Section 10 Of The Income Tax Act: Exemptions, Allowances, And Claim Process

Tax season shouldn't be an overwhelming situation. Instead, it can be an opportunity to learn how to save on those taxes. A critical element in this process is Section 10 of the Income Tax Act of 1961, which provides various exemptions and allowances to reduce taxable income.

The section comprises a broad category of allowances and includes leave travel allowances, house rent allowances, and other special child-related allowances for medical or educational purposes.

For example, imagine Rohan, a banker with 30 years of experience and also operating a small family farm. Rohan knows that the income earned by him on his job will be liable to taxation but is confused about his earnings from his farm. Surprisingly, he finds that Section 10 of the Income Tax Act exempts agricultural income, which means he will not be adding the farm's earnings to his income that is subject to taxation and can easily retain that income.
 

So, what kinds of income or allowances are eligible for tax benefits?

If such a question is popping in your head then this article is for you.

Like Rohan, if you also benefit from multiple income streams then you should understand the provisions of exemptions under Section 10. These provisions might help reduce the tax liability on the eligible income stream.

Curious about how these exemptions can benefit you? Let’s dive into the details, but before getting ahead, take a moment to decode Income Tax Returns-
 

What Is Income Tax Return (ITR)?

You file an Income Tax Return with the government, disclosing your income, assets, and tax liabilities for the year. In simple words, an ITR helps determine the tax liability by considering your income and any eligible deductions.

Why is this important?

Besides giving you the chance to benefit from any applicable deductions that may decrease your tax liability, the filing of an ITR ensures that you are fulfilling all your tax obligations.

In most cases, it is necessary to file an ITR to ensure proper reporting of income, deductions, and compliance; it is not just a routine.

 You must file an ITR in the following instances:

• Filing an ITR is compulsory if your income exceeds the specified limits set by tax authorities.
• An ITR is necessary if you are seeking a refund on excess taxes paid.
• If you have earned from or invested in foreign assets during the financial year.
• All firms and companies must file an ITR, regardless of whether they have profit or loss.
• Losses from business, profession, or capital gains can only be carried forward to future years if the ITR is filed before the due date.
• Filing is mandatory if you have deposited-
  • Rs. 1 crore or more in one or multiple bank current accounts. (Note: There’s no such requirement for deposits in post office current accounts.)
  • Over Rs. 50 lakhs in either one or more savings accounts.
  • If you’ve spent more than Rs. 2 lakh on foreign travel (for yourself or others), an ITR is required.
• Those with yearly electricity bills exceeding Rs. 1 lakh must file an ITR.
• Filing is required if Tax Deducted at Source (TDS) or Tax Collected at Source (TCS) exceeds:
  • Rs. 25,000 for regular taxpayers.
  • Rs. 50,000 for senior citizens who are aged 60 or above.
• Filing ITR is mandatory if -
  • Your business turnover is over Rs. 60 lakh.
  • Your professional income is above Rs. 10 lakh.

Filing an ITR enables you to officially report your income, claim applicable deductions, and avoid penalties for non-compliance.
 

What Is Section 10 Of Income Tax Act?

Section 10 of the Income Tax Act of 1961 deals with income that is exempt from tax in India. It outlines the specific categories of incomes that are either wholly or partly exempt from inclusion in a person's or an entity's total taxable income.

Taxpayers need to take special care regarding the exemptions they qualify for since the total taxable income is substantially reduced by the Section 10 exemptions. They can thereby optimise their tax savings and their management of funds.

Section 10 is important to taxpayers who are keen to maximise the available exemptions in an efficient and lawful way. It forms a very useful financial planning tool for reducing the burden of taxes on individuals and businesses.

Section 10 benefits can only be availed of if the taxpayer files its ITR. The underlying objective of this section is to grant financial security and promote common economic welfare to both individuals and enterprises through efficiency in tax-driven investments and savings.
 

Features Of Section 10 Of The Income Tax Act, 1961

Here are some features -

• Multiple Sources of Exempt Income
  The fact that Section 10 covers a wide variety of revenue streams is one of its most notable aspects. This implies that this provision may allow for exemptions for taxpayers with varying income sources.
   
• Limitations and Eligibility Requirements
  Every exemption under Section 10 has certain eligibility requirements and limitations. This means that to be eligible for certain exemptions, taxpayers must fulfil specific requirements.
   
• Importance of Proper Documentation
  In order to be eligible for the Section 10 exemption list, taxpayers must submit the correct documentation. This covers records like pay slips, proof of expenditures, and other pertinent information. It is essential to keep thorough and accurate records to guarantee that the exemptions are properly claimed.
  
  Although it has limitations, Section 10 of the Income Tax Act of 1961 essentially aims to provide tax relief on specific kinds of income. Both individuals and businesses benefit from these exemptions by having their total taxed income reduced. While doing so, they encourage investments, savings, and employment-related benefits, all of which are in line with larger social welfare goals. This makes Section 10 a crucial tool for lowering tax liabilities and fostering financial stability.
   

Individuals Receiving Allowances Exemption

Salaried employees are the primary category eligible for tax exemptions on allowances under Section 10 of the Income Tax Act, 1961. However, it's crucial to remember that certain provisions also apply to professionals and entrepreneurs.

So, who is actually eligible for these exemptions?

Well, certain groups of people are entitled to special exclusions, such as government workers and those employed in isolated or tribal locations. Each of these groups can benefit from allowances that are tailored to their unique work conditions.

These exemptions are strategically crafted to provide financial relief and lower taxable income. By paying for specific work-related expenses, the exemptions are intended to be in line with the nature of the job or its function. 
 

What Are Exemptions Under Section 10?

Certain types of income are exempt from taxes under Section 10 of Income Tax Act of 1961, which provides a means of lowering taxable income. Depending on their unique situation, these exemptions are crucial in helping people achieve financial relief.

But what is covered by these exemptions specifically? Well, they're made to meet a number of demands, including work, school, retirement, housing, and travel. These exemptions might result in substantial tax savings by lowering the taxable income.

It's important to remember that every Section 10 exception has unique requirements and limitations, which could change over time. As a result, it is essential to keep up to date and thoroughly read the provisions. It's a good idea to speak with a tax expert or financial counsellor to fully grasp your eligibility and ensure compliance.

Another important aspect to keep in mind is that you will not be able to claim Section 10 exemptions if you opt for the new tax regime. In India, there are two different tax structures that are accessible to taxpayers:

• The New Regime, and
• The Old Regime.

Let's examine each choice in more detail.

There are a number of deductions and exemptions u/s 10 of the Old Regime that can lower taxable income. The New Regime, on the other hand, restricts the number of exemptions and deductions you can claim while giving lower tax rates.

The noteworthy element is that each fiscal year, taxpayers are free to select between the two regimes. This implies that, depending on your unique financial circumstances, you can choose the one that benefits you the most.

Are you unsure which regimen suits you the best?

The Income and Tax Calculator on the Income Tax Portal allows you to calculate and compare your possible tax liability under both regimes.

Listed below are some of the main exemptions - 

Section 10(5) Of The Income Tax Act

The Income Tax Act's Section 10(5) provides a tax exemption for Leave Travel Allowance (LTA), which covers domestic travel costs such as bus, train, and flight fares. This is a detailed explanation so you know how it works -

First, it's crucial to remember that the only expenses exempted are those related to travel, such as flight, train, or bus fares. This exemption does not apply to things like sightseeing, local transportation, accommodation, and food.

For employees who get LTA as part of their compensation package, the exemption only applies to the LTA amount included in their Cost to Company (CTC). However, it's important to keep in mind that the exemption only applies to the actual amount spent on travel.

For example, if an employee spends Rs 20,000 on travel but the LTA is Rs 50,000, only Rs 20,000 will be exempt, and the rest of Rs 30,000 will be taxable.

Now, the exemption under Section 10(5) may vary based on the tax system you select. According to Section 17(1), if you choose the Old Tax Regime, the LTA you receive cannot be greater than your income. However, the LTA exemption would be zero if you decide to use the New Tax Regime.

Therefore, it is essential to know the details of your LTA and how it fits into the tax regime you choose.

Section 10(26) Of The Income Tax Act

Members of Scheduled Tribes who live in specific geographic regions are eligible for tax exemptions under Section 10(26) of the Income Tax Act, 1961. Therefore, you are eligible for these exemptions if you belong to a Scheduled Tribe in states such as Tripura, Nagaland, Mizoram, Manipur, or Arunachal Pradesh.

What is covered in particular?

Well, income from any source within these states is eligible for exemption. This covers revenue from dividends or interest on securities in addition to earnings from local sources.

The ultimate goal of this provision is to offer Scheduled Tribe members residing in these areas tax exemption, thereby boosting their financial stability.

Section 10(14)(i) Of The Income Tax Act

According to Section 10(14)(i) of the Income Tax Act, costs for certain purposes connected to an employer's company are excluded from taxes. It provides cover for expenses such as transportation, research allowance, and other costs.

But there is a key condition -

The exemption is only applicable if the expenditures were actually incurred for the specified business goals. There is also a cap on the exemption amount. It can only be as much as the employee's actual expenditures on these costs or it should be less than the amount of the allowance.

Here is a significant difference depending on the tax regime selected-

• According to Section 17(1), if you choose the Old Tax Regime, the benefits or allowances allowed for business-related expenses cannot be greater than the salary you receive.
• However, the exemption for these benefits or allowances would be reduced to zero if you opted for the New Tax Regime.

Therefore, it's critical to keep track of these charges and comprehend how they will affect your taxable revenue based on your tax regime.

Section 10(11) Of The Income Tax Act

When you retire or resign, the interest you earn from a provident fund is exempt from taxes under Section 10(11) of the Income Tax Act. This implies that any interest accrued in your provident fund will be tax-free upon your exit from employment.

However, there is a significant modification to take note of -

Starting from April 1, 2021, interest income earned on contributions to the fund that exceed Rs. 2,50,000 made by the employee in any previous year is no longer exempt.

Therefore, even after you retire or resign, the interest you earn on contributions beyond this threshold will be taxable. Thus, it is crucial to know this restriction and how it may affect your tax situation.

Section 10(34) Of The Income Tax Act

Dividends from investments in Indian companies are exempt from taxation under Section 10(34) of the Income Tax Act, up to a maximum of Rs. 10,000. Therefore, dividends that fall within this range are tax-free, which provides some relief for lesser investment incomes.

It's crucial to remember that this exemption only applies to dividends received through March 31, 2020. Dividends received after this date or above Rs. 10,000 will be taxed. Knowing this limit will enable you to more accurately determine the potential tax implications of your dividend income.

Section 10(26AAA) Of The Income Tax Act

Section 10(26AAA) of the Income Tax Act provides an important tax exemption for Sikkimese individuals. This exemption covers income from dividends or interest on securities, as well as income received from any source within Sikkim.

Section 10(38) Of The Income Tax Act

The Income Tax Act's Section 10(38) exempts long-term capital gains from income tax when they derive from the sale of equity shares or units of an equity-oriented mutual fund. The Securities Transaction Tax (STT) is still applicable, but long-term gains from holding these investments won't be included in your taxable income.

It's crucial to remember that this exemption only covers long-term capital gains made through March 31, 2018. When arranging your investments, keep in mind that gains made after this date are subject to different tax laws.

Section 10(23C) Of The Income Tax Act

Medical and educational institutions having yearly revenues of Rs. 5 crore or less are exempt from paying taxes under Section 10(23C) of the Income Tax Act. 

Section 10(37) Of The Income Tax Act

Section 10(37) specifies that capital gains resulting from the forcible purchase of urban agricultural property are exempt from tax. A few crucial requirements must be fulfilled in order to be eligible for this exemption -

• Land Use Requirement: The land must have been actively utilised for farming for at least two years before the sale date.
• Approval Requirement: The Reserve Bank of India (RBI) or the Central Government must authorise the forcible acquisition as part of a plan.

Owners of urban agricultural land may qualify for Section 10(37) capital gains tax relief by fulfilling these requirements.

Section 10(10A) Of The Income Tax Act

Employees of the government are excluded from paying taxes on the amount received from accumulated pensions under Section 10(10A) of the Income Tax Act. In order to lessen the financial burden on pensioners, this section offers significant tax relief on pension funds.

The commuted value of the pension, or the lump sum amount paid, cannot be greater than the salary amount specified under Section 17(1) of the Act, as stated in Sec. 10(10A).

Section 10(10D) Of The Income Tax Act

Income from a life insurance policy, including any bonus payments related to it, is excluded from taxes under Section 10(10D) of the Income Tax Act. However, some policy types are ineligible to receive this exemption -

• Specially Abled Dependents' Policies: This exemption does not apply to life insurance plans purchased for a dependent family member who is specially abled.
• Key Man Insurance Plans: Key Man insurance policies are also not eligible.
• High-Premium Policies: You cannot get insurance if the premium is more than 10% of the total amount guaranteed.

The eligibility for tax exemption varies based on the policy issuance date and specific conditions-

• Policies Issued After April 1, 2012: Section 10(10D) provides complete tax exemption for the amount received upon the policy's maturity, surrender, or insured's death, provided that the annual premium paid does not exceed 10% of the sum promised. Bonuses obtained under these policies are likewise exempt from taxes.
• Policies Issued Prior To April 1, 2012: The exemption threshold for premiums under this insurance is slightly higher. All funds received at maturity or as a bonus are completely exempt from taxes as long as the annual premium does not exceed 20% of the sum assured.
• Policies (Issued After April 1, 2013) For People With Disabilities: Sections 80U and 80DDB specify the premium threshold for plans issued on the life of an individual with a disability or an illness as adjusted to 15% of the sum assured.

Any amount received at maturity, policy surrender, or in case of death is exempt from taxes under Section 10(10D) as long as this limit is not exceeded.

Section 10(35) Of The Income Tax Act

Any revenue received from the selling of specific mutual fund units is exempt from taxes under Section 10(35) of the Income Tax Act.

It's crucial to remember that this exemption only includes revenue received until March 31, 2020. Income received after this date from specified mutual fund units is no longer eligible for this section's tax exemption.

Section 10(10) Of The Income Tax Act

Under certain circumstances, employees who receive gratuities are excluded from paying taxes under Section 10(10) of the Income Tax Act. A gratuity is a sum of money given to employees as an expression of appreciation for their contributions and hard work at the end of their period of service.

This section completely exempts gratuities given to government employees. The exemption, however, is contingent upon whether private sector workers are covered under the Payment of Gratuity Act.

It's also crucial to remember that there is a cap on the death-cum-retirement gratuity exemption under Section 10(10)- the maximum exempt sum cannot be more than Rs. 20,00,000. 

Internet Allowance Exemption Under Section 10

Under Section 10(14) of the Income Tax Act, any Internet allowance offered by an employer is eligible for tax exemption. Rule 3(7)(ix) states that workers are exempt from paying taxes on reimbursements and fixed allowances for internet or phone costs incurred while carrying out their official responsibilities. This implies that workers can claim a 100% tax exemption on the amount they are charged for using their phones or the Internet for work-related purposes.

This exception applies to the following types of bills -

• Bills from landlines
• Bills for mobile phones
• Bills for mobile internet
• Bills for home Wi-Fi connections

Although the amount of compensation for these costs is not limited, government regulations stipulate that it must be reasonable and consistent with the employee's pay grade.

A few vital points that should be remembered are-

• Usually, reimbursements are restricted to a single broadband or mobile connection under the employee's name.
• These reimbursements can only be used for official purposes.
• To get the reimbursement, employees must present their internet or phone bills.
• These benefits may be provided by employers on a reimbursement basis or as fixed benefits. Employees may submit a tax claim for the actual amount that is owed or the employer-provided amount, whichever is less.
• This tax exemption applies to both postpaid and prepaid connections. However, depending on their specific employment role and the company's policy, the amount of reimbursement may differ.

Employees can utilise the exemptions for internet and telephone allowances regardless of the tax regime they have opted to reduce their taxable income.

Food Allowance Exemption Under Section 10

The Income Tax Act's Section 10(14) provides an annual food allowance exemption of up to Rs. 26,400. This exemption is based on a monthly average of 22 working days and two meals per working day.

In order to be eligible, the food allowance must specifically cover meals consumed while carrying out official activities. But, if this allowance is provided as a fixed amount without requiring documentation of actual expenditure, it may be seen as a part of the salary and thus is taxable.
 

How To Claim Exemption Under Section 10?

You must file an income tax return (ITR) in order to claim an exemption under Section 10. Given that these exemptions are income-based, it is imperative to declare all earned income in addition to any applicable exemptions so as to ensure precise tax computations. To assist you with the claim exemption process, below is a guide for you -

• A Comprehensive Guide
  • Determine The Applicable Exemptions:
    To begin, examine your salary structure to figure out what benefits or sources of income are exempt from taxes under Section 10.
     
• • Compile the Documentation:
    Get all the documentation you'll need for the exemptions you intend to claim. These could consist of -
• • • Pay slips reflecting various allowances.
    • Form 16 from your employer, which details your salary and TDS deductions
    • Bills and receipts for travel and education fees that are linked to the leave travel allowance exemption under Section 10(5) and the annual receipts received by educational institutions under Section 10(23C).
       
  • Provide Proofs To Employer:
    Submit to your employer all pertinent documentation at the end of the fiscal year. This allows them to compute TDS on your compensation while taking these exemptions into account.
     
• • Check Form 16:
    Check your Form 16 to make sure you have included all applicable exemptions. It is vital to confirm the accuracy of Form 16, which summarises your income and tax deductions.
     
• • File Your Income Tax Return (ITR):
    To file your taxes, use the relevant ITR form, being sure to include all of your income sources, such as those that qualify for Section 10 exemptions.
     
• • Preserve Records:
  • Maintain copies of all invoices and documentation. In the event of an audit or subsequent tax enquiries, keeping correct documents might turn out advantageous.

You can effectively claim exemptions under Section 10 by following these procedures, which will lower your taxable income and total tax obligation.
 

Is Leave Encashment Exempted From Income Tax?

Depending on when it is received and the nature of the employment, leave encashment (the payout for unused leave) is handled differently under the Income Tax Act.

Leave encashment during employment is completely taxable and falls under the category of "Income from Salary." However, when an employee retires or resigns, their tax treatment changes -

• Government Employees:
  Any leave encashment received by either central or state government employees upon retirement or resignation is completely exempt from income tax.
   
• Employees In The Private Sector:
  Leave encashment earned following retirement or resignation is likewise regarded as "Income from Salary" and is taxable for private sector employees. However, the Income Tax Act's Section 10(10AA) exemptions are applicable. Based on the amount remaining after exemptions, the tax is computed in accordance with the applicable income tax slab.
   

Important Points To Consider While Claiming Exemptions

To ensure a seamless legal process when requesting exclusions, there are a few important considerations to make-

1. Employment Status
2. Appropriate Documents
3. Specified/Intended Purpose
4. Using the Claim Amount (For a Particular Purpose)
5. Requirements for Recognition and Approval
6. Caps and Exemption Limits
7. Time Frame Details
8. Knowledge of Tax Law Changes

Here are some more pointers for a seamless tax filing experience in addition to those mentioned above -

• Select The Appropriate ITR Form
  Depending on your sources of income and the exemptions you intend to claim, choose the correct ITR form. It is essential that you precisely fill out the form and include every relevant detail.
   
• Check For Accuracy
  Check your tax return carefully for correctness and completeness before filing. By doing this, mistakes that can result in scrutiny or penalties can be prevented.
   
• Maintain Filed Tax Returns And All Related Records
  For future reference or possible Income Tax Department audits, preserve copies of your filed tax return and any supporting documentation.

Thus, by following these procedures, you can maximise your available exemptions and steer clear of typical tax filing errors.
 

Common Mistakes To Avoid In Claiming Section 10 Exemptions

You can avoid these typical mistakes when making Section 10 exemption claims -

• Inadequate Documentation
  Failure to provide the necessary bills, receipts, and other evidence of expenses is a common mistake that can result in exemption requests being denied. To support your claim, be careful to collect and submit any necessary proof.
   
• False Claims
  If an exemption is claimed without meeting the requirements outlined in the Income Tax Act, penalties may be imposed. Before submitting a claim, it is crucial to confirm that all requirements have been fulfilled because each exemption has specific requirements.
   
• Missed Due Dates
  You risk losing your eligibility for benefits if you miss the deadlines for filing exemption claims or providing supporting documents. The key to avoiding complications is to remain mindful of deadlines and turn in everything on time.
   
• Misinterpreting The Eligibility Criteria
  Without properly comprehending the qualifying requirements, many people make the error of assuming they are eligible for specific exemptions. To prevent claiming exemptions for which you are ineligible, take the time to read over and comprehend the requirements for each one.  It's essential to assess whether the exemption aligns with the selected tax regime and stay updated on any changes.
   
• Inadequate Record-Keeping
  Keeping incomplete documentation can cause problems when it comes to audits or tax assessments. Keep detailed records of all transactions and exemption requests to prevent this. Thorough documentation guarantees transparency and provides a robust defence against any enquiries from tax authorities.
   
• Not Including Sources Of Income
  Make sure to reveal all sources of income, including those that qualify for exemptions. Being thorough in your income declarations is crucial because failing to disclose some incomes might result in penalties for underreporting.
   
• Making Use Of The Incorrect ITR Form
  If you choose the incorrect income tax return form, your return may be deemed defective. Verify that you are utilising the appropriate form in accordance with your planned exemptions and your sources of income.
   
• Skipping Return Verification
  It's important to confirm your return within 30 days of filing it. Unverified returns are regarded as invalid, which may cause issues later on.
   
• Overlooking The Reconciliation On Form 26AS
  Make sure the data on Form 26AS corresponds to what you have on file. Careful reconciliation is essential since any differences between this form and your file could attract the attention of the Income Tax Department.

Want to speed up the exemption process and stay on top of Section 10 tax rules? Just avoid the above common mistakes and you are good to go!
 

Wrapping Up,

Section 10 of Income Tax Act is an effective means that can actually put money back into people's pockets. Think about Bengaluru, one of India's software hotspots, where thousands of employees use benefits like HRA to help with the high cost of living. Or think about how a family's annual budget can be significantly impacted by claiming their rightful tax deductions.

In order to encourage us to invest in necessities like family, housing, and such, the government wants to reduce financial constraints. Knowing Section 10 is essential for making decisions that promote our future and well-being, not just to minimise taxation. Understanding these exclusions can genuinely enable us to improve our money management and create a safe future.

Understanding exemptions and allowances under Section 10 of the Income Tax Act is essential, especially when considering other provisions like Section 206AB of Income Tax Act, which deals with tax deduction at source for non-filers, and Section 115BAA of Income Tax Act, which provides a lower tax rate for domestic companies.

Disclaimer: The content provided here is intended solely to inform and explain. It has been compiled from various sources and may be subject to change. Since we are not an expert on this topic, we recommend consulting a qualified professional for better understanding or before taking any action.
 

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