Incomes Exempt from Tax

EXORDIUM OF CHPATER
An exempt income is not charged to tax, i.e., Income-tax Law specifically grants exemption from
tax to such income. Incomes which are chargeable to tax are called as taxable incomes. In this
chapter incomes are divided under three head:
I. Exempted income for all assesses
II. Taxable income for all assesses
III. Tax free (Rebatable) income for all assesses
I. EXEMPTED INCOME FOR ALL ASSESSES
Exempted incomes are those incomes which are not included in income of the assessee. There are
many incomes which are exempted as per Section 10. Consequently, such income shall not enter into
the computation of taxable income. There are two types of exempted incomes;
A. Fully exempted
B. Partially exempted
A. Fully Exempted Incomes for All Assesses
(1) Agricultural Income [Section 10(1)]: Agricultural income is exempted from income tax if
agriculture land is situated in India.
(2) Sum received by a Member from HUF [Section 10(2)]: 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, sum has been paid out of the income of the estate belonging to the family is
exempt from tax.
Example: HUF earned ` 5,00,000, during the previous year 2020-21 and it is not chargeable
to tax. Mr. X, a coparcener is earning individual income of ` 30,000 p.m. Besides his individual
income, Mr. A receives ` 80,000 from his HUF. Mr. X will pay tax on his individual income but
any sum of money received by him from his HUF is not chargeable to tax in the hands of
coparcener whether the HUF has paid tax or not on that income.
(3) Share of Income from the Firm [Section 10(2A)]: A partner share of profit received by a
partner from a firm is exempt from tax in the hands of the partner. Further, share of profit
received by a partner of LLP from the Limited Liability Partnership will be exempted from tax
in the hands of such partner. This exemption is limited only to share of profit and does not
apply to interest on capital and remuneration received by the partner from the firm LLP.
Note: The CBDT has clarified that the income of a firm is to be taxed in the hands of the firm only and
the same can under no circumstances be taxed in the hands of its partners.
(4) Interest paid to Non-residents [Section 10(4)(i)]: In the case of a non-resident, any
income by way of interest on such securities or bonds as the Central Government may, by
notification in the Official Gazettee, specify in this behalf, including income by way of premium
on the redemption of such bonds is exempt from tax.
3.2 Income Tax Law & Practice

(5) Interest paid to Non-residents on Non-resident Account [Section 10(4)(ii)]: In the

case of a non-resident, any income from interest on moneys standing to his credit in a non-
resident (external) account in any bank in India in accordance with the Foreign Exchange
Regulation Act, 1947, and any rules made thereunder is exempt from tax.
(6) Interest paid to a person of Indian origin or citizen of India who is Non-resident
[Section 10(4B)]: In the case of an individual, being a citizen of India or a person of Indian
origin, who is a non-resident, any income from interest on such savings certificates issued
before the 1st day of June, 2002 by the Central Government as that Government may, by
notification in the Official Gazette, specify in this behalf is exempt from tax. This exemption is
available only if the individual has subscribed to such certificates in foreign currency or other
foreign exchange remitted from a country outside India in accordance with the provisions of
the Foreign Exchange Act, 1973 FEMA, 1999 and any rules made thereunder.
(7) Interest payable by any Indian company to non-resident [Section 10(4C)]: Interest
payable to a non-resident, not being a company, or to a foreign company, by any Indian
company or business trust in respect of monies borrowed from a source outside India by way
of issue of rupee denominated bond during the period beginning from the 17th day of September,
2018 and ending on the 31st day of March, 2019, income of such fund is fully exempted.
[Inserted by the Act No. 23 of 2019, w.e.f. 1-4-2019]
(8) Remuneration received by officials of Embassies etc. of Foreign States who is not
citizen of India [Section 10(6)(ii)]: The remuneration received by officials of an embassy,
high commission etc. or members of the staff resident in such foreign countries shall be exempt
only if the remuneration of the corresponding officials or, as the case may be, members of the
staff, if any, of the Government resident for similar purposes in the country concerned enjoys a
similar exemption in that country and such members of the staff are subjects of the country
represented and are not engaged in any business or profession or employment in India.
(9) Remuneration received by an individual who is not a citizen of India for services
rendered in India as an employee of foreign enterprise [Section 10(6)(vi)]: Income
shall be exempt in the following case if, services rendered by employee during his stay in
India, fulfilled the following conditions:
(a) The foreign enterprise is not engaged in any trade or business in India; or
(b) His stay in India does not exceed in the aggregate a period of ninety days in such
previous year; and
(c) Such remuneration is not liable to be deducted from the income of the employer chargeable
under this Act;
(10) Remuneration received by Foreign Government employees who is not a citizen of
India for specified training [Section 10(6)(xi)]: Any remuneration received by an employee
of the Government of a foreign State during his stay in India in connection with his training in
any establishment or office of, or in any undertaking owned by –
(i) the Government; or
(ii) any company in which the entire paid-up share capital wholly or partly held by the
Central Government, or any State Government or Governments; or
(iii) any company which is a subsidiary of a company referred to in item (ii); or
(iv) any corporation established by or under a Central, State or Provincial Act; or
(v) any society registered under the Societies Registration Act, 1860, or under any other
corresponding law for the time being in force and wholly or partly financed by the
Central Government, or any State Government or State Governments.
Incomes Exempt from Tax 3.3

(11) Allowances and Perquisites paid by Government to its Employees serving outside
India [Section 10(7)]: Any allowances or perquisites paid or allowed as outside India by the
Government to a citizen of India for rendering service outside India are exempt from tax.
(12) Payment received under Bhopal Gas Leak Disaster Act, 1985 [Section 10(10BB)]:
Any amount received under the provision of such Act or any scheme framed thereunder shall
be fully exempted but in case payment is received against a loss or damage, for which deduction
has been claimed earlier, it shall be taxable.
(13) Compensation of any Disaster [Section 10(10BC)]: Any amount received or receivable
from the Central Government or a State Government or a local authority by an individual or
his legal heir by way of compensation on account of any disaster, is exempt from tax.
(14) Tax on Non-monetary Perquisites paid by Employer [Section 10(10CC)]: The Income
tax actually paid by the employer himself on perquisite provided to the employee is exempt
from tax.
(15) Life Insurance Policy [Section 10(10D)]: Any sum received under a life insurance policy,
including the sum allocated by way of bonus on such policy is fully exempt from tax. However,
the amount shall not be exempted in following cases:
(i) Any sum received under Section 80DD(3) or 80DDA(3).
(ii) Any sum received under a Keyman insurance policy.
(iii) Any sum received under an insurance policy issued on or after 1 April, 2003 but on or
before the 31 March, 2012 in respect of which the premium payable for any of the years
during the term of the policy exceeds 20% of the actual capital sum assured.
(iv) Any sum received under an insurance policy issued on or after the 1 April, 2012 in
respect of which the premium payable for any of the years during the term of the policy
exceeds 10% of the actual capital sum assured:
(v) Any sum received under an insurance policy issued on or after the 1 April, 2013 is for
insurance on life of any person, who is:
(a) A person with disability or a person with severe disability as referred to in Section
80U; or
(b) Suffering from disease or ailment as specified in the rules made under Section
80DDB, in respect of which the premium payable for any of the years during the
terms of policy exceeds 15% of the actual capital sum assured.
(16) Payment from Provident Fund [Section 10(11)]: Any payment from a provident fund to
which the Provident Fund Act, 1925 applies or from any other Provident Fund set-up by the
Central Government is exempt from tax.
(17) Payment from Sukanya Samriddhi Account [Section 10(11A)]: Any payment from an
account, opened in accordance with the Sukanya Samriddhi Account Rules, 2014 made under
the Government Savings Bank Act, 1873 is exempt from tax.
(18) Interest Incomes [Section 10(15)]: Interest incomes which are exempt under
Section 10(15) could be better explained with the help of following table –
Section Income Exemption to
10(15) (i) Interest, Premium on redemption, or other All assessee
payment on notified securities, bonds, certificates,
and deposits, etc. (subject to notified conditions
and limits)
3.4 Income Tax Law & Practice

Section Income Exemption to

10(15) (ii)(b) Interest on notified Capital Investment Bonds Individual/HUF
notified prior to 1-6-2002
10(15) (ii)(c) Interest on notified Relief Bonds Individual/HUF
10(15) (ii)(d) Interest on notified bonds (notified prior to Individual – NRI/nominee
1-6-2000) purchased in foreign exchange or survivor of NRI/
subject to certain conditions individual to whom bonds
have been gifted by NRI
10(15) (iii) Interest on securities Issue Department of
Central Bank of Ceylon
10(15) (iii)(a) Interest on deposits made with scheduled bank Bank incorporated with
approval of RBI abroad
10(15) (iii)(b) Interest payable to Nordic Investment Bank Nordic Investment Bank
10(15) (iii)(c) Interest payable to the European Investment European Investment
Bank loan granted by it in pursuance of frame- Bank
work – agreement dated 25-11-1993 for Financial
Corporation between Central Government
and that bank
10(15) (iv)(a) Interest received from Government or from All assessee who have
local authority on moneys lent to it before lent money, etc., from
1-6-2001 or debts owed by it before 1-6-2001, sources outside India
from sources outside India
10(15) (iv)(b) Interest received from industrial undertaking in Approved foreign
India on moneys to it under a loan agreement financial institution
entered into before 1-6-2001
10(15) (iv)(c) Interest at approved rate received from Indian All assessee who have
industrial undertaking on moneys lent or debt lent such money, or in
incurred before 1-6-2001 in a foreign country favour of whom such debt
in respect of purchase outside India of raw been incurred
materials, components or capital plant and
machinery, subject to certain limits and conditions
10(15) (iv)(d) Interest received at approved rate from All assessee who have
specified financial institutions in India on moneys lent such moneys
lent from sources outside India before 1-6-2001
10(15) (iv)(e) Interest received at approved rate from other All assessee who have
Indian financial institutions or banks on moneys lent such moneys
lent for specified purposes from sources out-
side India before 1-6-2001 under approved
long agreement
10(15) (iv)(f) Interest received at approved rate from All assessee who have
Indian industrial undertaking on money lent in lent such moneys
foreign currency from sources outside India
under loan agreement approved before 1-6-2001
Incomes Exempt from Tax 3.5

Section Income Exemption to

10(15) (iv) (fa) Interest payable by scheduled bank, on Non-resident or individual/
deposits in foreign currency when acceptance HUF who is not ordinarily
of such deposits by bank is approved by RBI resident in India
10(15) (iv) (g) Interest received at approved rate, from All assessee who have
Indian public companies eligible for deduction lent such money
under Section 36(1)(viii) and formed with
main object of providing long-term housing
finance, on moneys lent in foreign currency
from sources outside India under loan agree-
ment approved before 1-6-2003
10(15)(iv)(h) Interest received from any public sector All assessee
company in respect of notified bonds or
debentures and subject to certain conditions
10(15)(iv) (i) Interest received from Government on deposits Individual – Employee of
in notified scheme out of moneys due on account Central Government/
of retirement State, Government/Public
sector company
10(15) (v) Interest on securities held in Reserve Bank’s SGL Welfare Commissioner,
A/c No. SL/DH-048 and Deposits made after Bhopal Gas Victims, Bhopal
31-3-1994 for benefit of victims of Bhopal Gas
Leak Disaster held in such account with RBI or
with notified public sector bank
10(15) (vi) Interest on Gold Deposit Bonds issued under the All assessee
Gold Deposit Scheme, 1999 or deposit certificates
issued under the Gold Monetisation Scheme, 2015
10 (15)(vii) Interest on notified bonds issued by a local All assessee
authority/State pooled finance entity
10 (15) (viii) Interest on deposit made on or after 1-4-2005 in an Non-resident or person
Offshore Banking Unit referred to in Section 2(u) who is not ordinarily
of the Special Economic Zones Act, 2005 resident

(19) Educational Scholarship [Section 10(16)]: Any amount received as educational scholarship
(i.e., scholarship to meet the cost of education is exempt from tax in the hands of recipient).
(20) Daily allowance received by MPs and MLAs [Section 10(17)]: Following allowances
are exempt from tax of Member of Parliament and Member of State Legislature-
(i) Daily allowance received by any person by reason of his membership of Parliament or
of any State Legislature or of any Committee thereof.
(ii) Any allowance received by any person by reason of his membership of Parliament
under the Members of Parliament (Constituency Allowance) Rules, 1986.
(iii) Any constituency allowance received by any person by reason of his membership of
any State Legislature under any Act or rules made by that State Legislature.
(21) Awards [Section 10(17A)]: Any payment made, whether in cash or in kind is exempt from tax:
(i) Any award instituted in the public interest by the Central Government or any State Government
or instituted by any other body and approved by the Central Government in this behalf.
3.6 Income Tax Law & Practice

(ii) Any reward by the Central Government or any State Government for such purpose as
may be approved by the Central Government in this behalf in the public interest.
(22) Pension to Gallantry Award Winner [Section 10(18)]: Pension received by an individual
who was employee of the Central Government or State Government and who has been
awarded Param Vir Chakra or Maha Vir Chakra or Vir Chakra or any other notified gallantry
award is exempt from tax.
Family pension received by any member of such individual is also exempted.
(23) Family Pension received by the family members of Armed Forces [Section 10(19)]:
From the Assessment Year 2005-06, family pension received by the widow or children or
nominated heirs, of a member of armed forces (including paramilitary forces) of the Union, is
exempt from tax in the hands of such family members, if the death of such member of armed
forces has occurred in the course of operational duty in prescribed circumstances and subject
to such conditions as may be prescribed is fully exempt from tax.
(24) Annual value of one Palace [Section 10(19A)]: Annual value of any one palace in the
occupation of a former ruler is exempt from tax.
(25) Income received on behalf of Regimental Fund [Section 10(23AA)]: Any income received
by any person on behalf of any Regimental Fund or non-Public Fund established by the armed
forces of the Union for the welfare of the past and present members of such forces or their
dependents, is exempt from tax.
(26) Income of a fund established for welfare of employees or their dependents [Section
10(23AAA)]: Income of such fund is fully exempted if, the fund applies its income or
accumulates it for application to the objects for which it is established and invest its fund and
contribution and other sums in the forms or modes as specified. The fund should be approved
by the Principal Commissioner or Commissioner in accordance with the rules made in this
behalf.
Note: Any such approval shall at any one time or years not exceeding three assessment years as may
be specified in the order of approval.
(27) Income of Pension Fund [Section 10(23AAB)]: Any income of a fund set-up by the Life
Insurance Corporation of India on or after August 1, 1996 or any other insurer to which
contribution is made by any person for receiving pension from such fund, and which is approved
by the Controller of Insurance or the Insurance Regulatory and Development Authority, is
exempt from tax.
(28) Income of statutory bodies set up to manage religious and charitable institutions
[Section 10(23BBA)]: Income of any body or authority established, constituted or appointed
by or under any Central, State or Provincial Act which provides for the administration of any
one or more public religious or charitable trusts or endowments or societies for religious or
charitable purposes registered under Societies Registration Act 1860 or any other law for the
time being in force is fully exempted.
(29) Income of European Economic Community [Section 10(23BBB)]: Any income of
European Economic Community derived in India by way of interest, dividends or capital gains,
from investments made out of its funds under a notified scheme is exempt from tax.
(30) Income of SAARC Fund [Section 10(23BBC)]: Any income of SAARC fund for Regional
Projects is exempt from tax under Section 10 (23BBC).
(31) Income of Insurance Regulatory and Development authority [Section 10 (23BBE)]:
Income of such fund is fully exempted.
Incomes Exempt from Tax 3.7

(32) Income of certain funds of national importance [Section 10 (23C)]: Any income received
by any person on behalf of –
(i) The Prime Minister’s National Relief Fund or the Prime Minister’s Citizen Assistance
and Relief in Emergency Situations Fund (PM CARES FUND) Inserted by the Act.
No. 38 of 2020, w.r.e.f. 1-4-2020; or
(ii) The Prime Ministers’ Fund (promotion of Folk Art); or
(iii) The Prime Ministers’ Aid to Students Fund; or
(iv) The National Foundation for Communal Harmony; or
(v) The Swachh Bharat Kosh, set up by the Central Government; or
(vi) The Clean Ganga Fund, set up by the Central Government; or
(vii) The Chief Minister’s Relief Fund or the Lieutenant Governor’s Relief Fund in respect of
any State or Union territory or
(viii) Any university or other educational institution existing solely for educational purposes
and not for purposes of profit, and which is wholly or substantially financed by the Government;
or
(ix) Any hospital or other institution for the reception and treatment of persons suffering
from illness or mental defectiveness or for the reception and treatment of persons during
convalescence or of persons requiring medical attention or rehabilitation, existing solely
for philanthropic purposes and not for purposes of profit, and which is wholly or substantially
financed by the Government.
(x) Any other fund or institution established for charitable purposes which may be approved
by the prescribed authority, having regard to the objects of the fund or institution and its
importance throughout India or throughout any State or States.
(33) Income of mutual fund [Section 10(23D)]: Income of Mutual Fund registered under the
Securities and Exchange Board of India or such other Mutual Fund set up by a public sector
bank or a public financial institution or authorised by the Reserve Bank of India subject to
such conditions as the Central Government may notify in the Official Gazette.
(34) Income of a securitisation trust from the activity of securitisation [Section 10(23DA)]:
Income is fully exempted.
(35) Income of notified Investor Protection Fund set up by recognised stock exchange
[Section 10(23EA)]: Income of notified Investor Protection Fund by way of contributions
received from recognised stock exchanges and members thereof is fully exempted. Such
Investor Protection Fund set up by recognised stock exchanges in India, either jointly or
separately.
(36) Income of notified investor protection fund set by a depository [section 10(23ED)]:
Income of notified Investor Protection Fund by way of contributions received from a
depository of such fund is fully exempted.
(37) Income of core settlement guarantee fund [Section 10(23EE)]: Income of such fund
set-up by a recognised clearing corporation in accordance with the regulations as Central
Government may notify, is fully exempted.
(38) Income of an investment fund other than the income chargeable under the head
“Profits and gains of business or profession [Section 10(23FBA)]: Income is fully
exempted.
(39) Interest or dividend income of a business trust [Section 23FC]: Any income of a
business trust by way of interest received or receivable from a special purpose vehicle; or
3.8 Income Tax Law & Practice

dividend is fully exempted.

Here, “special purpose vehicle” means an Indian company in which the business trust
holds controlling interest and any specific percentage of shareholding or interest, as may be
required by the regulations under which such trust is granted registration.
(40) Income of the Employees State Insurance Fund [Section 10(25A)]: Any income of the
Employees State Insurance Fund set up under the provisions of the Employees State Insurance
Act, 1948 is exempt from tax.
(41) Income of an Agricultural Produce Marketing Committee/Board [Section 10
(26AAB)]: With effect from assessment year 2009-10, any income of an Agricultural Produce
Marketing Committee/Board constituted under any law for the purpose of regulating the
marketing of agricultural produce is exempt from tax.
(42) Income of corporation or other body or institution or association established for
promoting the interest of members of Scheduled Caste, etc. [Section 10(26B)]: Any
income of a corporation established by a Central, State or Provincial Act or of any other body,
institution or association (being a body, institution or association wholly financed by Government)
where such corporation or other body or institution or association has been established or
formed for promoting the interests of the members of the Scheduled Castes or the Scheduled
Tribes or backward classes or of any two or all of them.
(43) Income of a corporation for promoting the interests of the members of a minority
community [Section 10(26BB)]: Any income of a corporation established by the Central
Government or any State Government for promoting the interests of the members of a minority
community.
(44) Income of corporation established for ex-servicemen [Section 10(26BBB)]: Income
of a corporation established by a Central, State or Provincial Act for the welfare and economic
upliftment of ex-servicemen being the citizens of India is fully exempted.
(45) Income of a co-operative society formed for promoting the interests of the members
of Scheduled Castes or Scheduled Tribes [Section 10(27)]: Any income of a co-operative
society formed for promoting the interests of the members of either the Scheduled Castes or
Scheduled Tribes or both.
(46) Capital gain on transfer of an asset of Unit Scheme [Section 10(33)]: Any income by
way of transfer of a capital asset, being a unit of the Unit Scheme, and where the transfer of
such asset takes place on or after the 1st day of April, 2002;
(47) Income from international sporting event [Section 10(39)]: From the assessment year 2006-
07, any specified income of notified person, arising from an international sporting event held in India is
exempt from tax, if the event is approved by the international body and is notified by the Central
Government and has participation by more than two countries.
(48) Grants received by specified subsidiary company from holding company [Section
10(40)]: Income of any subsidiary company by way of grant or otherwise received from its
Indian holding company which is engaged in the business of generation/transmission/distribution
of power is exempt, if such receipt is for settlement of dues in connection with reconstruction
or revival of an existing business of power generation.
Note: Under Section 10 (41), any capital gain arising in the above case is not chargeable to tax, if the
transfer has taken place before April 1, 2006.
(49) Income of certain non-Profit Body or Authority [Section 10(42)]: Any specified income
of non-profit body/authority notified by the Central Government and established, constituted
Incomes Exempt from Tax 3.9

or appointed under a multilateral treaty agreement or convention to which Central Government

is a signatory is exempt from tax.
(50) Loan in the case of Reverse Mortgage [Section 10(43)]: Any amount received by an
individual as a loan (either in lumpsum or in installments) in a transaction of reverse mortgage
referred to in Section 47 (xvi), is not chargeable to tax.
(51) Income of New Pension System Trust [Section 10(44)]: With effect from assessment
year 2009-10, any income received by any person for, or on behalf of the New Pension
System Trust established on 27-2-2008 under the provisions of the Indian Trust Act, 1882 will
be exempt from tax.
(52) Allowance or perquisite paid to the Chairman/retired Chairman or any other member/
retired member of the UPSC [Section 10(45)]: Any allowance or perquisite, as may be
notified by the Central Government in the Official Gazette in this behalf, paid to the Chairman
or a retired Chairman or any other member or retired member of the Union Public Service
Commission is exempt from tax. [Omitted by the Act No. 12 of 2020, w.e.f. 1-4-2021]
(53) Exemption of specified income of notified body/authority/trust/board/commission
[Section 10(46)]: Any specified income arising to any notified body/authority/ Board/Trust
Commission (or a class thereof) which has been established or constituted by or under a
Central, State or Provincial Act, or has been constituted by the Government or a State
Government with the object of regulating or administering any activity for the benefit of the
general Public and is not engaged in any commercial activity and is notified by the Central
Government in the Official Gazette for the purposes of this clause is exempt from tax.
(54) Any income of a notified infrastructure dept fund set-up in accordance with prescribed
guidelines [Section 10(47)]: Any income of a notified infrastructure dept fund set-up in
accordance with the guidelines prescribed in Rule 2F of the Income tax Rules is exempt from
tax.
(55) Tax exemption to National Financial Holdings Company Limited [Section 10(49)]:
Any income of the National Financial Holdings Company Limited, being a company set-up by
the Central Government, of any year relevant to any assessment year commencing on or
before the 1st day of April, 2014 is exempt from tax.
(59) Income subject to Equalization Levy [Section 10(50)]: Any income arising from any
specified service provided on or after the date on which the provisions of Chapter VIII of the
Finance Act, 2016 comes into force and chargeable to equalisation levy under that Chapter.
B. Partially Exempted Income for All Assesses
Partially exempted incomes are those incomes which are partially included in income of the assessee.
There are several incomes which are partially included as per Section 10 and added in income for the
computation of taxable income.
(1) Leave Travel Concession or Assistance [Section 10(5)]: In the case of an individual,
the value of any travel concession or assistance received by, or due to, him, from his employer or
former employer for himself and his family, in connection with his proceeding on leave to any
place in India is exempt from tax. (Discussed in detail in Chapter 4 – Income from Salaries).
(2) Salary received by any individual being a non-resident as remuneration for services
rendered in connection with employment on foreign ship [Section 10(6)(viii)]: Income
is exempt only if person total stay in India does not exceed in the aggregate of ninety days in
the previous year.
3.10 Income Tax Law & Practice

(3) Gratuity received [Section 10(10)]: (Discussed in detail in Chapter 4 – Income from
Salaries).
(4) Commuted value of pension received [Section 10(10A)]: (Discussed in detail in
Chapter 4 – Income from Salaries).
(5) Payment received as leave encashment on retirement [Section 10(10AA)]: (Discussed
in detail in Chapter 4 – Income from Salaries).
(6) Retrenchment compensation received by a workman under the Industrial Disputes
Act, 1947 [Section 10(10B)]: (Discussed in detail in Chapter 4 – Income from Salaries).
(7) Payment received at the time of voluntary retirement or termination of service from
a public sector company or any other company [Section 10(10C)]: (Discussed in detail
in Chapter 4 – Income from Salaries).
(8) Payment from recognized provident fund [Section 10 (12)]: (Discussed in detail in
Chapter 4 – Income from Salaries).
(9) Payment from National Pension System Trust to an employee on closure of his account
or on his opting out of the pension scheme [Section 10(12A]: Any payment from the
National Pension System Trust to an employee on closure of his account or on his opting out
of the pension scheme referred to in Section 80CCD, to the extent it does not exceed 40% of
the total amount payable to him at the time of such closure or his opting out of the scheme
shall be exempt from tax.
Note: Payment does not exceed 60 % of the total amount payable to assessee at the time of closure or
his opting out of the scheme, is exempt from tax. [Inserted by the Act No. 23 of 2019,
w.e.f. 1-4-2020]
(10) Payment from National Pension System [Section 10(12B)]: Any payment from the
National pension System Trust to an employee under the pension scheme referred to in
Section 80CCD, on partial withdrawal to the extent it does not exceed 25% of the amount of
contributions made by him shall be exempt from tax.
(11) Payment from an Approved Superannuation Fund [Section 10(13)]: Any payment from
an approved superannuation fund made –
(i) On the death of a beneficiary; or
(ii) To an employee in lieu of or in commutation of an annuity on his retirement at or after a
specified age or on his becoming incapacitated prior to such retirement; or
(iii) By way of refund of contributions on the death of a beneficiary; or
(iv) By way of refund of contributions to employee on his leaving the service in connection
with which the fund is established otherwise than by retirement at or after a specified
age or on his becoming incapacitated prior to such retirement, to the extent to which
such payment does not exceed the contributions made prior to the commencement of
this Act and any interest thereon; or
(v) By way of transfer to the account of the employee under a pension scheme referred to
in 80CCD and notified by the Central Government. [Clause v. inserted by the Finance
Act, 2016 w.e.f. A.Y. 2017-18].
(12) House rent allowance [Section 10(13A)]: (Discussed in detail in Chapter 4 – Income
from Salaries).
(13) Special allowances or benefits [Section 10(14)]:
(i) Any special allowances or benefit granted to an employee to meet expenses wholly,
necessarily and exclusively incurred in the performance of the duties of an office or
Incomes Exempt from Tax 3.11

employment of profit as may be prescribed to which such expenses are actually incurred
for that purpose.
(ii) Any allowance granted to the assessee either to meet his personal expenses at the place
where the duties of his office or employment of profit are ordinarily performed by him or
at the place where he ordinarily resides, or to compensate him for the increased cost of
living, as may be prescribed and to the extent as may be prescribed.
(14) Income of Local Authority [Section 10(20)]: The following income of a local authority is
exempt from tax:
(i) Income which is chargeable under the head “Income from house property”, “Capital
gains” or “Income from sources”, or
(ii) Income from a trade or business carried on by it which accrues or arises from the supply
of a commodity or service (not being water or electricity) within its own jurisdictional
area, or
(iii) Income from business of supply of water or electricity within or outside its own
jurisdictional area.
(15) Income of Research Association [Section 10(21)]: Any income of a research association,
approved under Section 35 (1) (ii) (iii) is exempt from tax, if certain conditions as specified in
Section 10 (21) are satisfied.
(16) Income of a News Agency [Section 10(22B)]: Any income of a notified news agency, set-
up in India solely for collection and distribution of news is exempt from tax provided that the
news agency applies its income or accumulates it for application solely for collection and
distribution of news and does not distribute its income in any manner to its members.
(17) Income of a Professional Association [Section 10(23A)]: Any income (other than income
from house property and income from rendering any specific service or income by way of
interest or dividend on investment) of an professional institution/association is exempt from
tax, if the following conditions are satisfied –
(i) Professional institution is established in India for the purpose of control, supervision,
regulation or encouragement of the profession of law, medicine, accountancy, engineering
or architecture or such other notified profession.
(ii) The institution applies its income, or accumulates it for application, solely to the objects
for which it is established.
(iii) The institution is approved by the Central Government by general or special order.
(18) Income from Khadi or Village Industry [Section 10(23B)]: Income of an institution
constituted as a public charitable trust or society which is established for the development of
Khadi and Village Industries (not for profit purpose) is exempt from tax, if following conditions
are satisfied:
(i) Income is attributable to the business of production, sale, or marketing of Khadi or
products of Village Industries.
(ii) Institution applies its income, or accumulates it for application, solely for the development
of Khadi or Village Industries or both.
(iii) Institution is approved by the Khadi and Village Industries Commission.
(19) Income of Khadi & Village Industries Boards [Section 10(23BB)]: Any income of an
authority (whether known as the Khadi and Village Industries Board or by any other name)
established in a State by or under a State or Provincial Act for the development of Khadi or
Village industries in the State is fully exempt from tax.
3.12 Income Tax Law & Practice

(20) Income of a certain venture capital fund or a venture capital company from investment
in a venture capital undertaking [Section 10(23FB)]: Income will be exempted if
conditions are satisfied according to this section. But nothing contained in this clause shall
apply in respect of any income of a venture capital company or venture capital fund, being an
investment fund of the previous year relevant to the assessment year beginning on or after the
1-04-2016.
(21) Income of a Registered Trade Union [Section 10(24)]: Any income chargeable under
the head “Income from house property” and “Income from other sources” of a registered
union within the meaning of the Indian Trade Union Act, 1926, formed primarily for the purpose
of regulating the relation between workmen and employers or between workmen and workmen
is exempt from tax. Similar exemption is available to an association of registered unions.
(22) Income of Provident Fund [Section 10(25)]: Following income is exempt from tax under
this Section –
(i) Interest on securities held by a statutory provident fund and any capital gains arising
from such securities.
(ii) Any income received by the trustee on behalf of a recognized provident fund or an
approved superannuation fund or an approved gratuity fund; and
(iii) Any income received by the Board of Trustees on behalf of Deposit-linked Insurance
Fund.
(23) Income of a member of a Scheduled Tribe [Section 10(26)]: Any Income of scheduled
tribe members residing in the States of Arunachal Pradesh, Manipur, Mizoram, Nagaland,
Tripura, Assam or in the Ladakh region of the State of Jammu and Kashmir if, any income
which accrues or arises to him –
(a) from any source in the areas or states aforesaid, or
(b) by way of dividend or interest on securities.
(24) Income of a “Sikkimese” individual [Section 10(26AAA)]: Following income of a
Sikkimese individual is exempt from tax –
(i) Any income from the State of Sikkim; or
(ii) Income by way of dividend or interest on securities (generated in Sikkim or any other
place). This exemption is not available to a Sikkimese woman who, on or after April 1,
2008, marries a non-Sikkimese individual.
Note: For purposes of this clause, “Sikkimese” shall mean –
(a) An individual, whose name is recorded in the register maintained under the Sikkim Subjects
Regulation, 1961 (read with the Sikkim Subjects), immediately before 26th day of April, 1975; or
(b) An individual, whose name is included in the Register of Sikkim Subjects by virtue of the
Government of India Order No.26030/36/90-I.C.I; dated 7th August, 1990 and Order of even number
dated 8th April, 1991; or
(c) Any other individual, whose name does not appear in the Register of Sikkim Subjects, but it is
established beyond doubt that the name of such individual’s father or husband or paternal
grand-father or brother from the same father has been recorded in that register.
(25) Income of coffee board, rubber board, tobacco board etc. [Section 10(29A)]: Income
accruing or arising to following board will be exempted:
(a) The Coffee Board (b) The Rubber Board (c) The Tea Board (d) The Tobacco Board (e)
The Marine Products Export Development Authority (f) The Agricultural and Processed
Food Products Export Development Authority (g) The Spices Board (h) The Coir Board.
(26) Subsidy from the Tea Board [Section 10(30)]: In the case of an assessee who carries on
the business of growing and manufacturing tea in India, the amount of any subsidy received
Incomes Exempt from Tax 3.13

from or through the Tea Board under any such scheme for replantation or replacement of tea
bushes or for rejuvenation or consolidation of areas used for cultivation of tea will be exempted.
This exemption will be available if the assessee furnishes to the Assessing Officer, along
with his return a certificate from the Tea Board as to the amount of such subsidy paid to the
assessee during the previous year.
(27) Income of Minor [Section 10(32)]: Income of a minor child is clubbed along with the
income of his/her parent, subject to certain conditions. If the income of an individual includes
any income of his/her minor child, then such individual can claim exemption income (in respect
of each minor child) of lower of following amount:
(a) ` 1,500 per minor child; or
(b) Amount of income of each minor child (which is clubbed).
(28) Dividend from Indian Company [Section 10(34)]: Dividend received from a domestic
company is exempt in the hands of the shareholders provided such dividend has already
suffered Dividend Distribution Tax (DDT) under Section 115-O. However, as per Section
115BBDA (as inserted by Finance Act, 2016), in the case of resident individual/HUF/Firm,
dividend shall be chargeable to tax at the rate of 10% if aggregate amount of dividend received
during the year exceeds ` 10,00,000.
However that nothing contained in this clause shall apply to any income by way of dividend
received on or after the 1st day of April, 2020 other than the dividend on which tax under section
115-O and section  115BBDA,  wherever  applicable,  has  been  paid.   [Inserted  by  the Act
No. 12 of 2020, w.e.f. 1-4-2021.]
(29) Income of a Shareholder on Account of buy-back of shares by the Company [Section
10(34A)]: Any income arising to an assessee, being a shareholder, on account of buy-back of
shares by the company (whether listed or unlisted) as referred to in Section 115QA is exempt
from tax. [As amended by the Act No. 23 of 2019, w.r.e.f. 5-7-2019].
(30) Income from Units [Section 10(35)]: Any income by way of following shall be exempt
from tax –
(i) Income received in respect of the units of a Mutual Fund specified under Clause (23D);
or
(ii) Income received in respect of units from the Administrator of the specified undertaking; or
(iii) Income received in respect of units from the specified company.
(31) Income from sale of Shares in certain cases [Section 10(36)]: 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 1-03-2003 and 1-03-2004 and held for a period of twelve months or more.
For the purposes of this clause, “eligible equity share” means –
(i) any equity share in a company being a constituent of BSE-500 Index of the Stock
Exchange, Mumbai as on the 1st day of March, 2003 and the transactions of purchase
and sale of such equity share are entered into on a recognized stock exchange in India;
(ii) any equity share in a company allotted through a public issue on or after the 1st day of
March, 2003 and listed in a recognised stock exchange in India before the 1st day of
March, 2004 and the transaction of sale of such share is entered into on a recognised
stock exchange in India.
(32) Capital Gains in case of Compulsory Acquisition of Urban Agricultural Land
[Section 10(37)]: An individual or Hindu Undivided Family (HUF) can claim exemption in
respect of capital gain arising on transfer by way of compulsory acquisition of agricultural
3.14 Income Tax Law & Practice

land situated in an urban area provided compensation is by the taxpayer (or by his parents in
the case of an individual) for agricultural purpose for a period of 2 years immediately preceding
the date of its transfer.
(33) Capital Gain on Transfer of Specified Capital Assets under Land Pooling Scheme of
the Andhra Pradesh Government [Section 10(37A)]: Any income chargeable under the
head “Capital gains” in respect of transfer of a specified capital asset by an Individual or HUF
under the land pooling scheme of the Andhra Pradesh Government is exempt from tax.
“Specified capital asset” means –
(a) the land or building or both owned by the assessee as on the 2nd day of June, 2014 and
which has been transferred under the scheme; or
(b) the land pooling ownership certificate issued under the scheme to the assessee in lieu of
land or building or both transferred under the scheme;
(c) the reconstituted plot or land, as the case may be, received by the assessee in lieu of land
or building or both transferred under the scheme, if such plot or land, as the case may be,
so received is transferred within 2 years from the end of the financial year in which the
possession of such plot or land was handed over to assessee.
(Inserted by the Finance Act, 2017 w.e.f. 1 April, 2015)
(34) Long-term capital gains on transfer of equity shares or units of an equity oriented
mutual fund or a unit of a business trust covered by securities transaction tax [Section
10(38)]: 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 shall be exempt from tax provided:
(i) Such equity shares are sold through recognized stock exchange, whereas units of an
equity oriented fund may either be sold through the recognized stock exchange or may
be sold to the mutual fund.
(ii) Such transaction is chargeable to securities transaction tax.
(iii) Transfer should have taken place on or after October 1, 2004.
Equity oriented mutual fund means a mutual fund specified under Section 10 (23D) and 65%
of its investible funds, out of total proceeds are invested in equity shares of a domestic company.
Note: No exemption under Section 10(38) is available with effect from Assessment Year 2019-20. The
long-term capital gains arising from sale of listed securities in excess of ` 1 1akh is taxable at the rate of
10% under Section 112A (subject to certain conditions).
(35) Income received by certain foreign companies in Indian currency for import of crude
oil, etc. [Section 10(48)]: Any income received in India in Indian currency by a foreign
company on account of sale of crude oil, any other notified goods or rendering of notified
services to any person in India is exempt from tax provided –
(1) receipt of such income in India by the foreign company is pursuant to an agreement or
an arrangement entered into by the Central Government or approved by the Central
Government;
(2) having regard to the national interest, the foreign company and the agreement or
arrangement are notified by the Central Government in this behalf; and
(3) the foreign company is not engaged in any activity, other than receipt of such income, in
India.
(36) Income of a foreign company on account of storage and sale of crude oil [Section
10(48A)]: Income accruing or arising to a foreign company on account of storage of crude
oil in a facility in India and sale of crude oil therefrom to any person resident in India as per
Incomes Exempt from Tax 3.15

agreement by the Central Government or approved by the Central Government, will be

exempted.
(37) Income of Indian strategic petroleum reserves limited [Section 10(48C)]: Income
accruing or arising to the Indian Strategic Petroleum Reserves Limited, being a wholly owned
subsidiary of the Oil Industry Development Board under the Ministry of Petroleum and Natural
Gas, for storage facility in pursuance of directions of the Central Government is exempted if,
the crude oil is not replenished in the storage facility within three years. [Inserted by the Act
No. 12 of 2020, w.e.f. 1-4-2020].
II. TAXABLE INCOME FOR ALL ASSESSES
Taxable income is the total amount of income remaining as the basis of taxation for a given period
after all allowable deductions have been applied to gross income.
(1) Income from Salary
(2) Income from house property
(3) Wages
(4) Interest received from banks
(5) Dividends
(6) Professional income
(7) Capital gain
(8) Business income
(9) Income from other sources etc.
III. REBATABLE (TAX FREE) INCOME FOR ALL ASSESSES
Income Tax Rebates are those items which are allowed to be claimed from the total tax payable. The
rebate can be claimed by the taxpayer at the time of filing tax returns, before including education
cess on tax liability.
(1) Share of member of an association of persons or body of individuals in the income of
the association or body [Section 86]: The member shall be entitled to rebate of income
tax, if AOP and BOI is liable to pay tax at normal rates.
Rebate of Income Tax = Share of profit on AOP or BOI × Average rate of income tax
Note: Average rate = Total Income Tax × 100/Total Income.
(2) Rebate of income-tax for residential individual [Section 87A]: Rebate under
Section 87A will be lower of 100% of income-tax liability or ` 12,500. No rebate will be
available if the total income (i.e. taxable income) exceeds ` 5,00,000.

THEORETICAL QUESTIONS

Long Answer Type Questions Short Answer Type Questions

1. Explain the concept of exempted incomes. Discuss 1. Which incomes of Sikkimese individual is exempted
clearly the exemptions under the Income Tax Act. from tax under Section 10(26AAA)?
2. Explain any fifteen items which are not included in [CA Inter, Nov. 2010]
total incomes. 2. Briefly explain the exemption available under Section
3. Explain Section 10(15) of Income Tax Act for 10(48) of the Income Tax Act, 1961 in respect of
exemption regarding interest on securities. income received by certain foreign companies from
sale of Crude oil. [CA. Inter, Nov. 2013]
3.16 Income Tax Law & Practice

3. State exemption regarding allowance of MP’s. (c) Sum received by a member from HUF [Section
4. Write short notes on the following: 10(2)].
(a) Reserve Mortgage Loan scheme. 5. Agricultural income is exempt from tax even if the
(b) Income from property held for charitable or agricultural land is situated outside India. Do you agree?
religious purposes.

OBJECTIVE TYPE QUESTIONS

I. Multiple Choice Questions (MCQs) 8. Share of partner in the income of partnership firm
shall be –
1. Exempted income of an assessee will be included in (a) Fully exempted
the head – (b) Exempted
(a) Income from house property (c) Taxable
(b) Capital gains (d) Partially Taxable
(c) Income from other sources
9. The Income of an educational institution of the non-
(d) Not in any head
profit motive is exempt under which section –
2. Exempted income is (a) U/S 10 (23c)
(a) Not taxable under income tax (b) U/S 10 (80g)
(b) Agriculture income (c) U/S 10 (10B)
(c) Not included in total income (d) U/S 10 (70c)
(d) All of the above
3. Under which section of Income tax Act,1961 exempted Answers
incomes have been mentioned? 1. (d) 2. (d) 3. (a)
(a) Section 10 4. (b) 5. (c) 6. (b)
(b) Section 16 7. (b) 8. (a) 9. (a)
(c) Section 60
(d) Section 88 II. Fill in the blanks with appropriate
4. Income of a minor child included in income of the Word(s) or Figure(s)
assessee is exempt to the extent of –
(a) 1,200 p.a. per minor child 1. Daily allowance received by MP’s is or MLA’s is
(b) 1,500 p.a. per minor child ____________
(c) 500 p.a. per minor child 2. There are certain incomes of an assessee which are not
(d) 2,500 p.a. per minor child included in his total income. These incomes are called
5. State which of the following income is exempted from ________ incomes.
tax – 3. Any long term capital gains arising from the transfer
(a) Income from salaries of listed equity shares is _________.
(b) Capital gains 4. Income of notified news agencies is exempt
(c) Agricultural income in India provided their income for collection and ________of
(d) All of these news.
6. The benefit in respect of newly established industrial 5. _______received from public provident fund is
under – taping in SEZ is available to exempt.
(a) An individual only
6. The annual value of any one palace in the occupation
(b) All assessee
of an ex-ruler is ______from tax.
(c) A Partnership firm only
(d) A company only 7. Divided received from domestic company is ________.
7. The daily allowance received by a Member of
Answers
Parliament is –
(a) To be included in total income for tax purpose 1. Exempted from tax
(b) Exempt 2. Exempted income
(c) Taxable 3. Exempted from tax
(d) None of these 4. Distribution
5. Cash
Incomes Exempt from Tax 3.17

6. Exempt 5. Allowance received to member of Union Public

7. Exempted. Service Commission is tax-free.
6. Section 10 of Income Tax Act exempted incomes
III.State whether the following statement have been mentioned.
are ‘True’ or ‘False’ 7. Income from foreign agriculture land is totally
1. To claim Section 10AA deduction unit must be exempted.
established in Special Economic Zone. 8. Dividend received from an Indian Company is
2. Agricultural income is tax-free. partially taxable income.
3. Income to member of a Hindu Undivided Family
Answers
from HUF shall be fully exempted.
4. Interest received from post office saving account is 1. True 2. True 3. False
fully exempt. 4. False 5. True 6. True
7. False 8. False.

For detailed Solution of these Questions you can refer our book “Fundamentals of Income Tax: Problems and Solutions”.