the sum assured.
  • Maturity and bonus amount on the life insurance policy to a person with disability or disease specified under Section 80U and 80DDB.

According to the Union Budget 2023: 

Under the Section 10(10D), the tax exemption benefits on the maturity amount of the LI policy issued after 1st April 2023 are as follows:

  • For a ULIP policy, if the total premium amount paid is allowed up to Rs. 2.5 lakhs.
  • If the total premiums paid for other life insurance policies are up to Rs. 5 lakhs. 

Section 10(11): Exemption on Payment Made in PF and Sukanya Samriddhi Account

Any amount received in terms of contribution or interest from a provident fund account on retirement or termination of service is exempted. In addition, any payment made from the Sukanya Samriddhi Account is eligible for tax exemption under Section 10(11).

Section 10(10BC): Exemption on the Remuneration Received Against a Disaster

The employee is entitled to enjoy the exemption on tax if he receives compensation for natural disasters from the Central Government, the State Government, or a local authority.

Section 10(13A): Exemption on House Rent Allowance (HRA)

The salaried employees are entitled to receive the allowance on the house rent paid, which is exempted from tax. The part of the salary an employee receives towards rent and accommodation is exempt from tax under this section. The following are the conditions:

  • Actual HRA received by the employee
  • HRA is 40% of the salary for the rented property in non-metro cities or 50% for metro cities.
  • Actual rent paid is less than 10% of salary.

Section 10(14): Exemption of Special Allowance

An employer can offer a special allowance to its employees to support the employee’s expenses. These expenses should be incurred by the employee while performing his duties. There is no specified limit on the amount an employer provides his employee as a special allowance, but allowances must be utilized only for the mentioned purpose.
This section is further subdivided into two parts, namely,

Section 10(14) (i)

An employer can provide special allowance to its employees to meet a few expenses. These expenses must be incurred in the course of performing the duties of his employment. These allowances or benefits are not a part of the perquisites. For the allowances covered under this section, there is no limit on the amount an employer can extend to the employee. Moreover, these allowances must be utilized solely for the purpose for which they are provided.

For the purpose of section 10(14) (i), the allowances are prescribed in Rule 2BB:

AllowanceDescription
Daily AllowanceTo meet the daily expenses due to the employer’s absence in the regular place of duty. This allowance can also be extended within the period of the journey during transfer.
Helper AllowanceTo meet the expense of hiring a helper to perform office duties. 
Uniform AllowanceTo meet the expense of purchasing or maintaining the uniform. The uniform must be worn while performing the office duties.
Travelling AllowanceTo meet the expense of travelling or touring while performing office duties. The sum includes the fair of the transfer and the expense of picking up and dropping off personal belongings during the transfer.
Conveyance AllowanceTo meet the expense of travelling or touring while performing office duties. The sum includes the fair of the transfer and the expense of picking up and dropping of personal belongings during the transfer.

Section 10(14) (ii)

These allowances are provided to meet expenses incurred during the performance of the duties at the usual place of work. For the allowances covered under this section, there is no limit on the amount an employer can extend to the employee. 

These allowances are taxable in the hands of the employees if they receive it above the prescribed limit. The taxability is irrespective of the actual expenses incurred. For the purpose of section 10 (14) (ii), the allowances are prescribed in Rule 2BB.

The following are the allowances along with the prescribed limits:

AllowanceLimit
Children Education AllowanceRs 100 each month for one childAllowance is available up to two children
Tribal Area AllowanceRs 200 per monthAreas covered Tribal areas, Schedule areas, Agency areas
Compensatory Field Area AllowanceRs 2,600 per monthThe employee can claim either Compensatory Field Area Allowance or Border Area Allowance
Border Area AllowanceRanges from Rs 200 to Rs 1,300 per month. Border area allowance, remote locality or disturbed area or difficult area. Allowance allowed to army personnel only
Special Compensatory AllowanceSpecifically for employees working in hilly areas, high altitude allowance, uncongenial climate allowance, snowbound area allowance, or avalanche. Allowance ranges from ₹ 300 to ₹ 7,000 per month. It depends on certain conditions.
Counter Insurgency AllowanceMembers of the armed forces who are living away from their permanent residence receive this allowance. Limit is Rs 3,900 per month. An individual can claim either this allowance or border area allowance.
High Active Field Area AllowanceMembers of the armed forces receive this allowance subject to a few conditions. Limit is Rs 4,200 per month.
Island Duty AllowanceMembers of Armed Forces in the area of Andaman and Nicobar Islands and Lakshadweep Group of Islands. Limit is Rs 3,200 per month.

Section 10(15) the Income Earned from Interest on Investments

SectionIncomeTax exemption to
10(15)(i)The exemption on interest, redemption, or premium on bonds, securities, deposits, and certificates that are subject to some conditions and limitations.All assesses
10(15)(iib)Interest on the bonds of Capital Investment should be notified before the date of 01-06-2002HUF/Individual
10(15)(iic)Interest on Relief bondsHUF/Individual
10(15)(iid)Interest on declared bonds (which should be declared before 1-6-2002). It must be bought in foreign exchange, which must be subject to some limitations and conditions.NRI-Individual/NRI gift the bonds to the individual.
10(15)(iii)Securities’ interestIssue department under the central bank of Ceylon
10(15)(iiia) The interest on deposits with the scheduled bank with the approval from RBI Incorporation of bank broad
10(15)(iiib) Paying off interest to Nordic Investment Bank Nordic Investment Bank
10(15)(iiic) In the execution of an agreement on 25-11-1993, the interest is payable to the European Investment Bank for granting the loan between that bank and the central government. European Investment Bank
10(15)(iv)(a) Receiving the interest from the local authority or the government on money lent to it before 1-6-2001 All the assets which are committed to lent on money from sources outside the nation
10(15)(iv)(b) Under the agreement of loan, received the interest from the industrial undertaking in India prior to 1-6-2001. Approved the financial institution of foreign nations
10(15)(iv)(c) Receiving the interest on a certain rate from the industrial undertaking of India on debt or lent prior to the date of 1-6-2001 in a foreign nation for purchasing the capital plant, raw materials, and machinery within certain limitations and conditions. All the assesses who have committed to lending such cash
10(15)(iv)(d) Receiving the interest before 1-6-2001 at an approved rate from certain financial institutions on the lending money in India All the assessee which have committed to lend such money
10(15)(iv)(e) Receiving the interest at an approved rate from the country’s financial institutions on the lending of money from outside India before 1-6-2001 under the certain loan agreement All the assessee which have committed to lend such money
10(15)(iv)(h) Receiving interest from any company concerning approved debentures or bondsAll assesses

Impact of Section 10 on Individual Taxpayers

For individual taxpayers, Section 10 is nothing short of a boon. It reduces your taxable income, which in turn reduces the amount of tax you need to pay. But, and there’s always a but, not all exemptions under Section 10 are available to all taxpayers.

For instance, the aforementioned LTA exemption is available only to salaried individuals. Similarly, the exemption on agricultural income won’t do much for you unless you’re a farmer. But don’t let that dampen your spirit. Remember, it’s about finding the exemptions that work for you and maximizing them.

Stay tuned as we navigate the maze of Section 10 and unearth the exemptions that could potentially save you a fortune in taxes. But for now, remember – as thrilling as Section 10 might be, it isn’t a free pass to evade taxes. It’s a way to optimise your income and make the most of your hard-earned money. Happy tax planning!

Impact of Section 10 on Businesses and Corporations

Onto the boardrooms and corporate corridors now. Just as it does for individuals, Section 10 provides businesses and corporations with a plethora of exemptions to lighten their tax burden. After all, the income tax department knows that while corporations are not people, they sure do have bills to pay.

Certain exemptions under Section 10, such as those related to capital gains on the transfer of assets in cases of amalgamation (Section 10(37)) or Special Economic Zone income (Section 10AA), are specifically aimed at businesses. Also, the exemption of income from newly established units in Special Economic Zones (SEZs) under Section 10AA can be a significant benefit for corporations operating in these zones.

The catch here is that businesses, like individuals, must meet certain conditions to qualify for these exemptions. There’s always some fine print, isn’t there?

Common Misconceptions about Section 10

With a law as intricate as Section 10, it’s hardly surprising that it’s shrouded in myths and misconceptions. One common fallacy is that all income covered under Section 10 is universally exempt for everyone. But alas, tax laws aren’t one size fits all. The applicability of exemptions depends largely on the nature and source of income, the category of taxpayer, and other conditions laid down for each clause.

Another common myth is that income exempt under Section 10 does not need to be disclosed in the income tax return. This isn’t true. While you don’t need to pay tax on it, exempt income should be disclosed in your tax return. It’s like telling a little secret to the income tax department – it won’t affect your tax but it’s important to tell it anyway.

How to Claim Exemptions Under Section 10

You might be thinking, “I’ve got all these exemptions, but how do I claim them?” It’s simple, really. You have to declare these exemptions in your income tax return under the relevant sections. While you’re not required to submit any documents while filing your return, you should keep them handy in case the taxman comes knocking.

Make sure you’re meeting all the necessary conditions for the exemption. It’s like a secret handshake. If you don’t do it right, it doesn’t count.

The Future of Section 10 – Changes and Reforms

Just like fashion trends, tax laws evolve too. With changing economic landscapes, the tax laws also witness regular amendments. Section 10 isn’t an exception. It’s important to stay updated with the changes and reforms introduced in budgets every year.

What’s the takeaway? Keep your eyes peeled for changes in the world of Section 10. There could be new exemptions, alterations in existing ones, or even removal of some. Staying ahead of the curve means more money in your pocket.

Conclusion

And there you have it – a deep dive into the fascinating world of Section 10. This section, while complex, can be a game-changer in your tax planning strategy. Remember, the key to optimising your tax benefits is to understand your sources of income, identify the exemptions that apply to you, and make the most of them. After all, a penny saved is a penny earned!

Happy tax planning, folks!

Frequently Asked Questions

What is Section 10 of the Income Tax Act?

Section 10 is a provision in the Income Tax Act, 1961 that specifies various forms of income that are exempt from taxation.

Who can claim benefits under Section 10?

Both individual taxpayers and businesses can claim benefits under Section 10, depending on the nature and source of their income.

Can NRIs also claim exemptions under Section 10?

Yes, NRIs can claim certain exemptions under Section 10, but the applicability might vary depending on the type of income.

What are the documents required to claim exemptions under Section 10?

While there are no specific documents to be submitted while filing the return, you should keep necessary documents like salary slips, rent receipts, etc., as proof.

Are there any limitations or conditions under Section 10?

Yes, every exemption under Section 10 comes with its set of conditions. Only if these conditions are met can the taxpayer claim the respective exemption.