In India, tax exemptions are divided into several categories based on the source of income. The term “tax exemption” refers to a monetary exclusion from taxable income. You may receive entire tax relief, lower tax rates, and deductions only on a portion of your taxable income. They weren’t included in total income for tax purposes, whereas taxable incomes are subject to taxation under the Income Tax Act.
Income that isn’t taxed in the first place is referred to as income tax exemption is known as exempt income. The Indian government provides a variety of tax breaks to stimulate investment and promote certain economic activities. Exemptions are a practical approach for taxpayers to lower their taxable income, save money on taxes, and make some beneficial long-term investments. A taxpayer can save all or part of his tax bill by claiming tax exemptions.
Non-taxable income is called exempted income.
Learn the Basics: Clarity on Income Tax Rebate, Tax Deduction, Tax Exemption
The average person may sometimes use words like Income Tax Rebate, Income Tax Deduction, and exempted income in income tax interchangeably. All of these benefit the taxpayer by lowering their tax liability; the definition and application of each term differ.
- Income tax exemption can only be claimed on a single source of income, not on the whole income. For example, income tax exemptions claimed under one category are not permitted to be claimed under another.
- The deduction for income tax can be claimed on the total income under each heading as well as the gross total income. Deductions may be claimed if the taxpayer has undergone certain expenses or made certain investments.
- Income tax rebates are items that can be deducted from the total amount of tax owing. It’s important to know that Income Tax Exemptions and Deductions may be claimed against your income, whilst Rebates can be claimed against your tax liability.
- Exempted income is deemed to be exempt as per the law only if the evidence and proof related to it are presented.
- Exempted income is to be shown or disclosed while filing a return.
- Partially exempted income is exempted or tax-free up to a certain limit as per applicability.
- If any taxable income is shown as exempted income, then it will be disallowed and deemed to be the earnings, and income tax is levied on it.
- The distinction between tax deduction, tax relief, and tax-free income.
Exempted income in income tax
Section 10 has many sub-sections that detail which sorts of exempted income. This might be everything from an agricultural subsidy to a rent subsidy for a home. Certain income sources are tax-exempt under the Income Tax Act as long as they comply with the Act’s criteria and restrictions.
The following is a list of income that is exempt from taxation under Section 10:
- Agriculture brings in money.
- Amount collected from the Hindu Undivided Family’s income (H.U.F.)
- Non-Residents receive a portion of the profit interest.
- Non-Resident (External) Account Interest to Non-Resident
- Interest is paid to a person of Indian ancestry who is not a resident of the United States.
- Leave Concessions or Assistance for Travel.
- On the income of a foreign company, the government or an Indian company pays a tax.
- Allowances/Perquisites paid for by the government to its employees serving from outside India.
- Employees from other countries who are working in India as part of the Cooperative Technological Assistance Program
- Consultant’s Employees’ Earnings
- Anyone working in India under cooperative technological assistance programmes might earn any member of their family’s income.
- Gratuity paid to government employees.
- Gratuity paid to a non-government employee, as defined under the Payment of Gratuity Act of 1972.
Partially Exempt Incomes
For salaried employees, the Income Tax Act allows several income tax exemptions that can save you a lot of money. A salaried employee would have to tell their employers that they are seeking specifically exempted income available to salaried employees. The employer would estimate the tax on the residual income using the Income Tax Slabs and deduct TDS from the salary.
- LTA or Leave Travel Allowance
- Income from non-government employees through pension, gratuity, leave encashment, or retrenchment compensation is subject to prescribed limits.
- House rent allowance
- Payments received from approved superannuation funds
- Allowances like Children’s Education Allowance, Transport Allowance, etc.
- Employees are awarded a Leave Travel Allowance (LTA) to travel inside India with their families. If documentation of travel is provided, the sum is tax-free. The exemption solely applies to travel expenses. The exemption is valid for two trips within four years.
- The LTA for air travel cannot exceed the cost of the economy ticket (for the employer and family) on the national airline. It is the AC first class ticket rate for rail travel. The price is based on the shortest distance between two points.
A dividend is a taxable income in the hands of an investor. If the dividend income exceeds INR 5,000, the corporation must deduct TDS u/s 194 for equity shares and u/s 194K for equity mutual funds dividends.
Yes. When submitting your income tax return, you must include all of your earnings, whether taxable or exempt. There is a distinct tab for displaying exempt income. You must provide the type of exempt income as well as the quantity received throughout the year.
If you have exclusively exempt income during the year, you can submit an ITR-1. However, if your agricultural income exceeds Rs. 5,000, you must file Form ITR-2.
Every financial year, you can claim exempt income while completing your income tax return.
Many types of income are exempt from taxation; many taxpayers neglect to declare information about them. Individuals who do not provide these details, on the other hand, risk being audited by the IRS since it will be unable to trace the source of their money.
Specific categories of non-salary income are also excluded from taxation under the Income Tax Act. Dividends, agricultural revenue, interest on funds, capital gains, and other sources of income are among them. When submitting tax returns under ITR-1, the taxpayer is expected to disclose various categories of income on “Schedule EI – Details of Exempt Income.”
Allowances are predetermined periodic sums provided by an employer in addition to wages to suit the employee’s specific requirements. For example, a Tiffin allowance, a transportation allowance, a uniform allowance, and so on. Taxable allowances, completely exempted allowances, and partially exempted allowances are the three categories of allowances under the Income Tax Act.
Personal expenses cannot be claimed as a deduction when computing taxable income. When determining income under specific categories, only those expenditures that are authorised by the Income Tax Act can be deducted.
It is stated in Chapter VI A of the statute that income tax exemptions and deductions are distinct. Exemption denotes exclusion; therefore, if a given amount of money is tax-free, it does not go against a person’s total income. Subtraction, or a sum that may be used to lower taxable income, is referred to as a deduction. The deduction is a break, but the exemption is a reprieve.
Did You Know?
- Maximum income tax exemption can be availed by effective tax planning as per your financial goals and strategies.
- Tax exemptions are more inclined towards salaried class people than self-employed persons.
- If any income tax exemptions are bogusly claimed, they will be disallowed by Income tax and treated as an income in upcoming assessment years.
- Exempted income is reduced from Gross total income, i.e. adjusted from taxable income, not from tax liability.
Salary taxpayers and non-salary tax payer’s have differing amounts of tax-exempt income under section 10 allowances. Rent for the home allowance, leave travel allowance, leave encashment amount, pension amount, gratuity amount, and other exemptions are available to salary account holders. Dividends, agricultural income, interest on funds, capital gains, and other items are exempt for non-salary account holders. The Income Tax Act of 1961 has many annexures that have been added and altered to cover a variety of areas that had not previously been addressed.