Exempt Income
Understanding Tax Exemptions and Categories Explained

While calculating the tax liability of an individual, there are certain income sources that do not form a part of the total income. Section 10 of the Income Tax Act 1961 includes all those exemptions that a taxpayer can get while paying income tax. 

Agriculture Income (less than Rs. 5000)

Section 10(1) offers tax relief to India’s farmers and those who make a living from agriculture. The section further clarifies and lists down the type of incomes from agriculture that would be eligible for tax exemption under Section 10(1). They are:

• Income from sale of farm produce
• Rent or income generated through agricultural land holding in India
• Income derived from agricultural operations, such as cultivation, ploughing, and tilling
• Income made from subsequent operations for preservation and to increase the yield of the produce, such as cutting, weeding, pruning, irrigation, use of compost, manure, and fertiliser, etc.
• Income made from renting out buildings required for preserving farm produce or for carrying out other agricultural operations

In ITR 1, agricultural income should be reported in the Agriculture Income column. However, ITR 1 must only be used if agricultural income is up to Rs.5,000. If the stated income goes over this limit, form ITR-2 must be filed.

Section 10(10BC) - Any amount received as compensation on account of disaster

Any amount received/receivable by an individual or legal heir from the 

• Central Government; or 
• The State Government; or
• A local authority

on account of any disaster shall be exempt from tax . However, the amount received / receivable by the individual or legal heirs of the individual is not allowed as an exemption under section 10(10BC) to the extent the deduction is allowed under the Income Tax Act on account of any loss / damage caused by the disaster.

Here disaster means any disaster on account of any natural or man-made causes. It also includes disaster on account of any accident or negligence. Such a disaster should have resulted in any substantial loss of life or human suffering / damage or destruction of property / damage or degradation of the environment. The magnitude of such a disaster should be beyond the coping capacity of the community of the affected area.

Section 10(10D)

Any amount received under a life insurance policy, including bonus is exempt from tax. However, the following are some of the criteria to receive the benefit:

• Policies issued before 1st April 2012 and the premium paid on this policy is not more than 20% of the sum assured.
• Policies issued after 1st April 2012 and the premium paid on this policy is not more than 10% of the sum assured.
• With effect from 1st April 2013, in respect of policy taken in the name of a person suffering from diseases specified under section 80DDB or in the name of a person suffering from  disability specified under section 80U, the limit will be increased to 15% of capital sum assured.

Note 1  No exemption would be available in case of any sum received under section 80DD(3) or under Keyman insurance policy.

Note 2  W.e.f. Assessment Year 2021-22, any sum received from Unit Linked Insurance Plan (ULIP) is not entitled for exemption under section 10(10D) if such ULIP is issued on or after the 01-02-2021 and the amount of premium payable for any of the previous year during the term of such policy exceeds 2,50,000. Further, if premium is payable by a person for more than one ULIP, issued on or after 01-02- 2021, the exemption under Section 10(10D) shall be available in respect to those ULIPs, where the aggregate amount of premium does not exceed Rs. 2,50,000 in any of the previous year during the term of any of those policies.

Note. 3 Amount received on death of the person will continue to be exempt without any condition.

Note. 4 In the Union Budget 2023, a monetary limit is proposed on other life insurance policies,  It is provided that no exemption shall be available in respect of life insurance policies (excluding ULIP) issued on or after 01-04-2023 if the premium payable for any year during the term of policy exceeds 5 lakhs.

Section 10 (11) Statutory provident fund received

Under this section, Any amount received in terms of contribution or interest from a provident fund account on retirement or termination of service is exempted.

Section 10 (12) Recognised provident fund received

Section 10(12) exempt the accumulated balance, due and payable, to the employee participating in the Recognized Provident Fund. The exemption is available to the extent covered in Rule 8 of Part A of the Fourth Schedule. As per rule 8 of part A of the fourth schedule, accumulated balance payable to an employee covered in a Recognized Provident Fund shall be exempted only under any of the following cases- 

• The employee has provided continuous service, with his employer, for a period of 5 years or more.
• In case the service of the employee is terminated before the period of 5 years, the reason for termination should be any of the following-
• Termination of service due to Employee’s ill-health; or
• Termination of service by the contraction; or
• Termination of service due to discontinuation of employer’s business; or
• Termination of service due to any reason which is beyond the control of the employee. 

Section 10(13) Payment from approved superannuation fund

Payments made from the fund are exempt from tax under section 10(13) in following cases:

• Payment on death of beneficiary; or
• Payment to employee in lieu of, or in commutation of an annuity on his retirement at or after the specified age or on his becoming incapable prior to such retirement; or
• Payment by way of refund of contributions on the death of a beneficiary; or
• Payment to employee by way of refund of his contributions on leaving the service in connection with which the fund is established otherwise than by retirement at or after aspecified age or on his becoming incapacitated prior to such retirement; or
• Payment to employee by way of transfer to his account under a pension scheme referred to in section 80CCD.

Section 10(16) Educational scholarship 

Any amount received as educational scholarship (i.e., scholarship to meet the cost of education is exempt from tax in the hands of recipient).

Section 10(17) Daily allowance to a Member of Parliament 

Following allowances are exempt from tax in the hands of a Member of Parliament and a Member of State Legislature—

• Daily allowance received by a Member of Parliament or by a Member of State Legislature or by member of any committee thereof.
• Any other allowance received by a Member of Parliament under the Members of Parliament (Constituency Allowance) Rules, 1986.
• Any Constituency allowance received by a Member of State Legislature. 

Section 10(17A) Awards

Any payment received in pursuance of following (whether paid in cash or in kind) is exempt from tax   

•  Any award instituted in the public interest by the Central Government or State Government or by any other body approved by the Central Government in this behalf. [As amended by Finance Act, 2022]
• 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.

Section 10(18) Pension to gallantry award winner

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 exempt.

Section 10(19) Family pension received by the family members of armed forces

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.

Section 10(26) Income of a member of a Scheduled Tribe

Income of a member of a Scheduled Tribe is exempt from tax, if following conditions are satisfied:    Such member resides in any area in the State of Nagaland, Manipur, Tripura, Arunachal Pradesh, Mizoram or district of North Cachar Hills, Mikir Hills, Khasi Hills, Jaintia Hills and Garo Hills or in the Ladakh region of the State of Jammu and Kashmir Such exemption is available in respect of income which accrues/arises from any source in such areas or income by way of dividends/interest on securities arises from any area.

Section 10(26AAA) Income of a “Sikkimese” individual

Any income from the State of Sikkim; or 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.