Section 10 - Tax Exemptions, Allowances & How to Claim?

Section 10 contains many exemptions like House Rent Allowance (HRA), Leave Travel Allowance (LTA), interest on provident fund, gratuity, agricultural income, etc. Disclosure of exempt income is mandatory in ITR. It is to be noted that certain exemptions are exclusively available only under the old regime, from the introduction of new tax regime in the year 2020.

Popular Section 10 Exemptions

• House Rent Allowance (HRA) 
• Leave Travel Allowance
• Agricultural Income
• Interest on provident fund (on satisfaction of conditions)
• Retirement settlement amount such as gratuity, leave encashment, pension, etc. (on satisfaction of conditions)

What are Section 10 Exemptions of the Income Tax Act?

While calculating the tax liability of an individual, there are certain incomes which is exempt and do not form a part of the total income. Section 10 of the Income-tax Act 1961 includes all those exemptions that a taxpayer can claim while paying income tax. 

From an employee's perspective, the exemptions available under the act can be classified as exempt allowances, and other exempt income. They are presented as follows:

Exemption on Allowances

• Section 10(13A) - House Rent Allowance (HRA)
• Section 10(14)(ii) - Children’s Education Allowance
• Section 10(5) - Leave Travel Allowance (LTA)
• Section 10(14) - Exemption of Special Allowance

Other Exemption on Salaried  Income

• Section 10(11) - Provident Fund and Sukanya Samriddhi Account Interest
• Section 10(10) - Gratuity
• Section 10(10AA) - Leave Encashment
• Section 10(10A) - Commuted Pension
• Section 10(10B) - Retrenchment Compensation
• Section 10(10C) - Voluntary Retirement Compensation
• Section 10(10D) - Life Insurance Policy

Exemption on Other Income

• Section 10(1) - Agricultural Income
• Section 10(2A) - Partner’s Share in Profits
• Section 10(15) - Interest on Savings Certificates
• Section 10(23C) - Tax Exemption for Educational and Medical Institutions
• Section 10(26) - Tax Exemptions for Scheduled Tribe Members in Specific Northeastern States
• Section 10(26AAA) - Tax Exemption for Sikkimese Individuals
• Section 10(34) - Exemption on Dividends
• Section 10(34A) - Exemption on Buy-Back of Shares
• Section 10(35) - Exemption on Income from Specified Mutual Funds
• Section 10(37) - Exemption on Capital Gains from Compulsory Acquisition of Urban Agricultural Land
• Section 10(38) - Exemption on Long-Term Capital Gains from Sale of Equity Shares and Equity-Oriented Mutual Funds
• Section 10AA - Units In Special Economic Zones

What are the Income Tax Exemptions Under Section 10?

Here is a list of exempted income under Section 10:

Exemption on Life Insurance Policy - Section 10(10D)

Under this section, you get an exemption for the income you receive from a life insurance policy or bonus. However, the below insurance policies shall not be eligible:

• Life insurance policy has taken on a specially-abled dependent family member
• Key man insurance policy
• Insurance policies where the premium amount is more than 10% of the sum assured.

Exemption on House Rent Allowance - Section 10(13A)

Section 10(13A) of the Income Tax Act covers House Rent Allowance (HRA). The part of your salary you receive to cover house rent and accommodation expenses is exempted from taxation.

However, a few exceptions are included in Section 10(13A) Rule 2A. The exemption is allowed for the least of the following amounts:

• Actual HRA received
• 50% of [basic salary + DA] for those living in Delhi, Mumbai, Chennai, Kolkata or 
• 40% of [basic salary + DA] for those living in other cities
• Actual rent paid (-) 10% of [basic salary + DA]

Under Section 10(13A) of the Income Tax Act, the following types of expenses are covered under House Rent Allowance (HRA) for exemption from income tax:

Rent paid: The actual rent paid by the taxpayer for the residential accommodation they occupy.

Brokerage or commission: Any brokerage or commission paid to a real estate agent or broker for securing the rented accommodation.

Maintenance charges: Expenses incurred towards maintenance charges for the rented accommodation, such as society maintenance fees or charges for common fad

Lease agreement costs: Costs associated with preparing and registering the lease agreement, if applicable.

It is important to note that only expenses directly related to the rental accommodation occupied by the taxpayer are eligible for exemption under Section 10(13A) of the Act.

Let’s take a look at the below example.

An employee living in Mumbai with a basic salary of Rs. 40,000 per month, receiving an HRA of Rs. 20,000 per month, and paying rent of Rs. 15,000 per month.

Condition 1: Actual HRA received - Rs. 2,40,000 (Rs.20,000 per month)

Condition 2: Metro city 50% of [basic salary + DA] - Rs. 2,40,000 (50% of Rs.4,80,000) 

Condition 3: Actual rent paid (-) 10% of (basic salary + DA) - Rs.1,32,000 (Rs.1,80,000 – Rs.48,000)

Least of the above is the amount of Exempted HRA - Rs. 1,32,000, HRA chargeable to tax - Rs. 1,08,000 (Rs. 2,40,000 - Rs.1,32,000).

Children Education Allowance Exemption - Section 10(14)(ii)

Taxpayers with children's education allowance can an exemption of Rs. 100 per month for two children every year.

In case the taxpayer is blind or deaf and dumb or handicapped, and receiving a transport allowance can also claim an exemption of Rs. 3,200 per month.

Exemption of Special Allowance - Section 10(14)

Section 10(14) also includes a tax exemption of Rs.26,400 in a year for food allowance provided by your employer assuming two meals a day and 22 working days in a month.

Under Section 10(14), the Internet allowance provided by your employer is exempted from taxation.  

This section provides exemptions for expenses incurred due to your employer’s business. It includes travelling, conveyance, research allowance and more, provided such expenses are actually spent for the given purposes.

Leave Travel Allowance Exemption - Section 10(5)

Section 10(5), or leave travel allowance exemption, is applicable for individual taxpayers. The LTA exemption applies only to the domestic travel expenses, such as airfare, train or bus fare, incurred by the employee. Other expenses, such as transportation within the destination, sightseeing, hotels, and food, are not covered. Additionally, the exemption is limited to LTA provided in your CTC by the employer.

For example, if an employee is given LTA of Rs 30,000 and incurs travel expenses of Rs 20,000, only the amount actually spent on travel would be exempt from taxes and the remaining Rs 10,000 would be included as taxable income.

Exemption on Payment Made to Provident Fund and Sukanya Samriddhi Account - Section 10(11)

Under this section, you receive exemptions for interest from a provident fund upon resignation or retirement. 

Note: From 1st April 2021 onwards, the exemption under section 10(11) will not apply to interest income accrued during the previous year on contributions exceeding Rs. 2,50,000 made by the person/employee to that fund in any previous year.

Gratuity Exemption - Section 10(10)

Any income by way of gratuity received by the government, but in the case of employees working in the private sector, depends on whether they are covered under the Payment of Gratuity Act or not.

Leave Encashment Exemption - Section 10(10AA)

Employees are allowed a certain number of leaves during the period of their service. It is upto the employees to avail such leaves or not. In case the leaves are not availed, they either get lapsed to get accumulated for future or are allowed to be encashed at the end of every year or at the time of retirement/resignation. If the employee wished to encash such leave during the period of service then it is fully taxable. However, if such leaves are encashed at the time of resignation/retirement, they are eligible for deduction under section 10(10AA). Further, leave encashment for government employees is completely exempt. In case of a non-government employee, the exemption will be the lower of the follows:

• Rs. 25,00,000
• Leave Salary Actually Received
• Average 10 Months Salary
• Cash Equivalent of unavailed Leave Credit at the time of retirement

Exemption on Commuted Pension - Section 10(10A)

If you are a Government employee, under this section, you receive tax exemption on the money you get from accumulated pensions.

Exemption on Retrenchment Compensation - Section 10(10B)

Retrenchment compensation is the amount paid at the time of transfer of employment or closing down of the industrial undertaking. Taxpayers receiving such compensation can claim an exemption u/s 10(10B) of the lower of the following:

• Compensation Received
• Rs. 5,00,000
• 15 days Avg pay x Completed years of service

Exemption on Voluntary Retirement - Section 10(10C)

Any amount received by an employee at the time of voluntary retirement would be taxed as profit in lieu of salary. The taxpayer can avail an exemption u/s 10(10C) as least of the following:

• Compensation Received  
• Rs. 5,00,000
• 3 months' salary x Completed years of service
• Last drawn salary x Remaining months of service

Exemption on Agricultural Income - Section 10(1)

The following agricultural income exemptions are provided under Section 10(1) of the Income Tax Act:

• Sale of agricultural produce
• Agricultural operations such as sowing, cultivation, and tilling
• Income from agricultural land in India, including rent or revenue
• Earnings from farm buildings used for agricultural purposes
• Income from agricultural operations aimed at preservation and growth, such as weeding, pruning, and cutting

Exemption on Partner’s Share in Profits - Section 10(2A)

The partner’s share in the profits of the firm or Limited Liability Partnership(LLP) is fully exempt.

Interest Exemption on Savings Certificate - Section 10(15)

Interest income earned on post office savings bank account, premium on redemption or other payment on notified securities, bonds, annuity certificates or other savings certificates is exempt up to the following limits:

• Rs. 3,500 for individuals
• Rs. 7,000 for joint account holders.

Tax Exemption for Educational and Medical Institutions - Section 10(23C)

Educational or medical institutions whose aggregate annual receipts do not exceed Rs.5 crore are eligible for exemption under this section. 

Tax Exemptions for Scheduled Tribe Members in Specific Northeastern States - Section 10(26)

If you are a member of a Scheduled Tribe in Tripura, Nagaland, Mizoram, Manipur, and Arunachal Pradesh, you are eligible for tax exemptions against income earning either from any source in the states mentioned above or earning through dividends or interest on securities under Section 10(26) Of the Income Tax Act.

Tax Exemption for Sikkimese Individuals - Section 10(26AAA)

If you are a Sikkimese individual earning either from any source in Sikkim or earning through dividends or interest on securities, this part of your income comes under tax exemption under Section 10(26AAA). 

Exemption on Dividends - Section 10(34)

This section includes exemptions from the dividends that you receive from investing in an Indian company. However, this exception is only limited to an amount of Rs.10,000, exceeding which you have to pay tax. 

Note: This is applicable only for the dividends received till 31st March 2020. 

Exemption on Buy-Back of Shares - Section 10(34A)

The amount received on shares bought back by a domestic company before 01.10.2024 is fully exempt from tax u/s 10(34A).  

Exemption on Income from Specified Mutual Funds - Section 10(35)

Any income that you gain from the sale of specified mutual fund units.

Note: This is applicable only for the income earned till 31st March 2020.

Exemption on Capital Gains from Compulsory Acquisition of Urban Agricultural Land - Section 10(37)

This section provides exemptions for capital gains due to the compulsory acquisition of urban agricultural land, provided the below conditions are fulfilled:

land should be used for agricultural purposes for 2 years before its sale date

compulsory acquisition scheme should be approved by the central government or RBI

Exemption on Long-Term Capital Gains from Sale of Equity Shares and Equity-Oriented Mutual Funds - Section 10(38)

When you get long-term capital gains by selling equity shares of an equity-oriented mutual fund, it is exempted from Income Tax calculation. However, the Securities Transaction Tax must be paid. 

Note: This is applicable only for the long-term capital gain earned till 31st March 2018.

Exemption for Units In Special Economic Zones - Section 10AA

An assessee being an entrepreneur conducting business in an SEZ, set up after 01/04/2006 and before 01/04/2021 will be eligible for deduction as follows:

• For the first consecutive five assessment years, one can claim a deduction of 100% of profit and gains derived from exports and 50% of profit and gains for the next five assessment years.
• 50% of profit as debited in the profit and loss account and credited to reserves will be allowed as a deduction for the next consecutive five assessment years. 

Summary Of Income Tax Exemptions Under Section 10

How Do I Claim Section 10 Income Tax Exemptions On My Taxes?

Claiming Section 10 exemptions or allowances while filing your income tax return requires accurately disclosing your income sources and exemptions in the return. It's crucial to maintain proper documentation. The documents required are Form 16, salary slips, and other supporting documents, to validate their exemption claims. 

After applying the exemptions to your total income, make sure to calculate your taxes correctly. Choose the appropriate ITR form based on your income sources, submit it, and e-verify it before the filing deadline to avoid penalties and interest.

Conclusion

Section 10 provides several exemptions that help taxpayers reduce their taxable income, resulting in lower tax liability. Understanding these exemptions and the conditions for claiming them can significantly reduce tax obligations. Therefore, it's crucial for taxpayers to be aware of these exemptions and how to claim them while filing their returns.