There are various categories for tax exemptions in India depending on the nature of income. Some of the incomes that are exempt are agricultural income, pension, allowances, etc. There is also Deduction of Tax at Source that can be availed.
Tax exemption is the monetary exclusion that reduces the taxable income. You can get complete relief from tax or reduced tax rates or tax will be applicable on a certain portion. Tax exemption is therefore a statutory exemption to a general rule instead of the absence of taxation in certain circumstances. Tax exemptions are offered to encourage certain economic activities.
What are the Tax Exemptions?
There are exemptions from tax like Property Tax and income tax if the taxpayer has children or dependents who depend on him for finances. The various sections of tax exemptions in India are as follows:
|Section||Nature of Income|
|10(2)||Share from income of Hindu Undivided Family|
|10(2A)||Share of profit from firm whose taxes are filed separately|
|10(3)||Income received in a casual form not exceeding Rs.5,000 and in case of horse race winnings, it should not exceed Rs.2,500|
|10(10D)||Receipt from life insurance policy|
|10(16)||Scholarship to meet cost of education|
|10(17)||Allowances of MP and MLA. MLA’s allowance should not exceed Rs.600 per month|
|10(17A)||Awards and rewards by central and state government, from approved awards by others and the approved rewards from central and state government.|
|10(26)||Income of members of scheduled tribes of North Eastern States or Ladakh region. The income should be arising from those regions itself.|
|10(26A)||Income of Ladakh resident. His income can arise in Ladakh or outside India.|
|10(30)||Subsidy from Tea Board under approved scheme|
|10(31)||Subsidy from any concerned board under approved scheme of replantation|
|10(32)||Income of minor clubbed with individual to a maximum of Rs.1,500|
|10(33)||Dividend earned from Indian companies, income from Unit Trust of India, Mutual funds and income from venture capital.|
|10(A)||Profits earned in free trade zones, electronic hardware technology park or on software technology park for up to 10 years.|
|10(B)||Profits form complete export oriented undertakings, manufacturing articles or computer software for 10 years.|
|10(C)||Profits from newly established undertakings in IIDC or IGC in the North-Eastern region for up to 10 years.|
|10(15)(i)(iib)(iic)||Interests, premiums, redemptions or any other payments that you get from securities, bonds, capital investment bonds, relief bonds, etc. that are notified. The exemption limit is to the extent that is notified.|
|10(15)(iv)(h)||Interest paid by public sector company on its bonds and debentures.|
|10(15)(iv)(i)||Interest that the government pays on the deposits made by employees of central and state government or public sector employees for their retirement under the notified scheme.|
|10(15)(vi)||Interest received on notified gold deposit bonds.|
|10(15)(vii)||Interest received on notified local authorities’ bonds|
|10(5)||Leave travel assistance or concession received. The amount should not exceed the amount payable by the central government to its employees.|
|10(5B)||Remuneration received by technicians who have specialised knowledge in specific fields. Their service must commence after 31.3.93 and their tax should be paid by the employer. The exemption limit is in respect of tax paid by employer for a period of up to 48 months.|
|10(7)||Allowances and perquisites that the government provides to citizens of India who provide their services abroad.|
|10(8)||Remuneration received from foreign governments for duties in India provided it is under cooperative technical assistance programmes. You also get exemption for income arising outside India provided that the tax on that income is paid by the government.|
|10(10)||Death-cum retirement gratuity from government, payment made under Gratuity Act, 1972 the amount must be as per section(2), (3) and (4) of that Act and up to one and half month's salary for each completed year of service.|
|10(10A)||Commutation of pension from funds set by LIC under section 10(23AAB) and government, statutory corporation, etc. Commutation of pension from employers; when gratuity is payable, 1/3rd value of the pension and when gratuity is not payable, half of the pension.|
|10(10AA)||Encashment of the earned leave that was unutilised from central or state government and from other employers up to an amount equal to 10 months’ salary or Rs.1,35,360, whichever is less.|
|10(10B)||Retrenchment compensation, where the amount is either the amount under section 25F(b) of Industrial Dispute Act, 1947 or the amount that the government notifies, whichever is less.|
|10(10C)||Amount received on voluntary retirement or on termination. The maximum limit is Rs.5 lakh.|
|10(11)||Payment received under Provident Fund act, 1925 and other central government notified bonds.|
|10(12)||Payments received from recognised provident funds to the extent provided in rule 8 of Part A of 4th schedule.|
|10(13)||Payments received from approved superannuation fund.|
|10(13A)||House rent allowance, the exemption is either the least of actual allowance, actual rent in excess of 10% of the salary or 50% of salary in Mumbai, Chennai, Delhi and Calcutta and 40% in other places.|
|10(14)||Prescribes special allowance or benefits granted to meet expenses that incur in performing your duties, the exemption is granted to the extent of expenses that actually incur.|
|10(18)||Pension that includes family pension of recipients of notified gallantry awards.|
There are exemption specifically for non-citizens, NRIs and for funds, institutions, etc.
If your employer deducts your Income Tax at the time of paying your salary, it is called Deduction of Tax at source. The particulars and the limits and TDS rates are as follows:
|Particulars||Maximum Limit (in Rs.)||TDS Rate (in %)|
|Interest on debentures||5,000||10|
|Interest on FD’s in Banks/ housing finance companies and 8% taxable bonds||10,000||10|
|Interest other than interest on securities||5,000||10|
|Insurance commission to individual agents||20,000||10|
|Insurance commission to domestic company agents||5,000||20|
|Winnings from lottery, cross word and game shows||10,000||30|
|Commission earned on the sale of lottery tickets||1,000||10|
|Winnings from horse races||5,000||30|
|Payments made to advertising agency||20,000||1*|
|Payments made to contractor (per contract)||30,000||1*|
|Payments made to subcontractor||30,000||1*|
|Commission and brokerage not relating to shares and securities||5,000||10|
|Payments made to professional technical services||30,000||10|
|Payment of rent||1,80,000||10|
|Payment of rent on machinery or equipment||80,000||2|
|Sale of property||50,00,000||1|
|TDS on survival benefits earned on life insurance policies||1,00,000||2|
Note: If recipient is other than an Individual or HUF, the TDS rate is 2%
House rent allowance is offered to employees to meet the cost of the rented house that is taken by them. Income Tax Act allows deduction in respect of the HRA that is paid. The exemption is covered under Section 10(13A) of the IT Act and Rule 2A of the IT Rules. However, you need to know that the entire HRA is not deductible. The employee must pay rent and the rented premises can’t be owned by him. If he is staying in his own house, then HRA is not deductible and the entire amount is subject to tax. The HRA exemption is the minimum of-
- The actual HRA that is paid to the employee.
- Actual rent paid minus 10% of your basic salary.
- 50% of basic salary if you are living in a metro city, else 40% of your basic salary.
Salary is the basic pay plus the dearness allowance plus the commission fixed if applicable. For example, Mr. Harish living in Nashik receives Rs.5,000 basic salary each month and his monthly dearness allowance is Rs.1,000 and the HRA is Rs.2,000 and the actual rent he pays is Rs.2,000 each month, then his HRA exemption will be lower of:
- Actual HRA received = Rs.2,000 x 12 = Rs.24,000
- Rent paid in excess of 10% salary = [(Rs.2,000 x 12)- 10%(Rs.72,000*)] = 24,000- 7,200 = Rs.16,800.
- 40% of his salary = Rs.28,800
*Note: Calculation of salary for HRA:
Basic salary = Rs.5,000 x 12 = Rs.60,000
Dearness allowance = Rs.1,000 x 12 = Rs.12,000
Total salary for HRA calculation = Rs.60,000 + Rs.12,000 = Rs.72,000
The exemption allowed to Mr. Harish is Rs,16,800 and the balance Rs.7,200 will be included in the computation of his gross salary.
Service Tax Exemption:
Service Tax is tax imposed by the government on the services provided on certain service transactions that are borne by the customers. The tax on service is only payable when the value of services provided in the financial year exceeds Rs.10 lakhs. The new Service Tax Rate is 14%. There is a negative list and 39 services which are exempted. Some of the exemptions are:
|Exemption and negative list||
|Exemption to main service does not mean Exemption to auxiliary services||
|Small service provider exemption||
Tax Exemption on Education Loan:
If you have taken an educational loan, deduction is allowed under Section 80E for the interest that you pay towards the loan. But, you must:
- Be an individual taxpayer.
- The deduction is allowed towards the interest paid.
- The loan is to be taken from a financial institution or an approved charitable institution only.
- The loan is taken towards higher education for yourself, your spouse and children or to a student who you are a legal guardian to.
- The interest is to be paid from your income that is subject to tax.
There is no limit to the amount of interest that you can claim deduction for. The deduction is available till the loan is paid or for 8 years, whichever is sooner. The loan can be taken for higher studies in India or abroad.
Tax Exemption on Car Loan:
If you are a salaried individual, then you will not avail the tax benefits on the interest paid towards the car loan. The deduction can be availed if you are self-employed or a businessman and when you declare a profit or capital gain earned on the business and if you have purchased the car for the business purpose. Then you will get exemption on the interest and also depreciation of the vehicle. For example, Mr. Mohan, a businessman who runs a textile store buys a new car on loan, if he is declaring the earnings of his business under Section 80C, then he will get exemption for the interest paid towards the car loan.
Tax Exemption for Ladies:
Tax exemption to women are allowed under Section 80C and 80D to 80U. They are as follows:
- Public provident fund
- National savings certificate
- 5 year fixed deposit
- Life insurance corporation policies
- Equity linked savings scheme
- Pension plans
- Employee provident fund
- Health insurance
- Education loan
- Donation to research and development programmes and donations to political parties.
Leave Travel Allowance is paid by the employer for employee’s and his family’s travel and is tax free under Section 10(5) of the Income Tax Act, 1961. The exemption can be claimed:
- When employer provides LTA to the employee for leave to any destination in India, then the actual travel costs incurred are exempt.
- When the travel is within India and not overseas.
- The exemption is on the travel cost only and not on the food, stay, etc.
- The family includes spouse, children, parents and siblings.
There is no restriction on the number of children. The exemption is however not available for every year. It is provided for two journeys in a period of 4 years. If in the current year you get LTA of Rs.10,000, you can carry it over for the next year to get a LTA of Rs.20,000. LTA can be claimed only once in a year. If you are shifting a job, you get LTA from your current employer and also from your previous employer, if it was unutilised.
Exemption is as follows:
|Journey by air||Economy air fare of national carrier by the shortest route or the actual expenditure, whichever is less.|
|Journey by rail||AC first class ticket fare by shortest route or amount actually spent, whichever is less.|
|Place of origin and destination place of journey connected by rail but opted another mode of transport||AC first class ticket fare by shortest route or amount actually spent, whichever is less.|
|Place of origin and destination place of journey not connected by rail but by other recognised public transport||First class or deluxe fare by shortest route or the actually spent, whichever is less.|
|Place of origin and destination place of journey not connected by rail or by any other recognised public transport||AC first class ticket fare by shortest route (assuming that the journey was performed by rail) or amount actually spent, whichever is less.|
Capital Gains Tax Exemption:
Capital gain tax are exempt under the following sections:
Exemption can be claimed by an individual and a Hindu undivided family. The residential house property that was held for 3 years has to be sold. You can buy a new asset one year back or 2 year from the date of sale or can be constructed 3 years after the sale. The amount exempt is the investment in the new asset or capital gain, whichever is less. Capital gain deposit account scheme is applicable.
Exemption can be claimed by an individual and a Hindu undivided family. The eligible assets that can be sold is the agricultural land that the assessee has used for agricultural purposes two years prior to the sale. You can buy a new agricultural land in two years from the sale. The amount exempt is the investment in the agricultural land or capital gain, whichever is less. Capital gain deposit account scheme is applicable.
Any person can claim exemptions under this section. The assets that can be sold are the long term capital assets that have been held for a period of 3 years. You can acquire Bond of NHAI or REC and you get 6 months to acquire the new asset. The exemption amount is the investment in the new asset or capital gain, whichever is lower, subject to a maximum of Rs.50 lakhs in a financial year. Capital gain deposit account scheme is not applicable.
Exemption can be claimed by an individual and a Hindu undivided family. The asset that can be sold is any long term capital assets other than residential property provided that on the date of transfer, the taxpayer doesn’t own more than one property. You can acquire a new residential house property before a year from the date of sale or two years after the sale or after 3 years if it is being constructed. The exemption amount is the investment in the new asset divided by net sale consideration multiplied by the capital gain. Capital gain deposit account scheme is applicable.
Income Tax Exemption Limit:
The basic exemption limit for individuals below the age of 60 years is Rs.2.50 lakhs. For senior citizens the exemption limit is Rs.3 lakhs and for very senior citizen who are above 80 years, it is Rs.3.50 lakhs.
The income tax slab is as follows:
|Income||General||Women (below 60 years)||Senior citizens (above 60 years)||Very senior citizens (above 80 years)|
|Up to Rs.2.5 lakhs||-||-||-|
|Rs.2,50,001 to Rs.3,00,000||10%*||10%*||-||-|
|Rs.3,00,001 to Rs.5,00,000||10%*||10%*||10%*||-|
|Rs.5,00,001 to Rs.10,00,000||20%||20%||20%||20%|
|Above Rs.10 lakhs||30%**||30%**||30%**||30%**|
*Tax rebate of Rs.2,000 is calculated for those having annual income up to Rs.5 lakh.
**Surcharge is chargeable at 12% and is payable if income is above Rs.1 crore.
Highlights of Union Budget 2018 for Tax Exemptions
In the Union Budget 2018, the Finance Minister Arun Jaitley announced many changes regarding different tax exemptions. Listed below are some of the key points regarding tax exemptions:
- From now on senior citizens will have to pay tax on income earned from interest only if the amount is higher than Rs.50,000 during a financial year.
- The exemption limit for senior citizens for income earned from interest for post office and bank deposits has been raised from Rs.10,000 to Rs.50,000. Moreover, as per Section 194A, TDS will not be necessary for such income.
- Instead of the transport allowance and medical allowance that existed before, there will now be a standard deduction of Rs.40,000.
- Under Section 80D and Section 80DDB, there is a rise in tax break for both health insurance and medical expenses. Under section 80D, there is an increase from Rs.30,000 to Rs.50,000 for health insurance premiums and medical expenses.
- For pensioners, there will be a standard deduction of Rs.40,000.
- The government also announced that it has proposed for no tax deduction at source if one earns interest less than or equal to Rs.10,000 in a certain financial year on the brand new Government of India (GOI) Savings (Taxable) Bonds. If this proposal is accepted, then the amendment for this aspect will be passed on April 1, 2018.
- Corporate tax has been minimised to 25% for companies that make a turnover of up to Rs.250 crore.