Exempt Incomes and Allowances

INTRODUCTION
Information of Section 10 of I T Act relating to Individuals and HUFs.
In computing the total income of a previous year of any person, any income falling
within any of the following clauses shall not be:
1.

Agricultural Income {Section 10(1)]: Income received from agriculture is totally

exempt from tax if it is the only source of income in the financial year. However, if it is
accompanied by income from other sources, it is taxable.

2.

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. {Section 10(2)]

3.

In the case of a partner of a firm, who is separately assessed as such, his share in

the total income of the firm shall not be included.{Section 10(2A)]

4.

Any income by way of interest on moneys in a Non-Resident (External) Account

in any bank in India in accordance with the Foreign Exchange Regulation Act, 1973 (46 of
1973), and the rules made there under, provided such individual accruing to a person
1

resident outside India as defined in clause (q) of section 282 of the said Act or is a person
who has been permitted by the Reserve Bank of India to maintain the aforesaid
Account. {Section 10(4)(ii)]

5.

The payment proceeds of a life insurance policy are exempt under section

10(10D). The sum received (including the bonus) under a life insurance policy (other than
any sum received under sub-section (3) of section 80DDA or under a Keyman insurance
policy).{Section (10)(10)(D)]

6.

The value of any travel concession or assistance received by, or due to a person,

from his employer for himself and his family, in connection with his proceeding on leave to
any place in India or from his employer or former employer for himself and his family, in
connection with his proceeding to any place in India after retirement from service or after
the termination of his service, subject to such conditions as may be prescribed (including
conditions as to number of journeys and the amount which shall be exempt per head)
having regard to the travel concession or assistance granted to the employees of the Central
Government.
The amount exempt under this clause shall in no case exceed the amount of expenses
actually incurred for the purpose of such travel.{Section 10(5)]

7.

Any allowances or perquisites paid or allowed as such outside India by the

Government to a citizen of India for rendering service outside India. {Section 10(7)]

8.

Any special allowance or benefit, not being in the nature of a perquisite within the

meaning of clause (2) of section 17, specifically granted to meet expenses wholly,
necessarily and exclusively incurred in the performance of the duties of an office or
employment , to the extent to which such expenses are actually incurred for that
purpose. {Section 10(13A)]

9.

Income by way of interest, premium on redemption or other payment on such

securities, bonds, annuity certificates, savings certificates, other certificates issued by the
Central Government and deposits as the Central Government may, by notification in the
Official Gazette, specify in this behalf, subject to such conditions and limits as may be
specified in the said notifications.{Section 10(15)]

10.

Scholarships granted to meet the cost of education.{Section 10(16)]

11.

Any income to the extent such income does not exceed one thousand five hundred

rupees in respect of each minor child whose income is so includible. {Section 10(32)]

12.

Any income arising from the transfer of a capital asset, being a unit of the Unit

Scheme, 1964. {Section 10(33)]

13.

Any income by way of dividends referred to in section 115-O. {Section 10(34)]

14.

Any income by way of

income received in respect of the units of a Mutual Fund specified under clause (23D); or

 income received in respect of units from the Administrator of the specified undertaking;
or
income received in respect of units from the specified company
The Exemptions under this section are subjected to the conditions listed under the
section. (Section 10(35)]

15.

Any income arising from the transfer of a long-term capital asset, being an

eligible equity share in a company purchased on or after the 1st day of March, 2003 and
before the 1st day of March, 2004 and held for a period of twelve months or more. {Section
10(36)]

16.

Any income chargeable under the head Capital gains to an individual or a Hindu

undivided family arising from the transfer of agricultural land , where

1. such land is situate in any area referred to in item (a) or item (b) of
sub-clause (iii) of clause (14) of section 2;
2. such land, during the period of two years immediately preceding the
date of transfer, was being used for agricultural purposes by such
Hindu undivided family or individual or a parent of his;
3. such transfer is by way of compulsory acquisition under any law, or a
transfer the consideration for which is determined or approved by the
Central Government or the Reserve Bank of India;

4. such income has arisen from the compensation or consideration for

such transfer received by such assessee on or after the 1st day of April,
2004. {Section 10(37)]

17.

Any income arising from the transfer of a long-term capital asset, being an equity

share in a company or a unit of an equity oriented fund where such transaction is

chargeable to securities transaction tax. {Section 10(38)]

(A) AGRICULTURAL INCOME

Under the provisions of Section 10(1) of the Income Tax Act, agricultural income is
frilly exempt from income tax. However, for individuals or HUFs when agricultural
income is in excess of 5,000, it is aggregated with the total income for the purposes of
computing tax on the total income in a manner which results into no tax on
agricultural income but an increased income tax on the other income. Agriculture
income is exempt under the Indian Income Tax Act. This means that income earned from
agricultural operations is not taxed. The reason for exemption of agriculture income
from Central Taxation is that the Constitution gives exclusive power to make laws with
respect to taxes on agricultural income to the State Legislature. However while
computing tax on non-agricultural income agricultural income is also taken into
consideration.
What does the term Agricultural Income mean?
As per Income Tax Act income earned from any of the under given three sources meant
Agricultural Income;
(i)

Any rent received from land which is used for agricultural purpose.

(ii) Any income derived from such land by agricultural operations including processing
of agricultural produce, raised or received as rent in kind so as to render it fit for the
market, or sale of such produce.
(iii) Income attributable to a farm house subject to the condition that building is situated
on or in the immediate vicinity of the land and is used as a dwelling house, store house
etc.
Now income earned from carrying nursery operations is also considered as agricultural
income and hence exempt from income tax.
In order to consider an income as agricultural income certain points have to be kept in
mind:
(i) There must me a land.
(ii) The land is being used for agricultural operations.
(iii) Agricultural operation means that efforts have been induced for the crop to sprout
out of the land .
(iv) If any rent is being received from the land then in order to assess that rental income
6

as agricultural income there must be agricultural activities on the land.

(v) In order to assess income of farm house as agricultural income the farm house
building must be situated on the land itself only and is used as a store house/dwelling
house.

Certain income which is treated as Agriculture Income;

(a)

Income from sale of replanted trees.

(b) Rent received for agricultural land.

(c)

Income from growing flowers and creepers.

(d) Share of profit of a partner from a firm engaged in agricultural operations.

(e) Interest on capital received by a partner from a firm engaged in agricultural
operations.
(f)

Income derived from sale of seeds.

Certain income which is not treated as Agricultural Income;

(a)

Income from poultery farming.

(b) Income from bee hiving.

(c)

Income from sale of spontaneously grown trees.

(d) Income from dairy farming.

(e)

Purchase of standing crop.

(f)

Dividend paid by a company out of its agriculture income.

(g) Income of salt produced by flooding the land with sea water.
(h) Royalty income from mines.
(i)

Income from butter and cheese making.

(j)

Receipts from TV serial shooting in farm house is not agriculture income.

Certain points to be remembered;

(a) Agricultural income is considered for rate purpose while computing tax of
Individual/HUF/AOP/BOI/Artificial Judicial Person.
(b) Losses from agricultural operations could be carried forward and set off with
agricultural income of next eight assessment years.
(c) Agriculture income is computed same as business income.

Income from saplings and seedlings in a nursery to be exempt Section 2 (IA)

Any
would

income

derived

be

agricultural

from

saplings

income

and

and
thus

seedlings
be

fully

grown

in

exempt

nursery

from

tax.

This is as per the Finance Act 2008 w.e.f. the AY 2009-20 10.

Illustration:
For the assessment year 201 3-2014 a male individual has a total income from trading in
cloth amounting to `2,02,000. Besides, he has earned 40,000 as income from agriculture.
The income tax payable by him will be computed as under:

On the first `2,00,000 of taxable non-agricultural income

Nil

On the next `40,000 of agricultural income

(falling under 10% slab)

Nil

On the next ` 2,000 of taxable non-agricultural

income@10%

200

IT on aggregated income of `2,02,000 + ` 40,000 = `2,42,000 =

200

Agricultural income which fulfils the above conditions is completely exempt from tax. The
manner of calculating tax on total income and agricultural income, is explained in
Illustration.

(B) GRATUITY

Gratuity is a retirement benefit. Gratuity Act, 1972 act envisages in

providing retirement

benefit to

the

workman

who

have

rendered

long

and

unblemished service to the employer. Gratuity is a reward for long and meritorious
service. Earlier, it was not compulsory for an employer to reward his employee at the time
of his retirement or resignation. But in 1972 the government passed the Payment of
Gratuity Act that made it mandatory for all employers with more than 10 employees to pay
gratuity.

Applicability of the Act: The act provides for the payment of gratuity to workers
employed in every factory, mine, oil field, plantation, port, railways, shop &
Establishments or educational institution employing 10 or more persons on any day of the
proceeding 12 months.
A shop or establishment to which the Act has become applicable shall continue to
be governed by the Act even if the numbers of persons employed falls below 10 at any
subsequent stage.

Here employees are defined as those hired on the companys payroll. Trainees and
interns are not eligible for this compensation.

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Eligibility criteria
Gratuity shall be payable to an employee on the termination of his employment after he
has rendered continuous service for not less than five years.
On his superannuation.
On his retirement or resignation.
On his death or disablement due to accident or disease.
Note: However, the condition of five years of continuous service is not necessary if service is
terminated due to death or disablement.

To whom is Gratuity Payable?

Gratuity is normally payable to the employee himself, however in the case of death of the
employee it shall be paid to his nominee & nomination has been made to his heirs. Incase
the nominee is a minor; share of the minor shall be deposited with the controlling authority
who shall invest the same for benefit of the minor, until he/she attains majority.

Maximum amount payable under the Gratuity Act:Maximum gratuity payable is Rs 10 lakhs for Government &Non Government
employees. [Section 4(3)] [Of course, employer can pay more. Employee has also right to
get more if obtainable under an award or contract with employer, as made clear in section
4(5)].

Nomination facility: -

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Yes, by filling Form F at the time of new joinee formality, each employee is required to
nominate one or more member of his family, as defined in the Act, who will receive the
gratuity in the event of the death of the employee.

Forfeiture of Gratuity:The gratuity of an employee whose service have been terminated for any Act of willful
omission or negligence causing any damage or loss to or destruction of property
belonging to the employer, gratuity shall be forfeited to the extent of the damage or loss
caused. The right of forfeiture is limited to the extent of damage.
The gratuity payable to an employee shall be wholly forfeited:
1.

If the services of such employee have been terminated for his riotous or disorderly

conduct or any other act of violence on his part, or

2.
If the service of such employee have been terminated for any act which
constitutes an offense involving moral turpitude, provided that such offense is committed
by him in the course of his employment.

Applicability to contract Employee:Yes, the only criterion is to serve at least 5 years of service at a stretch.

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Calculating gratuity
a)

In respect of Employees covered Under the Payment of Gratuity Act, 1972:

As per the Act, the gratuity amount is 15 days wage multiplied by the number of years put
in by you. Here wage refers to basic salary plus dearness allowance. Take the monthly
salary drawn by you last (basic + dearness allowance) at the time of resignation or
retirement. Divide this by 26. This gives you your daily salary. Multiply this amount by 15
days, and further by the number of years of service you have put in.

If you have put in 10 years and seven months in an organisation, your service period
will be taken to be 11 years. But if your service tenure is 10 years and five months, then for
the purpose of this calculation your tenure will be taken to be 10 years only.
Take an example. Suppose that your average monthly salary is Rs 26,000. Your
daily salary will be Rs 1,000. Multiply this by 15 and then by 10. The gratuity you are
entitled to after 10 years of service will be Rs 1.5 lakh.
Formula :- Gratuity shall be calculated as per the below formula:
Gratuity = Last drawn salary x 15/26 x No. of years of service
Your last drawn salary will comprise your basic + DA. For computation of gratuity,
your service period will be rounded off to the nearest full year.

b)

In respect of Employees not covered Under the Payment of Gratuity Act, 1972:

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For non-government employees, who are not covered under this Act, the manner of
calculating gratuity is different. First, the average salary is calculated: for this the average
of last ten months salary is taken (this will include the basic plus dearness allowance plus
commission as a percentage of turnover achieved by the employee). Divide this average
salary by 30 (ignore fractions). Now, multiply this amount by 15 and further with the
number of years of service put in. Dividing the daily salary by 30 instead of 26 does put
those not covered by the Gratuity Act at a disadvantage.

Formula :- Gratuity shall be calculated as per the below formula

Gratuity = Last drawn salary x x No. of years of service
Your last drawn salary will comprise your basic + DA+ commission on sales on turnover
basis. For computation of gratuity, your service period will not be rounded off to the
nearest full year. While calculating completed years, any fraction of the year will be
ignored. For instance, if the employee has a total service of 20 years, 10 months and 25
days, only 20 years will be factored into the calculation.
Tax treatment of gratuity: - For the purpose of exemption of gratuity under sec.10 (10)
the employees are divided under three categories:
1.

Any death cum retirement gratuity received by Central and State Govt. employees,

Defense employees and employees in Local authority shall be exempt.

2.

Any gratuity received by persons covered under the Payment of Gratuity Act,

1972shall be exempt subject to following limits:-

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For every completed year of service or part thereof, gratuity shall be paid at the rate

of fifteen days wages based on the rate of wages last drawn by the concerned employee.
o

The amount of gratuity as calculated above shall not exceed Rs. 10,00,000/-

3.

In case of any other employee, gratuity received shall be exempt, subject to the

following exemptions
o

Exemption shall be limited to half month salary (based on last 10 months average) for

each completed year of service or Rs. 10 Lakhs whichever is less.

o

Where the gratuity was received in any one or more earlier previous years also and

any exemption was allowed for the same, then the exemption to be allowed during the year
gets reduced to the extent of exemption already allowed, the overall limit being Rs. 10 Lakhs.

As per Boards letter F.No. 194/6/73-IT(A-1) Dated 19.06.73 exemption in respect of gratuity
is permissible even in cases of termination of employment due to resignation. The taxable
portion of gratuity will qualify for relief u/s 89(1).

Gratuity payment to a widow or other legal heirs of any employee who dies in active
service shall be exempt from income tax subject to provisions mentioned above Circular
No. 573 dated 21.08.90).
The ceiling of Rs. 10 lakh applies to the aggregate of gratuity received from one or more
employers in the same or different years.

Taxable under what head:- Gratuity received by an employee on his retirement is taxable
under the head Salary and gratuity received by the legal heir is taxable under the head
Income from Other Sources.

15

QUESTION: I am a pensioner from Orissa State Government. I retired in 2007 receiving

an amount of Rs. 3,00,000 as gratuity. But I received a further amount of Rs. 1.20 lakhs in
December 2002 consequent on revision of pay. At the time of my retirement the exemption
limit was Rs. 3.50 lakh. Am I eligible for the higher exemption limit under Sec. 10(10)
available at the time of receipt. The higher limit of Rs. 10 lakhs is raised by Gratuity
Amendment Bill 2010.

ANSWER: Every time the limit has been raised, such limit has only referred to the
retirement on or after the date on which it was raised. Hence the limit on the date of
retirement time would alone have to be considered, so exemption with reference to the
enhanced limit will not apply to the readers case. It is stated that the reader is a
government pensioner. There is no ceiling for Central or State pensioners. If the reader is a
retiree from the civil service of a State or held a civil post under a State or had even been
an employee of a local authority, the gratuity amount, that is received, is totally exempt
vide Sec. 10(10)(i) of the Income-tax Act irrespective of the date of retirement or the
notification.

16

Reference of Section 10(10)

(i) any death-cum-retirement gratuity received under the revised Pension Rules of the
Central Government or, as the case may be, the Central Civil Services (Pension) Rules,
1972, or under any similar scheme applicable to the members of the civil services of the
Union or holders of posts connected with defence or of civil posts under the Union (such
members or holders being persons not governed by the said Rules) or to the members of the
all-India services or to the members of the civil services of a State or holders of civil posts
under a State or to the employees of a local authority or any payment of retiring gratuity
received under the Pension Code or Regulations applicable to the members of the defence
services ;

(ii) any gratuity received under the Payment of Gratuity Act, 1972 (39 of 1972), to
the extent it does not exceed an amount calculated in accordance with the provisions of subsections (2) and (3) of section 4 of that Act ;

(iii) any other gratuity received by an employee on his retirement or on his becoming
incapacitated prior to such retirement or on termination of his employment, or any gratuity
received by his widow, children or dependants on his death, to the extent it does not, in either
case, exceed one-half months salary for each year of completed service [calculated on the
basis of the average salary for the ten months immediately preceding the month in which any
such event occurs, subject to such limitas the Central Government may, by notification in the
Official Gazette, specify in this behalf having regard to the limit applicable in this behalf to
the employees of that Government] :

Provided that where any gratuities referred to in this clause are received by an
employee from more than one employer in the same previous year, the aggregate amount
exempt from income-tax under this clause [shall not exceed the limit so specified]:

17

Provided further that where any such gratuity or gratuities was or were received in
any one or more earlier previous years also and the whole or any part of the amount of such
gratuity or gratuities was not included in the total income of the assessee of such previous
year or years, the amount exempt from income-tax under this clause

32

[shall not exceed the

limit so specified] as reduced by the amount or, as the case may be, the aggregate amount not
included in the total income of any such previous year or years.

Example: Sunil retired from a private organisation after working for 15 years 8 months.
On his retirement he received Rs. 5,00,000 as Gratuity. During the past 12 months from his
retirement his basic pay was Rs. 50,000 pm and DA was at Rs. 10,000 pm. His Taxable
gratuity amount will be;

Situation 1: If Sunils employer is covered under the Payment of Gratuity Act, 1972
Situation 2: If Sunils employer is not covered under the Payment of Gratuity Act, 1972

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(C ) PENSION

The tax treatment of pension in various cases is discussed below

There are different situations in which pension is received by an employee.
Accordingly the tax treatment for the same also differs. In a situation where pension is
received by an employee after retirement but during his lifetime, it is chargeable to tax as
follows
To discuss the tax treatment of the pension received, comprehensively, the employees
have been divided in two types, government and non-government. Even the pension received
can be of two types, commuted and uncommuted. Uncommuted pension is the periodical
payment of pension.
For instance, X gets monthly pension of Rs. 2,000/-. It is taxable as salary under
section 15 in the hands of a government as well as a non government employee. Commuted
pension is a lump sum payment in lieu of periodical payment. For instance after his
retirement, X gets 25 percent of his pension commuted for Rs. 60,000/- (after commutation
he will get the remaining 75% i.e. Rs. 1,500/- by way of monthly pension).
In this case, Rs. 60,000/- is commuted pension which X has received in lieu of 25%
of his monthly pension. The taxability of the commuted pension is dependent upon the status
of the employee and whether or not such employee has received gratuity. If such commuted
pension is received by a government employee (i.e. employee of the Central Government,
State Government, Local Authority and Statutory Corporation) who may or may not have
received gratuity, then such commuted pension would be completely exempt from tax.
If such commuted pension is received by a non-government employee who has
received gratuity, then only one-third of the pension which he is normally entitled to receive,
would be exempt from tax. If the same commuted pension is received by a non-government
employee who has not received gratuity, then only one-half of the pension which he is
normally entitled to receive is exempt from tax.

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If the payment in commutation of pension received by an employee exceeds the

aforesaid limits, such excess pension received is liable to tax in the assessment year relevant
to the previous year in which it is due or paid.
The assessee can however, claim relief under section 89. Another situation is where
pension is received by an employee as per the NPS. The New Pension Scheme or NPS is
applicable to new entrants to Government Service or any other employer. As per the scheme,
it is mandatory for persons entering the Government service on or after January 1, 2004 to
contribute 10 per cent of their salary every month towards a notified pension account. A
matching contribution is required to be made by the employer to the said account. The tax
treatment under the new scheme is as follows
1)

Contribution by the employer to the notified pension scheme (NPS) is first included

under the head Salaries in the hands of the employee.

2)

Such contribution is deductible to the extent of 10 per cent of the salary of the

employee under section 80 CCD(2)

3)

Employees contribution to the notified pension scheme (NPS) to the extent of 10 per

cent of the salary of the employee is also deductible under section 80CCD (1)
4)

When pension is received out of the aforesaid amount it will be chargeable to tax in

the hands of the recipient.

5)

Salary for the purpose of points 1 and 2 includes dearness allowance, if the terms

of employment so provide, but excludes all other allowances and perquisites.

6)

The aggregate amount of deduction under section 80C, 80CCC and 80CCD (1) i.e.

contribution by the employee towards the notified pension scheme cannot exceed Rs.
1,00,000/-.

Although from the assessment year 2012-13 onwards, employers contribution

towards NPS is NOT considered for the purpose of the monetary ceiling of Rs. 1,00,000/-.
Which means that any contribution made by the employer to the NPS would be deductible in
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the hands of the employee over and above the Rs. 1,00,000/- monetary limit but subject to 10
per cent of the salary. This section is called, section 80CCD.

Other situations are as follows

Sr.
No.

Different Situations

Tax Treatment

Pension received from the UNO

by the employee or his family
members

It is not chargeable to tax.

Family pension received by the

family members of the armed
forces

It is exempt under section 10(19) in some

cases

Family pension received by the

family members after the death
of an employee (not covered by
case 2)

It is taxable in the hands of the recipients

under section 56 under the head Income
from other sources. Standard deduction is
available under section 57 which is 1/3rd of
such pension or Rs. 15,000/- whichever is
lower.

(i) Any payment in commutation of pension received under the Civil Pensions
(Commutation) Rules of the Central Government or under any similar scheme applicable [to
the members of the civil services of the Union or holders of posts connected with defence or
of civil posts under the Union (such members or holders being persons not governed by the
said Rules) or to the members of the all-India services or to the members of the defence
services or to the members of the civil services of a State or holders of civil posts under a
State or to the employees of a local authority] or a corporation established by a Central, State
or Provincial Act ;
21

(ii) Any payment in commutation of pension received under any scheme of any other
employer, to the extent it does not exceed

(a) in a case where the employee receives any gratuity, the commuted value of onethird of the pension which he is normally entitled to receive, and
(b) in any other case, the commuted value of one-half of such pension, such
commuted value being determined having regard to the age of the recipient, the state of his
health, the rate of interest and officially recognised tables of mortality ;

(iii) any payment in commutation of pension received from a fund under clause (23AAB)

How to Calculate Taxable Pension?

The computation is as under: Family Pension received by the members of the
employee's family

xxx

Less: Standard Deduction (Lower of the following)

1/3 of the Family Pension

xxx

Rs.15,000

xxx

22

xxx
--xxx
Less: Any other expenditure

xxx
---

Less: Exemption under section:

Section 10(18)(ii)

xxx

Section 10(19)

xxx
--xxx
---

Taxable Pension

Xxx
---

Calculation
Let's consider Mr.A a Government Servant, died on 11-05-2008 whilst still being in service. In
terms of the rules governing his service, his wife Mrs.A is paid a family pension of Rs.9000
p/m and dearness allowance of 30%.
For AY 2012-13, to calculate the Tax on Pension received by Mrs.A, we have to first calculate
the taxable pension as given below:

23

Family Pension received by Mrs.A (9000 x 12)

1,08,000

32,400
--------

Dearness Allowance (30% of family pension)

Total Pension

Less:

1,40,400

Standard

Deduction

Least of the following:

1/3 of the total pension

46,800

Standard Amount

15,000

15,000
-------1,25,400
--------

Taxable Pension

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CONCLUSION:
By doing this project, I got to know about the Exemptions which can be availed under
Section 10 of the Income Tax Act. As per section 10 to 13A, certain incomes are either totally
exempt from tax or exempt up to a certain limit Such incomes which do not form part of total
income may also called incomes exempt from tax.

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BIBLIOGRAPHY:
1. M.Com Semester III Direct Tax Textbook.
2. IPCC Taxation Study Manual.
3. http://www.authorstream.com/Presentation/Yash%20Jain-1665785-income-exempt-taxaccording-section-10-act-1961/
4. http://www.indiataxes.com/Information/incometax/contents/exemptincome/exempt_inc
ome.htm
5. http://www.slideshare.net/sanjaySDessai/incomes-exempt-from-tax-under-section-10
6. Taxmann- Students guide to Income Tax.

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