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  • Tax Exemption

    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(1) Agricultural 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.

    TDS Exemption:

    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%

    HRA Exemption:

    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
    • Negative list is a service but not taxable.
    • Exempted services are taxable but can be exempted by an issue of a notification by the central government.
    • Exemption can be changed.
    Exemption to main service does not mean Exemption to auxiliary services
    • Reference to a service does not include service used for providing the main service.
    • Main service can be exempt or included but the service provided for the main service is taxable.
    • Service tax is payable on services of advertisement agents and services of designing of advertisements. But advertising is not taxable as it is in the negative list.
    • Public road construction is exempt but not related services such as hire of equipment, excavation, manpower supply, etc.
    • Sub-contractor’s service in SEZ will not exempt.
    • If the subcontractor is under work contract with the main contractor who is also under work contract, then the service tax is exempt if the main contractor’s service is exempt.
    • If the subcontractor is providing the exempt service, then service tax is exempt.
    Important exemptions
    • Services by UN and other international organisations.
    • Veterinary and health care services.
    • Services by charitable organisations.
    • Religious ceremony and religious places that are rented out.
    • Advocate or an advocate firm whose turnover is up to Rs.10 lakhs.
    • People on Arbitral Tribunal.
    • New drugs that are technically tested.
    • Recreational activities relating to arts, culture and sports.
    • Services offered or received by a recognised educational institution for auxiliary services and renting the immovable property.
    • Auxiliary educational services such as midday meal, admission, examination related services, transport of students and staff.
    • Services rendered to a sports body, but the ambassador is not exempt.
    • Sports sponsorship to recognised sport bodies.
    • Service provided to government or local authority that includes construction, maintenance, repair to commercial non-industrial use, educational purposes, sewage, etc.
    • Civil construction services towards infrastructure.
    • Transfer or permission to use copyright on a temporary basis.
    • Services offered by performing artists.
    • Services offered by journalists.
    • Hotel and guest houses whose daily tariff is less than Rs.1,000.
    • Restaurants that don’t have AC or a bar.
    • Goods transport of up to 750 per consignee and 1,500 per vehicle and transport of agricultural commodities.
    • Renting vehicle for state transport or GTA.
    • Passenger transport in specified cases.
    • Parking for public is exempt but it is not exempt if the parking space is leased.
    • Specific general insurance schemes.
    • Incubatee services of up to Rs.50 lakhs.
    • Trade unions services.
    • Housing society’s or RWA of up to Rs.5,000 to its members including medical camps.
    • Stock exchange sub-brokers.
    • Services offered by mutual fund agents and distributors and marketing agents of lottery.
    • Agents and distributors of SIM card.
    • Job in agriculture, textile processing, diamonds, gemstones, parts of cycle and sewing.
    • If principal manufacturer is paying excise duty, then job work is exempt. The material are to be sent under rule 4(5)(a) of Cenvat Credit Rules.
    • Business exhibitions that are held outside India.
    • Public telephones.
    • Services offered by slaughterhouses.
    • Services to government or charitable organisations offered outside India.
    • Public libraries.
    • Services offered by ESIC.
    • Slump sale, sale of businesses and demergers.
    • Public toilets and bathrooms.
    • Services offered by government authority.
    Small service provider exemption
    • Exemption is available if the taxable services value incurred in the previous year did not exceed Rs.10 lakhs.
    • Exempted turnover is not to be considered for Rs.10 lakh limit.
    • Sale turnover or goods manufacture is not to be considered for calculating the Rs.10 lakh limit.
    • If turnover crosses Rs.10 lakh in a financial year, the tax is to be paid and no exemption will be available for the next financial year.
    • You will have to register when the turnover crosses Rs.9 lakhs.
    Conditions for the exemption:
    • Cenvat credit should not be availed.
    • Clubbing provisions are applicable.
    • Services shouldn’t be under a brand name.
    • If the assessee starts the payment of service tax, he cannot change it during the financial year.
    • When service receiver is accountable to pay service tax under reverse charge, exemption limit is not available.
    • GTA is not required on value of services that is less than Rs.10 lakhs.

    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.

    LTA Exemption:

    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:

    • Section 54:

      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.

    • Section 54B:

      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.

    • Section 54EC:

      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.

    • Section 54F:

      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%**

    Note:

    *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.

    News About Tax Exemption

    • Supreme Court dismisses plea against tax exemption for political parties

      As per Section 13A of the Income Tax Act, political parties are exempt from paying tax on funds collected through donations. Few inactive parties out of the 1,848 registered political parties are suspected of using their tax exemption status to launder unaccounted money. A public interest litigation filed by Advocate M L Sharma, challenging the tax exemption was dismissed by the Supreme Court lead by Chief Justice J S Khehar, and Justice D Y Chandrachud. The Supreme Court dismissed the plea claiming that the government has the right to decide who come under tax exemption, not the court. The SC also dismissed another plea to make it compulsory for political parties to reveal the source of funds received. However, the government may reduce the limit of (current limit is Rs.20,000 per donation) anonymous donation. Donations above Rs.20,000 cannot be anonymous, the name and address of the donor have to be recorded.

      16th January 2017

    • Tax Exemption for Political Parties Depositing Cash

      Hasmukh Adhia, the Revenue Secretary recently clarified that political parties depositing the banned currency notes of 500 and 1,000 denominations will not have to pay tax for the same. But all individuals will still have to account for large cash deposits in their personal accounts.

      The Income Tax Act, 1961, Section 13A excludes political parties from paying income tax on income from voluntary donations, house property and other sources. The parties have to maintain proper books to avail this benefit. However, they are not required to disclose the names of contributors who donate less than Rs.20,000.

      There is also no cap for the amount of exemption for political parties. Although the provision of exemption had been there since long, the general public expressed their displeasure on this announcement at social media platforms like twitter.

      17th December 2016

    • Much-Awaited tax exemptions rolled out for startups

      Startups have a reason to rejoice since the CBDT has permitted them to issue shares to investors at higher than fair value without worrying about taxation issues. The move was long-awaited since the industry was looking forward to get the angel tax abolished. As per Department of Industrial Policy and Promotion, a startup is a company in which the public is not greatly or substantially interested. Till now, if an Indian company received funds from any Indian resident in excess to the fair value of shares then that excess amount was taxed.

      The new notification passed by the CBDT exempts startups from this rigorous rule. Last week, the DIPP had launched a mobile app for startups to access all notifications and circulars issued by the department with respect to change in the angel investment rule.

      1st July 2016

    • Industries with Captive Generation to receive Tax Exemption upto 500 KVs

      Industries with captive generation will now receive tax exemption upto 500 KVs, signifying an increase from the previous exemption mark of 250 KV. Bangalore Energy minister D.K Shivakumar stated that the department decided to extend the tax exemption following demands from various chambers of commerce as well as industrial areas. He also stated that the extension was agreed upon in order to drive industries to perform better. Speaking on the power situation of the state, Shivakumar also said that there is enough to satisfy the needs of the people, with a 1000 MW medium term tender expected to be available by June.

      27th April 2016

    • Existing Facility of Tax Exemptions for Cooperative Societies to be revoked

      BJP-led NDA Government had promised in their manifesto to provide strength to the cooperative sector, but failed to do so after coming to power. With this year’s Union Budget announcement, to revoke the existing facility of tax exemptions on the income made by the Cooperative Societies or the Urban Cooperative Banks, these Cooperative Societies have decided to protest the same. There were 6 lakh cooperative institutions were exempted from the purview of IT till 2006. The income and any profits earned by Cooperative Societies, belong all the members of the society. Hence, the UCB members are demanding that Section 80 P (4) and restoration of Section 80(P) of the IT Act be restored, so that they can benefit the people who have small means in both the agriculture and non-agriculture sectors.

      14th March 2016

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