Section 10 of Income Tax Act: Exemptions, Allowances & How to Claim it?
- Rashmita Choudhary
- Jul 7, 2023
- 12 min read
Updated: Oct 22, 2024
Understanding taxes can be confusing, especially when it comes to figuring out what you can and cannot claim. One important part of the Income Tax Act, is Section 10, which talks about different types of income that you don’t have to pay tax on. This includes things like agricultural income and certain allowances from your employer. These exemptions can help you save money on your taxes and keep more of your hard-earned income.
In this article, we will explain what Section 10 covers, including the various exemptions and allowances you might qualify for. We will also guide you on how to claim these benefits, making it easier for you to manage your taxes. Whether you’re an individual taxpayer or a business owner, knowing about Section 10 can help you make smart financial decisions. Let’s dive in and learn how you can take advantage of these tax exemptions!
Table of Content
Understanding Section 10 of Income Tax Act
Section 10 of the Income Tax Act, 1961, enumerates different types of income exempted from taxation. This section is, in fact, an effort to give relief to the taxpayer by excluding certain types of income from the total taxable income of such taxpayers. Section 10 seeks to achieve the twin-fold purpose of encouraging certain activities and helping improve the lot of different sections of society by granting tax exemptions and allowances to them.
Features of Section 10 of the Income Tax Act
The primary method for determining the total income of a salaried professional is to examine their entire tax liability.
This provision of the Income Tax Act, specifically provision 10(10D), governs tax deductions granted to salaried professionals.
One of Section 10's goals is to lessen the cost of various tax structures, including rent allowances, child care tuition fees, travel allowances, gratuities, and so on.
Common Exemptions Under Section 10 of Income Tax Act
The commonly available exemptions under Section 10 of the Income Tax Act are as follows:
House Rent Allowance (HRA) [Section 10(13A)]
House Rent Allowance (HRA) is a key component of an employee's salary structure, designed to help meet rental accommodation costs. Section 10(13A) of the Income Tax Act allows salaried individuals to claim an exemption on the HRA they receive, but the exemption is subject to certain limits. To determine the exempted HRA, the least of the following amounts is considered:
Actual HRA received
50% of [Basic Salary + Dearness Allowance (DA)] for individuals living in metro cities (Delhi, Mumbai, Kolkata, or Chennai) or 40% of [Basic Salary + DA] for those living in non-metro cities.
Rent paid minus 10% of [Basic Salary + DA]
Let’s take an example to better understand this:
Example: An employee working in Mumbai earns a basic salary of INR 40,000 per month, receives an HRA of INR 20,000 per month, and pays rent of INR 15,000 per month.
Actual HRA received: INR 2,40,000 (INR 20,000 per month)
50% of [Basic Salary + DA] for a metro city: INR 2,40,000 (50% of INR 4,80,000)
Rent paid minus 10% of [Basic Salary + DA]: INR 1,32,000 (INR 1,80,000 – INR 48,000)
The least of the three values is INR 1,32,000, which is the exempted HRA. The remaining INR 1,08,000 (INR 2,40,000 – INR 1,32,000) will be taxable.
This method ensures that individuals living in metro cities, where rental costs are higher, can claim a higher exemption, while those in non-metro cities have a slightly lower limit.
Leave Travel Allowance (LTA) [Section 10(5)]
Purpose: To encourage domestic tourism by granting exemption from tax on the cost of travel.
Exemption Details:
Eligibility: Applicable only for salaried employees who have LTA in their salary package.
Limit of Exemption:
LTA exemption is applicable to spending incurred for travel within India only and on the shortest route to the place of destination.
Covers expense on travel by employee along with his family including spouse, children and dependent parents/siblings.
Allows for exemption on 2 journeys taken during a block of 4 calendar years.
Only the travel expenses by airfare, rail fare, or bus fare come into the ambit of exemption; all other expenses like accommodation and food are not exempt.
Conditions:
The travel should be within India.
Proof of such travel shall be furnished in the form of tickets, boarding passes, and so on.
Gratuity [Section 10(10)]
Purpose: To provide financial security to employees on retirement or resignation.
Exemption Details:
Eligibility: Exemption is available in respect of gratuity received by employees upon retirement, resignation, or termination.
Exemption limit: Least of the following shall be exempt from tax:
Actual gratuity received.
15 days' salary for each completed year of service.
INR 20 lakhs in the case of government employees and INR 10 lakhs in the case of non-government employees.
Conditions:
Applicable to those employees who are covered under the Payment of Gratuity Act, 1972.
Gratuity shall be received subject to the conditions of employment.
Section 10(11): Provident Fund Interest
This section exempts interest earned on the balance in a provident fund upon resignation or retirement. However, starting from April 1, 2021, the exemption is limited to contributions of up to Rs. 2,50,000 annually. Any interest earned on contributions exceeding this threshold will now be taxable.
For example, if an employee contributes Rs. 3,00,000 in a given year to their provident fund, the interest accrued on the excess Rs. 50,000 will be subject to taxation. Prior to this amendment, all interest from provident fund contributions was fully exempt from tax. This change encourages individuals to be more cautious about their provident fund contributions and helps the government reduce tax leakage.
Agricultural Income [Section 10(1)]
Purpose: The obvious object is to encourage cultivation of land or agriculture business.
Exemption Details:
Eligibility: The exemption is available to any person who derives income from agricultural operations.
Exemption Limit: The agricultural income is wholly exempt from tax but it is taken into account for rate purposes where the non-agricultural income exceeds INR 2.5 lakhs.
Conditions:
The income has to accrue from land situated in India used for agricultural purposes.
The land must be subject to assessment for land revenue or be subject to a local rate.
Pension Income [Section 10(10A)]
Purpose: To provide tax relief to retired persons who receive pension.
Exemption Details:
Eligibility: Any person who receives pension.
Exemption Limit: Commuted pension received is exempt subject to the following limits:
Government employees: Fully exempt.
For Central Government employees: One-third of the commuted pension is exempt if gratuity is received; one-half is exempt if gratuity is not received.
Conditions:
The pension has to be received in pursuance of the terms of employment.
Specific Allowances Under Section 10 of Income Tax Act
In the Income Tax Act, 1961, Section 10 has different types of allowances that are exempt from tax. These were designed to meet various types of expenses incurred by employees and provide them with some financial relief by reducing their taxable income. The following are the detailed descriptions of specific allowances under Section 10:
Special Allowances for Meeting Expenses [Section 10(14)]
Purpose: Reimbursement to staff for expenses incurred by them for some purposes connected with their employment.
Examples:
Traveling Allowance: For travel on official tours or transfer.
Daily Allowance: Expenses incurred on account of daily expenditure while on duty elsewhere than the usual place of work.
Conveyance Allowance: Expenses incurred on commuting between the employee's residence and place of work.
Helper Allowance: Expenses incurred on engaging a helper for official work.
Conditions:
The allowance is to be awarded only when the expenses are wholly, necessarily and exclusively incurred in the performance of duties.
Exclusion is only the extent of actual expenditure incurred.
Children’s Education and Hostel Allowances [Section 10(14)]
Purpose: Reimbursement of hostel allowance expenses incurred by the employee for his children.
Exemption Limit: INR 100 per month per child, up to a maximum of two children.
Hostel Expenditure Allowance:
Purpose: Reimbursement for expenditure on hostels for the accommodation of children.
Exemption Limit: INR 300 per month per child up to a maximum of two children.
Conditions:
These allowances are given to meet the children-related educational expenditure of the worker.
The allowances are exempt to the extent of limits specified.
Transport Allowance [Section 10(14)]
Purpose: To allow reimbursement of expenses incurred by employees for commuting from their residence to the place of work.
Exemption Limit:
For general employees: Exempt up to INR 1,600 per month.
For differently-abled employees: Exempt up to INR 3,200 per month.
Conditions:
This allowance is granted specifically for the purpose of travel from home to work and vice versa.
The exemption is subject to the limits specified.
Other Specific Allowances [Section 10(14)]
Uniform Allowance:
Purpose: This is provided to an employee to cover the expenses incurred on purchase or maintenance of uniforms, which are compulsory to be worn during official duties.
Exemption: It is exempt to the extent of actual expenditure incurred.
Research Allowance:
Purpose: It is given to an employee for meeting expenses over academic or research-related activities.
Exemption: Exempt to the extent of actual expenditure incurred.
Outfit Allowance:
Purpose: Compensation toward expenses on outfits for official work; normally provided to those staff whose conditions of service require them to wear specific attire.
Exemption: Exempt to the extent of actual expenditure incurred.
Special Compensatory Allowance:
Purpose: This allowance is given as compensation to persons serving in hilly areas, tribal areas, or difficult terrain.
Exemption: Varies based on place and conditions.
Conditions:
The allowances must have been specifically granted to meet expenses wholly, necessarily, and exclusively incurred for the purpose specified.
The exemption shall be available subject to the overall limit to the extent of actual expenditure incurred.
Eligibility Criteria for Exemptions and Allowances
The allowances and exemptions under Section 10 of the Income Tax Act, 1961, apply only to the case of salaried employees. However, there are certain conditions and requirements that must be followed to avail these benefits. Generally, the allowances under Section 10 can be availed of by the following individuals only:
Salaried Employee: Most allowances such as HRA, LTA, and special allowances are applicable in case of salaried employees only.
Government Employees: The specific exemptions available for travel and uniform allowances are more relevant for government employees only.
For Professionals and Business Owners: While most of the exemptions are directed at salaried employees, some, like provisions for research allowances, do apply under certain circumstances to professionals and business owners.
Conditions and Criteria to be met to Claim Exemptions and Allowances
To claim the exemptions and allowances under Section 10, following conditions are required to be satisfied by individuals:
Employee Status: The individual must be an employee receiving the particular allowance or benefit from the employer.
Purpose-Specific Use: The allowances must be utilized for the specified use. For example, HRA must be used for payment of rent, LTA for travel, and uniform allowance used for purchasing or maintenance of uniform.
Documentation: Proper documentation should be kept and furnished to the employer or the Income Tax Department. For example, rent receipt under HRA, travel tickets under LTA, and expense receipt for other allowances.
Non-Cash Transactions: Some exemptions, such as under Section 80GGA, require expenditure by way of donation in non-cash modes.
Limits and Caps: The exemptions, themselves, are subject to certain limits and caps. For example, HRA exemption cannot exceed the actual rent paid minus 10% of basic salary, and LTA is available only for journeys made within India.
Approval and Recognition: In case of exemptions on donations and research, institutes to which such donations are made or with which research is undertaken are required to be approved and recognized by the prescribed authorities.
Specific Time Frames: Some allowances, like LTA, are related to time frames. LTA can be claimed for any two journeys within a block of four calendar years.
How to Claim Exemptions Under Section 10 of Income Tax Act?
Documents Required
Following documents will have to be furnished for claiming exemption under the Section 10:
Salary Slips: It should indicate the allowances that are received.
Proof of Expenses: Bills and receipts for expenditures claimed under special allowances (for example: journey tickets, education fees)
Form 16: Provided by the employer after the end of a calendar year, it includes a break-up of salary paid and TDS.
Supporting Documents: Any other document as required by the employer or the Income Tax Department for proving or verifying claims.
Step-by-Step Guide to Claim Exemptions under Section 10 of Income Tax Act
Understand your Allowances: The very first step is to check one's salary structure for those allowances which are exempt under Section 10.
Gather Bills/Proof for Expenses: Next, gather the proof of expenses for which exemption needs to be claimed.
Provide Proof to Employer: Provide all such proofs/receipts/bills to your employer, usually at the end of the financial year, before they calculate and deduct TDS.
Check Form 16: Check Form 16 issued by the employer for ensuring that all eligible exemptions are considered while deducting TDS.
File Your Income Tax Return: Use the correct ITR form depending on the nature of the sources of your income. Enter the exempt allowances in the relevant sections in the correct places in the ITR form.
Attach Necessary Documents: While filing the return online, you might not have to attach any documents. However, keep them handy in case of scrutiny or assessment by the Income Tax Department.
Filing of the Necessary Forms and Declarations
Form 12BB: This form has to be furnished to the employer to get exemption on HRA, LTA, and other allowances.
Form 16: Ensure that all exemptions show up in this form issued by employer
ITR Forms: The correct ITR form should be used and filled-up based on sources of income, that is, ITR1, ITR2, ITR3, and so on, with details of exempt income.
Important Points to Remember
Limits and Caps on Various Exemptions
HRA: The exemptions shall be the least of the following : actual HRA received, 50% of salary (metro cities) or 40% (non-metro cities) and actual rent paid minus 10% of salary.
LTA: Exemption can only be claimed on travel expenses within India. It can further be availed for two journeys in a block of four calendar years.
Children's Education Allowance: Maximum of INR 100 per month per child, for up to two children.
Transport Allowance: Maximum of INR 1,600 per month. This increases to INR 3,200 for differently-abled employees.
Common Mistakes to Avoid
Incomplete Documentation: Failure to provide necessary receipts and bills may result in refusal to grant exemption.
Incorrect Claims: Claiming exemption without meeting the laid-down conditions.
Missing Deadlines: Failing to provide proof of expenses incurred to the employer before the deadline.
Benefits of Understanding Section 10
Tax Savings and Financial Planning: It is through an understanding and utilization of these exemptions under Section 10 that one can substantially reduce taxable income, leading to substantial tax savings for the taxpayer.
Maximization of Exemptions and Allowances for Better Tax Management: If effectively utilized, Section 10 exemptions spell better financial planning and administration of tax, ensuring that every benefit accruable to taxpayers is accounted for.
Conclusion
The Income Tax Act's Section 10 focuses on the income tax exemptions available to Indian citizens who are employed. Furthermore, under certain exemptions or incomes, the taxpayer may lawfully be able to avoid paying taxes under a number of subsections of the act. As a taxpayer, you can significantly reduce your tax liability by leveraging the various clauses of Section 10 of the Income Tax Act.
FAQ
Q1. What is Section 10 of the Income Tax Act?
Section 10 enumerates the types of income exempted from tax. It provides relief to the taxpayer by reducing the amount of taxable income through certain allowances and exemptions.
Q2. Who can avail exemptions under Section 10?
Mainly, exemptions under Section 10 are allowed to the salaried class, but some other provisions may apply on professionals and businesspeople, subject to certain conditions.
Q3. What is HRA and how does it get exempt under Section 10?
House Rent Allowance (HRA) is given to those employees who have to bear the expenses towards rent. It is exempt partially from tax subject to conditions and limits amongst the salary, rent compensation paid and location.
Q4. How does Leave Travel Allowance work under Section 10?
Under Section 10, tax relief is provided for travel expenses incurred within India. It can be claimed for two journeys in a block of four calendar years, subject to certain conditions and documentation.
Q5. What are the exemptions available for children's education and hostel allowances?
Children's education allowance exemption is up to INR 100 per month per child for two children. Exemption on hostel expenditure allowance up to INR 300 per month per child for two children.
Q6. What are the conditions for claiming a transport allowance?
Up to INR 1,600 per month for general employees and INR 3,200 per month for differently-abled employees is allowed as an exemption on transport allowance. Provided it is the amount paid for commuting to and from the employee's residence and place of work.
Q7. Are there any exemptions for special compensatory allowances under Section 10?
Yes, working in hilly areas, tribal areas, or difficult terrain provides for exemptions, and the exemption amount varies to different locations and conditions.
Q8. Which type of documents are to be provided as proof to claim exemption under Section 10?
Documents like rent receipts, travel tickets, receipts of expenses, certificates approved by the relevant authorities for official status need to be retained and should be produced as proof.
Q9. Can donations qualify for exemptions under Section 10?
Donations to recognized scientific research and rural development bodies under Section 80GGA when made in forms other than cash and other conditions are satisfied are exempt under Section 10.
Q10. What precautions should I take to ensure I am eligible for tax concessions as mentioned in Section 10?
Make donations to recognized bodies, use the amount for purpose-oriented usage, and adhere to the prescribed non-cash transaction, limit and cap should be adhered, recognition and approval, and conditions related to the employment status and specified time frame of the section.
Q11. Is leave encashment exempt from income tax?
Accrued leave encashment during work is subject to full taxation and is included in the calculation of "Income from Salary." On the other hand, your leave encashment income will not be subject to taxes when you retire or resign if you work for the State or Central government. Conversely, if you work for a private company, your income from leave encashment on retirement or resignation will be regarded by the government as "Income From Salary" and will be subject to taxation. However, the Income Tax Act's Section 10(10AA) will provide some exemptions. The amount that remains after exemptions will be subject to tax based on your income tax slab.
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