Income Exempt from Income Tax | Income Tax Act

The article 'Income Exempt from Income Tax' refers to specific types of income that are not subject to taxation by the government. Under the Income Tax Act, certain types of income may be exempt from income tax. As per the Income Tax Act, agricultural income, the income of a Hindu undivided family, provisional fund income etc., are significant aspect that is treated differently from other sources of income.

Introduction

Certain types of income are referred to as exempt income and are not subject to taxation by the taxpayers. If specific requirements and conditions are met, the provisions relating to such exempt income are governed by Section 10 of the Income Tax Act in India. Exempt income can take on any form, including interest from agricultural land, PPF interest, and more.

Income that is exempt from all taxes is referred to as exempt income, which is distinct from income tax deductions. To deduct from the total is what the verb deduct signifies. Deductions are amounts taken out of the taxpayer's overall income under income tax laws. Taxpayers are eligible for these deductions if they invest in specific tax-saving equipment. In other words, they can deduct certain expenses from their taxes.

Agricultural Income

According to Section 2(1A) (a) of the Income Tax Act of 1961, “agricultural income” means—

(a) any rent or revenue derived from land which is situated in India and is used for agricultural purposes.

Any revenue derived from the actual sale of agricultural products falls within the definition of "agricultural income" as it is defined in Section 10(1). In this regard, it is important to keep in mind that any revenue derived from the sale of agricultural products in their raw form or from the use of common methods to prepare them for sale falls within the category of "agricultural income." In other words, incomes will be treated as a combination of agricultural revenue and business income whenever agricultural produce is subjected to activities or processes that are not typically performed to get the food suitable for sale.

Income of Hindu Undivided Family

According to Section 10(2) of the Act, a member of a HUF (Hindu Undivided Family) is completely exempt from income tax on any income they receive from the family or from the impartible family estate, as the case may be. It is important to emphasise in this context that a member of a HUF is not excluded from paying income tax on their personal income. Only the funds donated to him from the HUF's family estate or impartible family income are exempt from income tax.

Example: Mr W receives his annual part of the family income from his HUF (Hindu Undivided Family), which is worth Rs. 3,00,000. He receives a salary of Rs. 5,00,000 a year for his employment as an employee at a company. According to Section 10(2), his portion of the family's income, Rs. 3,00,000, is completely exempt from income tax, but his personal income of Rs. 5,00,000 is subject to deduction as tax.

Tax Exemption on Profit Share from Firm/LLP

A Partner is not required to pay taxes on the profit share they get from the firm. Similarly to this, an LLP partner's profit share is not subject to taxation in the partner's hands [Section 10(2A)]. However, this exemption is only applicable to the profit share; it does not cover the interest on capital or the compensation the partner receives.

Income Earned by Non-Resident Indians (NRIs) by Way of Interest on Certain Bonds and Securities

NRIs can take advantage of the tax exemption if their income comes from interest on security bonds or from bank accounts in India. Following FEMA, 1999, any interest income received by an individual on funds held in a non-resident (external) account at any Indian bank is exempt from income tax. However, the exemption is only valid for those who are either FEMA, 1999-defined residents outside India or those who have been given permission by the RBI to retain the aforementioned account. In accordance with this clause, Indian citizens and people of Indian descent who are non-residents and receive income from interest on notified savings certificates are excluded from paying taxes.

Additionally, from 17 September 2018 to 31 March 2019, any interest income received by a non-resident or a foreign corporation in relation to rupee-denominated bonds issued outside of India by an Indian company or business is tax-free. Additionally, capital gains from the sale of rupee-denominated bonds, derivatives, or other capital assets are not subject to taxation.

Leave Travel Concession

A worker may request an exemption from the Leave Travel Concession under section 10(5). All employees (including Indian and non-Indian nationals) are eligible for the exemption under section 10(5). An exemption is allowed for the cost of any travel benefits or assistance the employee received or is owed by his employer (including a former employer) in connection with travelling on leave to any location in India. The following provisions should also be considered in this regard:

When travelling by air, the amount of the exemption will be the lesser of the actual cost or the price of the National Carrier's economy class airfare for the shortest route. When travelling by train, the amount of the exemption will be the lesser of the cost of an air-conditioned first-class rail ticket for the shortest route or the actual amount paid. The same criteria shall be followed when travelling by any other mode provided train service exists between the points of origin and destination.

When a journey is completed by a mode of transport other than air because the places of origin and destination are not connected by rail: The following exemptions apply:

If a recognised public transport option is available, the exemption will be based on the lower of the first class or deluxe class fare or the actual amount paid.

Exemption to Gratuity

According to section 10(9), the income of any family member of any such individual as is described in sections 10(8), (8A), or (8B) accompanying him to India, which accrues or arises outside India and is not deemed to accrue or arise in India, and in relation to which such member is required to pay any income or social security tax to the Government of that foreign State or country of origin of such member, as the case may be, is exempt from tax.

Provisional Fund Income (Section 10(25))

This provision exempts the following income from taxation: Interest on securities held by statutory provident funds and any capital gains resulting from those instruments.

Any revenue that the trustee receives on behalf of a recognised provident fund, an approved superannuation fund, or an approved gratuity fund; and Any income that the board of trustees receives on behalf of a deposit-linked insurance fund.

The Income Tax Act's Section 10(14) offers exclusions from paying taxes on benefits and allowances given to employees to cover specific costs. The list of allowances that are exempt under Sections 10(14)(i) and 10(14)(ii) of the Income Tax Act is set forth in Rule 2BB of the Income Tax Rules. Under the current article, the aforementioned exemption covered by section 10(14) read with rule 2BB is completely stated.

Section 10(14)(i)'s provisions exempt employees from paying for special perks or allowances that are awarded to them to cover costs that are (wholly, entirely, and necessarily) related to carrying out their official duties. Only when the costs are genuinely spent by the employees is the exemption granted.

• The amount is given to cover the expense of a transfer or trip.
  
• The daily allowance is given to cover the regular daily expenses incurred by an employee when they are away from their regular place of employment.
• Awarded to cover transport costs incurred while carrying out the responsibilities of an office. Free transport, however, shouldn't be offered by the business.
• A helper allowance is given to cover the costs associated with hiring a helper to carry out work-related responsibilities.
• Research grants are given to support academic, training, and research endeavours in educational and research institutes.
• A uniform allowance is given to cover the costs of purchasing and maintaining a uniform that must be worn while carrying out an office's tasks.

Conclusion

The Indian government offers a few exclusions to lessen your income tax obligations. The rules and conditions under which one may qualify for a tax exemption are discussed in Section 10 of the Income Tax Act.

References

[1] Section 10 of Income Tax Act: Exemptions, Allowances & How To Claim It?, Available Here

[2] Tax-Free Incomes, Available Here

[3] Exempt Income, Available Here

[4] Agricultural Income: Computation and All You Need to Know, Available Here

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