What Is Section 10 Of Income Tax?
If you are looking to reduce your income tax liability legally, understanding Section 10 of the Income Tax Act is essential. This section lists several types of incomes that are either partially or fully exempt from tax. These exemptions are especially relevant for salaried individuals, retirees, business owners, professionals, and even institutions in some cases.
Section 10 of income tax covers various components such as House Rent Allowance (HRA), Leave Travel Allowance (LTA), gratuity, agricultural income, and more. By claiming these exemptions, you can significantly lower your total taxable income. Each exemption has specific conditions and limits, and knowing them can help you avoid mistakes while filing your return. The purpose of these provisions is to provide tax relief, promote savings, and support certain types of income.
What Is Section 10 Of The Income Tax Act?
Section 10 of the Income Tax Act, 1961 lists the types of incomes that do not form part of your total taxable income. These are exempt incomes, which means even though you receive them, they are not taxed, provided they fulfil certain conditions.
These exemptions are offered with the objective of promoting specific activities, providing relief to particular sections of society, and reducing the tax burden for salaried individuals and retirees, among others.
Exemptions under section 10 of income tax are applicable to individuals, Hindu Undivided Families (HUFs), companies, partnerships, and even institutions depending on the type of income.
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List of Popular Exemptions Under Section 10
Below is a detailed explanation of the major exemptions available under various subsections of section 10 of the Income Tax Act:
Section 10(1) - Agricultural Income
Income earned from agricultural activities in India is fully exempt from tax. This includes:
- Revenue or rent from agricultural land
- Sale of agricultural produce
- Income from farm buildings
- Activities like cultivation, harvesting, weeding, and pruning
However, this exemption applies only to agricultural land located in India.
Section 10(2A) - Share of Profit from Partnership Firms
If you are a partner in a firm or LLP, your share of profit from the business is fully exempt from tax. This is irrespective of whether the firm pays tax on the same profit.
Note: This does not include interest or remuneration received from the firm, which is taxable.
Section 10(5) - Leave Travel Allowance (LTA)
If your employer offers you an LTA as part of your salary package, you can claim exemption on travel related expenses incurred on domestic travel with your family.
Conditions:
- Exemption is limited to actual travel expenses (train, bus, airfare) or the fixed LTA amount, whichever is lower. If the actual expense is lower than the fixed LTA component in the salary, then the balance amount is taxable.
- Only two journeys in a block of four years are exempt
- Food, hotel stay, or sightseeing is not covered
- You must provide proof of travel
Section 10(10) - Gratuity
Gratuity received by government employees is fully exempt from tax. For private-sector employees, the exemption depends on whether they are covered under the Payment of Gratuity Act, 1972.
For employees covered under the Act:
- Exempt up to ₹20,00,000 (from FY 2019-20 onwards)
Section 10(10A) - Commuted Pension
For government employees, the commuted value of pension is fully exempt.
For non-government employees:
- If gratuity is received: one-third of full value is exempt
- If gratuity is not received: half of the commuted value is exempt
Section 10(10AA) - Leave Encashment
This applies when you encash your accumulated leave at the time of retirement or resignation.
For government employees - fully exempt
For others - lowest of the following is exempt:
- ₹25,00,000
- Actual leave encashment received
- 10 months’ average salary
- Leave credit × monthly salary
Section 10(10B) - Retrenchment Compensation
Exempt up to the least of:
- Actual compensation received
- ₹5,00,000
- 15 days’ average pay × completed years of service
Section 10(10C) - Voluntary Retirement Scheme (VRS)
Exemption up to the least of:
- ₹5,00,000
- Actual amount received
- 3 months’ salary × completed years of service
- Salary × months left until retirement
Section 10(10D) - Life Insurance Policy Maturity Amount
Any sum received under a life insurance policy, including bonus, is exempt, provided:
- Premium paid ≤ 10% of sum assured (for policies issued after 1 April 2012)
- The policy is not a Keyman Insurance Policy
Section 10(11) - Provident Fund & Sukanya Samriddhi Yojana
Interest and maturity proceeds from the following are exempt:
- Recognised Provident Fund
- Public Provident Fund (PPF)
- Sukanya Samriddhi Account
However, contributions to EPF beyond ₹2.5 lakh/year (since FY 2021–22) make the interest on excess amount taxable.
Section 10(13A) - House Rent Allowance (HRA)
If you receive HRA and stay in a rented accommodation, you can claim exemption under the Section 10(13A) of the Income Tax Act. The exempt amount will be the lowest of the following:
- Actual HRA received
- 50% of basic salary (if you live in a metro city) or 40% (for other cities)
- Rent paid minus 10% of your basic salary
- If your annual rent paid exceeds ₹ 1 lakh, you must furnish your landlord’s PAN in your ITR.
Section 10(14) - Special Allowances
Some common exemptions under this section:
- Food allowance - up to ₹2,200/month
- Internet allowance, travel, and uniform allowance - actuals
- Children’s education - ₹100/month per child (max. 2)
- Transport allowance for differently-abled employees - ₹3,200/month
Section 10(15) - Interest on Specified Investments
Interest from specified savings like:
- Post Office savings (up to ₹3,500 for individuals; ₹7,000 for joint)
- Notified bonds and savings certificates
These are exempt under certain conditions.
Section 10(23C) - Educational & Medical Institutions
If an institution's annual receipts do not exceed ₹5 crore, its income is exempt, subject to compliance with specified norms.
Section 10(26) - Scheduled Tribes in Northeast
Members of Scheduled Tribes residing in Manipur, Mizoram, Tripura, Nagaland, or Arunachal Pradesh can claim exemption on income earned in those states.
Section 10(26AAA) - Sikkimese Individuals
If you're a Sikkimese individual, your income from Sikkim or dividends/interest on securities is exempt under this section.
Section 10(37) - Capital Gains on Urban Agricultural Land
Capital gains on compulsory acquisition of agricultural land in urban areas are exempt if:
- The land was used for agriculture for at least 2 years before sale
- The acquisition is under a notified scheme
Section 10AA - Units in Special Economic Zones (SEZs)
For SEZs established between 1 April 2006 and 1 April 2021:
- 100% of export profit for the first 5 years
- 50% for the next 5 years
- Further 5-year deduction on reinvested profit (50%)
Who Can Claim Exemptions Under Section 10?
The following categories of taxpayers may claim these exemptions:
- Salaried employees
- Self-employed professionals
- Business owners
- Partners in firms or LLPs
- Members of Scheduled Tribes (specific sections)
- Retired individuals
- Institutions (educational or medical)
- SEZ unit owners
However, you must meet the specific conditions mentioned under each subsection to be eligible.
Difference Between Exemption and Deduction
While both reduce your tax liability, they are not the same:
Basis | Exemption | Deduction |
|---|---|---|
Definition | Income not included in total income | Income included, but reduced through deductions |
Under Section | Section 10 | Section 80C to 80U |
Examples | HRA, LTA, PF interest, agricultural income | LIC premiums, ELSS, home loan interest |
Applicability | Direct exclusion from taxable income | Reduction after computing gross total income |
Conclusion
Section 10 of the Income Tax Act offers several important exemptions that can help reduce your taxable income. These exemptions apply to different types of income such as agricultural income, house rent allowance, gratuity, leave travel allowance, provident fund interest, and more. If you are a salaried employee, self-employed, a retired person, or a partner in a firm, some of these exemptions under section 10 may apply to you.
Understanding which incomes are excluded from tax under section 10 of income tax helps you plan your taxes better. It is important to check the conditions for each exemption and maintain proper documentation. Keep in mind that if you opt for the new tax regime, most of these exemptions may not be available. By using the provisions of income tax act section 10 correctly, you can lower your tax burden in a legal and effective manner. Always ensure that your claims are backed by valid proofs to avoid future issues.
Additional Read: Income Tax: Basics of Income Tax for Beginners | Mirae Asset
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FAQ
Can I claim House Rent Allowance (HRA) if I pay rent to my parents?
Yes, you can claim HRA exemption under Section 10(13A) of the Income Tax Act if you pay rent to your parents. However, you must have valid proof, such as a rent agreement and evidence of payment, like bank transfers.
Is leave encashment on resignation exempt under Section 10?
For government employees, the entire amount of leave encashment received at the time of retirement or resignation is exempt under Section 10(10AA). If you are a non-government employee, only a portion is exempt, subject to conditions such as the least of ₹25 lakh, 10 months’ average salary, actual leave encashment received, or unutilised leave.
Can I claim LTA for international travel?
No, Section 10(5) allows exemption only for domestic travel within India
Does Section 10 exemption apply under the new tax regime?
Most exemptions under Section 10, like HRA, LTA, and standard allowances, are not available if you opt for the new tax regime under Section 115BAC. You should compare the old and new regimes to decide which offers better tax savings based on your income and exemptions.
What if I receive gratuity twice from different employers?
The overall exemption limit is still ₹20,00,000. Any excess amount will be taxable.
Do I need to declare exempt income in my ITR?
Yes, even though the income is exempt under Section 10 of income tax, you should declare it in your Income Tax Return (ITR) under the 'Exempt Income' schedule. This applies to HRA, LTA, agricultural income, and others.
Are life insurance proceeds taxable under Section 10?
The maturity amount and any bonus received from a life insurance policy are tax-free under Section 10(10D), as long as the premium paid is not more than 10% of the sum assured.
Can partners in a firm claim exemption on profit share?
Yes. If you are a partner in a firm or LLP, your share of profit is exempt under Section 10(2A). However, salary and interest received from the firm are taxable.
Are Provident Fund and Sukanya Samriddhi Account proceeds exempt?
Yes, interest and maturity proceeds from a recognised Provident Fund or Sukanya Samriddhi Account are exempt under Section 10(11). However, from FY 2021–22, if your PF contribution exceeds ₹2.5 lakh in a year, interest on the excess will be taxable.
Can I claim both deduction and exemption under the Income Tax Act?
Yes, but they apply differently. Deductions reduce your taxable income after it is added up, whereas exemptions under Income Tax Act Section 10 exclude certain incomes from being taxed altogether. You can claim both if eligible.