What is Tax Exemption?
A tax exemption is the right to have some or all of one's income exempt from country’s taxation. The majority of taxpayers are eligible for a number of exemptions that can be used to lower their taxable income, while some people and organisations are fully free from paying taxes.
A tax exemption is the right to have some or all of one's income exempt from country’s taxation. The majority of taxpayers are eligible for a number of exemptions that can be used to lower their taxable income, while some people and organisations are fully free from paying taxes.
The Indian government offers a wide range of tax exemptions to raise investments and support particular economic activity.
For example, it grants an exemption on insurance premiums to encourage more individuals to buy life insurance and 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.
Union Budget Highlights: Tax exemption limit on leave encashment increased
In the Union Budget, Finance Minister Nirmala Sitharaman announced an increase in tax exemption limit of up to Rs.25 lakh for leave encashment for salaried non-government employees upon retirement.
Various Sections of Tax Exemptions in India
There are exemptions from tax like Property Tax and income tax if the taxpayer has children or dependents who depend on him for finances and sections 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 (4) | Interest from notified bonds or NRE account |
10 (6) | Income of foreign citizens like ambassadors and diplomats of foreign countries |
10 (7) | Benefits received while serving the Indian government head |
10 (8) | Payments from foreign governments for taxes due in India, so long as they fall within programmers for technical cooperation. If the government pays the tax on the income, the exemption also applies to income received outside of India. |
10 (10) | Gratuity received by a government servant on retirement or death |
10 (10A) | Commuted pension received from the government or statutory body |
10 (10AA) | Leave encashment for central or state government employee |
10 (10B) | Commission received by employees for retrenchment |
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 (18) | Pension received gallantry award winners |
10 (19) | Pension received by the family of armed forces personnel |
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(11) | Payment received under Provident Fund act, 1925 and other central government notified bonds. |
10(12) | th |
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
TDS denotes Tax Deducted at Source. The tax is deducted by a payer for payment made to you, whether salary or a professional fee. Banks also deduct tax from payments of interest at the source. The money is subsequently credited to your tax account after the payer deposits the tax with the government. If the TDS is greater than your tax, you can either claim it against the amount of tax you are required to pay or request a refund.
With the onset of COVID 19, TDS rates have been reduced by 25% for up to 23% for non-salaried payments to Indian residents who have valid PAN cards. This covers TDS that is relevant to, among other things, contracts, professional fees, interest, rent, dividends, commissions, and brokerage.
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 House Rent Allowance 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 |
|
Exemption to main service does not mean Exemption to auxiliary services |
|
Important exemptions |
|
Small service provider exemption |
|
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 eight 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 Exemptions for Women in India
Tax exemption to women are allowed under Section 80C and 80D to 80U. They are as follows:
- Public provident fund
- National savings certificate
- Five 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 two year from the date of sale or can be constructed three 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 three years. You can acquire Bond of NHAI or REC and you get six 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 three 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.
FAQs on Tax Exemptions
- What is an example of tax exemption in India?
In India, common tax exemptions include House Rent Allowance (HRA), agricultural income, and donations eligible under Section 80G, which allow taxpayers to reduce their taxable income.
- How is tax exemption calculated from HRA?
Actual HRA received b. 50% of [basic salary plus Dearness Allowance] for those who stay in metro cities (40% in case of non-metros), or Actual rent paid less 10% of basic salary + Dearness Allowance.
- Are there any tax benefits for donations made to charitable organizations?
Yes. Under Section 80G of the Income Tax Act of 1961, individuals may claim a tax exemption for donations given to certain relief funds and charitable organisations.
- Can I get tax exemption for life insurance?
According to Section 10(10D) of the Income Tax Act of 1961, income received from a life insurance policy is free from taxation. According to this clause, every payout from a life insurance policy, whether it be on maturity or death, is excluded from income tax.
- Do I have the option to choose between the new tax regime and the old tax regime?
Yes, you have the option to choose between the new tax regime and the old tax regime.
- How much can I save under Section 80C of the Income Tax Act?
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.
- In case of any salary arrears, are they taxable?
Yes, salary arrears are taxable. However, relief is provided under Section 89 of the Income Tax Act.
- Are Food and Beverage exemption provided under the new tax regime?
Under the new tax regime, Food and Beverage exemption is not provided.
- Is tax break allowed for the interest that has been paid on an education loan?
No, a tax break is not allowed for the interest that has been paid on an education loan.
News About Tax Exemption
Union Budget 2024: Tax exemption on retail schemes and Exchange Traded Funds in IFSC
As per the Union Budget announcements made by the finance minister, Nirmala Sitharaman, tax exemptions can be availed on retail schemes and Exchange Traded Funds (ETFs) in IFSC as available to specified funds and certain income of Core Settlement Guarantee Fund set up in IFSC. the applicability of section 94B will also be excluded for certain finance companies located in IFSC.
The source of fund will not be call upon for explanation if a venture capital fund (VCF) located in IFSC extends a loan or other amount to an assessee. Income tax payable on income from securities by specified funds will not be applicable for surcharge.
Interim Union Budget 2024: Tax exemptions for IFSC units and startups extended till 31 March 2025
As per an announcement made by the Finance Minister Nirmala Sitharaman, tax exemptions for IFSC units and startups have been extended until 31 March 2025. Earlier, the exemptions were until 31 March 2023. The main reason for the extension is to provide continuity in taxation.
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