How to Report Exempt Income Like Agricultural Income or LTCG Below Threshold
- Farheen Mukadam
- Aug 11
- 9 min read
Exempt income refers to earnings that are not subject to income tax under the Income Tax Act of India. These are specific categories of income that are excluded from the total taxable income, meaning they don’t contribute to the income on which tax is calculated. However, just because certain income is exempt doesn’t mean you don’t need to report it in your Income Tax Return (ITR). It is crucial for taxpayers to understand what qualifies as exempt income and how to report it accurately to avoid penalties. Let us explore the different types of exempt income, how to report them in your ITR, and address some common queries.
Table of Contents
Understanding Exempt Income: What Qualifies?
Exempt income falls under various categories and includes income that is legally exempted from taxation by the government. Below are the key types of exempt income:
Agricultural Income: Income derived from agricultural activities is exempt from tax. This includes income from farming, horticulture, or growing plants and crops on agricultural land.
Dividend Income: Any dividend received from domestic companies is exempt from tax in the hands of the taxpayer. However, this exemption applies only to dividends from Indian companies, not foreign ones.
Interest on Tax-Free Bonds: Interest earned from tax-free bonds issued by the government or certain public sector entities is exempt from tax. This includes bonds issued by entities such as the Indian Railways Finance Corporation (IRFC), National Highways Authority of India (NHAI), and others.
Long-Term Capital Gains (LTCG): Under certain conditions, long-term capital gains (from the sale of assets like stocks, mutual funds, and property) can be exempt, such as when the gains fall under a specified threshold.
Income from Life Insurance: The maturity proceeds of life insurance policies, including bonuses, are exempt from tax, provided the policy meets certain conditions, such as being taken for a minimum number of years.
Income from Provident Fund (PF): The contributions and interest earned on Provident Fund (PF) balances are exempt from tax, as long as they meet the requirements of the Employee Provident Fund Organization (EPFO).
Retirement Benefits: Pensions, gratuities, and other retirement benefits, when received from a recognized retirement scheme, are typically exempt from tax.
Gift from Relatives: Gifts received from specified relatives, including parents, siblings, and spouses, are exempt from tax, regardless of the amount.
It is important to note that while these types of income are exempt from tax, they must still be reported in your ITR to ensure full compliance with tax laws.
How to Report Exempt Income in Your ITR
Reporting exempt income in your Income Tax Return (ITR) may seem straightforward, but it requires attention to detail to ensure that the income is accurately declared. Here’s how to go about it:
Report in the Right Section: In the ITR forms, there is a specific section where exempt income needs to be reported. For instance, in ITR-1 (Sahaj), exempt income such as agricultural income, dividends, and tax-free bond interest is reported in the “Exempt Income” section.
Declare the Amount: Ensure that you report the exact amount of exempt income you’ve received. This is necessary because the Income Tax Department requires taxpayers to provide all income details, even if they are not taxable.
Supporting Documents: While exempt income is not taxable, it is still important to maintain the supporting documents for the income you’ve reported. These documents can include dividend receipts, bond interest certificates, agricultural income statements, and insurance maturity statements, as these may be requested by the tax authorities for verification.
Cross-Verify: Make sure that the exempt income reported matches the figures mentioned in your annual tax statements, such as Form 16 (if applicable), Form 26AS (for TDS), or any other certificates received for income, dividends, or interest.
Reporting exempt income accurately ensures that you stay compliant with the tax laws and helps avoid discrepancies during the tax return assessment process.
Practical Scenarios and Questions
Scenario 1: I received a dividend from an Indian company. Do I need to report this in my ITR?
Yes, even though dividend income is exempt from tax, it still needs to be reported in your ITR. You’ll need to mention the amount of dividend you received under the ‘Exempt Income’ section of your return.
Scenario 2: I sold a long-term asset and made a capital gain. Is the gain taxable?
Long-term capital gains from listed stocks and mutual funds are generally taxed. However, if your gains are below a specified threshold (₹1.25 lakh), they are exempt. In such cases, the gain still needs to be reported in your ITR under the appropriate section.
Scenario 3: I receive a gift from my friend. Is it taxable?
Gifts from non-relatives are generally taxable if the value exceeds ₹50,000. However, gifts from specified relatives (like parents or siblings) are exempt from tax, irrespective of the amount. Be sure to report the gift accurately in the ITR if required.
Scenario 4: How do I treat agricultural income when filing my ITR?
Agricultural income is fully exempt from tax but must still be reported in your ITR. It should be reported under the ‘Agricultural Income’ section, and you may need to include the total amount of income along with the nature of the agricultural activity.
Where to Report Different Incomes
Type of Exempt Income
| Where to Report in ITR
|
Agricultural Income
| Exempt Income section
|
Dividend Income
| Exempt Income section
|
Tax-Free Bond Interest
| Exempt Income section
|
Long-Term Capital Gains (LTCG)
| Exempt Income section (if below threshold)
|
Life Insurance Maturity Proceeds
| Exempt Income section
|
Provident Fund Income | Exempt Income section
|
Retirement Benefits | Exempt Income section
|
Gifts from Relatives | Exempt Income section
|
Important Recent Changes (2025)
In 2025, the Income Tax Act introduced several amendments that impact the reporting of exempt income. One major change involves the introduction of a new tax regime where certain exemptions are no longer available, such as those for long-term capital gains. The government has also modified the provisions relating to dividends, potentially affecting their taxability. However, the reporting requirements for exempt income remain largely unchanged, and taxpayers should be diligent about accurately reporting their exempt income to stay compliant.
Conclusion
Exempt income plays an essential role in reducing the overall taxable income of taxpayers. However, it must be correctly reported in the Income Tax Return (ITR) form to maintain compliance with the law. Understanding what qualifies as exempt income and knowing where to report it can help taxpayers avoid errors, penalties, and delays in processing their returns. It is also crucial to stay updated with the latest changes in tax laws that may affect how exempt income is treated. By reporting exempt income accurately, taxpayers ensure they benefit from the exemptions while complying with the tax regulations. For a seamless, secure, and hassle-free filing experience, it is highly recommended to download theTaxBuddy mobile app, which will help simplify your ITR filing and ensure that all exemptions are correctly accounted for.
FAQs
Q1: What types of income are considered exempt?
Exempt income refers to income that is not subject to tax under Indian tax laws. Some common examples include agricultural income, dividend income (up to ₹10 lakh), interest on savings accounts (up to ₹10,000 per year), and certain long-term capital gains on the sale of specified assets such as listed securities. Additionally, income earned by charitable organizations, provided they are registered under Section 80G, may also be exempt from tax. The key point is that although this income is exempt, it must still be reported in the Income Tax Return (ITR) for transparency.
Q2: Do I need to report exempt income in my ITR?
Yes, exempt income must be reported in your ITR, even though it is not taxable. Reporting exempt income ensures transparency, helps tax authorities monitor income sources, and allows taxpayers to remain compliant with tax regulations. For instance, dividend income, agricultural income, or interest on savings accounts needs to be included under the 'Exempt Income' section in the ITR form.
Q3: Is dividend income from mutual funds exempt?
Yes, dividend income from mutual funds is exempt from tax up to ₹10 lakh per year. If your dividend income exceeds ₹10 lakh in a financial year, the portion above ₹10 lakh will be taxable at a rate of 10% under Section 115BBDA of the Income Tax Act. It is important to note that even though it is exempt up to the ₹10 lakh limit, this income must still be reported in the ITR to maintain proper records.
Q4: How is HRA exempt income calculated?
House Rent Allowance (HRA) is partially exempt from tax under Section 10(13A) of the Income Tax Act. The exempt portion is calculated as the least of the following three amounts:
Actual HRA received.
Rent paid minus 10% of basic salary.
50% of salary (for metro cities) or 40% of salary (for non-metro cities).
To claim HRA exemption, you must submit rent receipts and other supporting documents, and the exemption is allowed only if the rent exceeds 10% of your salary.
Q5: What is the exemption limit for interest on savings accounts?
Under Section 80TTA, the interest income from a savings account is exempt up to ₹10,000 per year for individuals and Hindu Undivided Families (HUFs). If the interest earned exceeds ₹10,000, the excess amount will be taxable under the head "Income from Other Sources." The exemption limit is specific to savings accounts and does not apply to fixed deposits or recurring deposits.
Q6: Is agricultural income always exempt from tax?
Agricultural income is generally exempt from tax under Section 10(1) of the Income Tax Act, provided it is derived from agricultural activities. However, it must be genuinely earned from the cultivation of crops or agricultural land. If agricultural income is substantial, taxpayers may need to disclose it in their ITR, even though it is exempt, especially when it exceeds ₹5,000 in a year. Also, if agricultural income is substantial and other income exceeds the basic exemption limit, agricultural income may impact the overall tax rate.
Q7: How should I report long-term capital gains in my ITR?
Long-Term Capital Gains (LTCG) from the sale of listed equity shares or equity-oriented mutual funds held for more than 12 months are exempt up to ₹1.25 lakh. Gains exceeding ₹1.25 lakh are taxable at 12.5% without any indexation benefit. The earlier exemption under Section 10(38) no longer applies, having been replaced by Section 112A. LTCG should be reported under the "Capital Gains" section in the Income Tax Return (ITR), ensuring correct calculation with the updated exemption limit and tax rates as per the latest amendments.
Q8: Are there any recent changes to dividend income taxability?
Yes, as of FY 2024-25 (Assessment Year 2025-26), dividend income exceeding ₹10 lakh in a year is taxable. The portion exceeding ₹10 lakh is subject to tax at the rate of 10% under Section 115BBDA. The dividend income within the ₹10 lakh limit remains exempt. This change was introduced to align the tax treatment of dividend income with other sources of income, ensuring that high dividend earners pay tax on their excess earnings.
Q9: Can TDS be deducted on exempt income?
Yes, in some cases, TDS (Tax Deducted at Source) can still be deducted on exempt income. For example, TDS is deducted on dividend income from mutual funds or interest income from savings accounts, even though they are exempt up to certain limits. In these cases, taxpayers can claim the TDS amount as a credit when filing their ITR and may get a refund if the TDS amount exceeds their total tax liability.
Q10: Can I claim exemption for income from charitable trusts?
Yes, income from registered charitable trusts can be exempt from tax under Section 10(23C) of the Income Tax Act. However, the exemption applies only if the trust is registered under the Income Tax Department and follows the guidelines for charitable activities. You must report the income from charitable trusts in the ITR, even though it is exempt. Additionally, you need to ensure the income is being utilized for charitable purposes and not diverted for personal gain.
Q11: What happens if I don't report exempt income in my ITR?
Failing to report exempt income in your ITR can lead to scrutiny by the tax authorities. While exempt income is not taxable, it must be disclosed in the ITR for transparency. Not reporting it may raise red flags during assessment, leading to penalties or further investigations. It is essential to disclose all types of income, including exempt income, to avoid complications and ensure compliance with the tax laws.
Q12: Is there a limit on exempt income?
Yes, certain types of exempt income have limits. For example, interest on savings accounts is exempt up to ₹10,000 under Section 80TTA. Similarly, dividend income is exempt up to ₹10 lakh, and agricultural income is exempt only if it is derived from genuine agricultural activities. Any income above these thresholds will be subject to tax. It's important to stay informed about the latest tax rules to understand the exemption limits and ensure you are not exceeding them.
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