Exemptions & Rebates in Taxation

  • Post last modified:12 August 2023
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Exemptions & Rebates in Taxation

Section 10 covers the incomes that do not form the part of the taxable income. These are those incomes on which income tax is exempted. In other words, no tax is applied on these incomes. Some of the exemptions under Section 10 of the Income Tax Act, 1961 are discussed in the next sections.

Agricultural Income [Section 10(1)]

As per Section 10(1), Agricultural Income; the earnings from agriculture are totally exempted if it falls within the definition of agricultural income given under Section 2(1A). The reason for totally exempting agricultural income is that under the Constitution, the Parliament has no power to levy a tax on agricultural income. However, tax can be levied on agricultural income in an indirect way, which is known as partial integration of taxes.

For example, if an income is made by a seller of standing crops, who has invested labour and skill to make the crop sprout out of the land is agricultural income. However, if someone buys a standing crop, and generates profits out of it, that income will not be considered as agricultural income.

Receipts From HUF [Section 10(2)]

As per Section 10(2), Amounts Received by a Member from the Income of the Hindu Undivided Family (HUF); an HUF is a separate legal identity and any income earned by the HUF is taxable in the hands of HUF only. Subject to the provisions of sub-section (2) of Section 64, any sum received by an individual as a member of a Hindu Undivided Family, where such sum has been paid out of the income of the family, or, in the case of any impartible estate, where such sum has been paid out of the income of the estate belonging to the family, is exempt from tax.

For example, let’s say an HUF earned ₹5,00,000 in the last year and has already paid tax on his/her income. Mr X is a co-parcener in the HUF and earns ₹20,000 per month as his salary. In the last year, Mr X also received ₹1,00,000 from HUF. In this case, Mr X will pay tax on his taxable salary income but not on the sum he received from his HUF. This money is not chargeable to tax.

Partner’s Share in the Income of the Firm [Section 10(2A)]

As per Section 10(2A), Share Income of Partner; in the case of a person being a partner of a firm which is separately assessed as such, his share in the total income of the firm will be exempt from tax. In other words, the share of the partner in the firm’s total income determined in accordance with the profit sharing ratio will be exempted from tax. For example, if you are a partner of a firm, any amount of money that you have as a share in the firm’s total income is exempted from income tax.

Income Earned by a Non-resident From NTRO [Section 10(6D)]

In the Union Budget of 2018, a new clause 6D was added under Section 10. As per this clause, if a non-resident not being a company or a foreign company arises any income by way of royalty from or fees for technical services rendered in or outside India to the National Technical Research Organisation (NTRO), then such income will be exempt from income tax.

Payment From Provident Fund [Section 10(11)]

As per Section 10 (11), Payment from Provident Funds, any payment from a provident fund, to which the Provident Funds Act, 1925, applies or from any other provident fund set up by the Central Government and notified by it in this behalf in the Official Gazette, will be exempted from tax.

For example, if your basic salary is not more than ₹15,000, you need to contribute 12% of the basic component of your salary every month towards PF. This amount will be deducted from your income and will be exempted from tax. You also earn some interest (8.5%) on a yearly basis, which will also be exempted from tax.

House Rent Allowance [section 10(13A)]

As per Section 10 (13A), House Rent Allowance (HRA), tax exemption is available on any special allowance specifically granted to an assessee by his employer to meet expenditure actually incurred on the payment of rent (by whatever name called) in respect of residential accommodation occupied by the assessee, to such extent as may be prescribed having regard to the area or place in which such accommodation is situated and other relevant considerations.

Explanation: For enhanced clarity, it is hereby declared that nothing contained in this clause shall apply in a case where:

  • the residential accommodation occupied by the assessee is owned by him; or

  • the assessee has not actually incurred expenditure on the payment of rent (by whatever name called) in respect of the residential accommodation occupied by him.

For example: Mr Kapoor receives ₹3,000 as the basic pay and ₹600 as the dearness allowance. His HRA allowance is ₹900 per month, while he pays ₹1,000 per month as his accommodation in Kanpur Metropolitan Area. In this case, we can calculate the taxable HRA as follows:

Least of the following is exempt u/s 10 (13A):

  • Actual HRA received = 900 × 12 = ₹10,800

  • 50% of basic salary (for employees staying in metro cities) and 40% of Salary (for employees staying in non-metro cities) Since, Kanpur is a metro city, we calculate 50% of basic salary as = 50% ((3000+600) × 12) = 50% of ₹43,200 = ₹21,600

  • Actual rent paid – 10% of basic salary = (1000 × 12) – 10% (3600 × 12) = 12,000 – 4,320 = ₹7,680

Least of these is ₹7,680.

Therefore, Mr Kapoor’s taxable HRA will be = 10,800 – 7,680 = ₹3,120.

Scholarship [Section 10(16)]

As per Section 10 (16), Education Scholarships, tax is exempt on scholarships granted to meet the cost of education. For example, if a student receives ₹1,00,000 as the scholarship amount from his/university, that amount will be exempted from tax.

Clubbed Income of a Minor Child [Section 10(32)]

As per Section 10(32), Income of Minor, in the case of an assessee referred to in sub-section (1A) of Section 64, any income includible in his total income under that sub-section, to the extent such income does not exceed ₹1,500 in respect of each minor child whose income is so includible.

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