Tax Exemption

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(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.

Highlights of Union Budget 2020 for Tax Exemptions

In the Union Budget 2020, the Finance Minister Nirmala Sitharaman announced several changes regarding different tax exemptions. Listed below are some of the key points regarding tax exemptions:

  • According to the Finance Minister, the government wants to remove every income tax exemption over the long-run.
  • Taxpayers have the option to choose between the new income tax regime and the old income tax regime.
  • In case taxpayers opt for the new regime, they cannot claim deductions for professional tax, entertainment allowance, interest on vacant/self-occupied property, housing rent allowance, LTC, and deductions under Section 80C and 80D.
  • New tax slabs have been introduced to increase the tax-exempted income, as it could bring simplicity.
  • Some of the exemptions that will be allowed under the new tax regime are payments that have been received due to the NPS closure, payments that have been received from the Sukanya Samriddhi account, partial withdrawal from the NPS account, any scholarship that has been granted for education, agricultural income, and transport allowance for handicap employees to travel to work.
  • Income tax rates will be lower for individuals who forego exemptions, reliefs.
  • Individuals who earn Rs.5 lakh do not have to pay tax

FAQs on Tax Exemptions

  1. Do I have the option to choose between the new tax regime and the old tax regime?
  2. Yes, you have the option to choose between the new tax regime and the old tax regime.

  3. How much can I save under Section 80C of the Income Tax Act?
  4. Under Section 80C of the Income Tax Act, exemption of up to Rs.1.5 lakh is provided. However, no exemption is provided under the new tax regime.

  5. In case of any salary arrears, are they taxable?
  6. Yes, salary arrears are taxable. However, relief is provided under Section 89 of the Income Tax Act.

  7. Are Food and Beverage exemption provided under the new tax regime?
  8. Under the new tax regime, Food and Beverage exemption is not provided.

  9. Is tax break allowed for the interest that has been paid on an education loan?
  10. No, a tax break is not allowed for the interest that has been paid on an education loan.

News About Tax Exemption

  • Income tax department notifies Tax exemption for sovereign wealth funds

    The IT department who are aiming to attract more investments into the country has issued a notification giving global pension funds and sovereign wealth funds the benefit of exemption from being taxed on their investment in Indian infrastructure. The tax exemption will apply to interest, dividend and capital gain incomes.

    In a notification, the Central Board of Direct Taxes (CBDT) the scope of 'infrastructure' for the purpose of claiming income tax exemption under Section 10 (23FE) of the I-T Act introduced via the Finance Act 2020 was widened. The section permits a certain exclusive category of non-resident investors on their income streams such as dividends, interest and capital gains completely exempted from being taxed.

    This notification shall become effective from April 1, 2021, and shall be applicable for the assessment year (AY) 2021-22 and subsequent AYs.

    07 July 2020

  • Owners of unauthorised colonies in Delhi to be exempted from Income Tax

    Owners of unauthorised colonies in Delhi, which were regularised last year, will now be able to enjoy income tax exemption even if they had bought land or house at rates below the prevailing market price.

    A notification had been issued by the income tax department granting the exemption on "any immovable property, being land or building or both, received by a resident of an unauthorised colony in the National Capital Territory of Delhi, where the Central Government..regularised the transactions of such immovable property based on the latest Power of Attorney, Agreement to Sale, Will, possession letter and other documents .... in favour of such resident".

    The notification came into effect from April 1, 2020, and would be applicable for Assessment year 2020-21 and subsequent years. The notification dated June 29 clearly states that the owner of these properties is exempted from payment of tax on the differential of FMV and purchase price.

    If the property bought at a lower price than the actual market rate, then the income tax was levied only on the differential of fair market value (FMV) and actual purchase price.

    Over 1,700 unauthorised colonies in Delhi were regularised in December last year after a law was passed at the Parliament allowing ownership rights to be given on the basis of agreement of sale, will or possession letter, and power of attorney.

    01 July 2020

  • Government to give economic relief packages to affected industries

    The nation is now preparing itself for an economic relief package that might even include tax concessions for many industries that have been hit by the coronavirus. The central government is currently in talks with the World Bank and has urged for a relief package that will bolster the healthcare infrastructure which the country needs for tackling the coronavirus. This will also help in providing support to all the affected sectors of the economy. The government is also considering a lot of measures like relaxation in payment of dues and fees, reduction in import and export duties, a moratorium on select tax payments for some sectors, and also additional interest subvention for exports.

    A lot of industries have been bearing the brunt of the coronavirus after many non-essential services have now been prohibited during the lockdown that will go on till 14 April.

    The Finance Minister, Nirmala Sitharaman had said that Rs.1.7 lakh crore worth economic relief package will be given to the migrant and poor workers. The RBI (Reserve Bank of India) had also announced a lot of measures. These include a cut in the repo rate by 75 bps and a three-month moratorium on loan repayments.

    16 May 2020

  • Approximately 92% of taxpayers availed up to Rs.2 lakh in tax exemptions

    According to statistics, approximately 92% of tax filings done in India claimed up to Rs.2 lakh in deductions. Out of 5.78 crore taxpayers, approximately 5.3 crore claimed these deductions that came under several sections of the Income Tax Act, such as Section 80D, Section 80C, Section 80CCD (1B), additional NPS deductions, as well as deductions for interest on housing loan, and standard deductions in FY2018-19. Less than 1% of taxpayers, about 3.77 lakh, claimed over Rs.4 lakh in deductions individually. According to the Revenue Secretary, this is a progressive taxation system that is adopted internationally as well. A graded and multiple income tax structure is deemed to be more beneficial in a society where there is income inequality. The new tax structure, which has 7 different tax slabs and lower interest rates, is optional while the old structure has four tax slabs and will remain. Although most exemptions have been removed from the new system, there are still some that remain. Once the new tax system with no exemptions and deductions has been chosen, however, the individual cannot return to the older tax system with exemptions and deductions. The FM stated that the new tax system may be beneficial especially for senior citizens and small businessmen. While 70 exemptions have been already eliminated in the new system, the remaining will be rationalised or reviewed in future. This is to lower the tax rate and simplify the tax structure.

    03 February 2020

Display of any trademarks, tradenames, logos and other subject matters of intellectual property belong to their respective intellectual property owners. Display of such IP along with the related product information does not imply BankBazaar's partnership with the owner of the Intellectual Property or issuer/manufacturer of such products.

reTH65gcmBgCJ7k
This Page is BLOCKED as it is using Iframes.