EXEMPTED INCOME

(Section-10)
Presented by:MANYA

Introduction
Chapter III of the Income-tax Act, 1961 deals with the Incomes which do not form part of total income. This Chapter covers sections 10 to 13A Section 10 contains numerous clauses subject to amendments, exempting various kinds of income from inclusion for purposes of tax. These exemptions stem from social, economic, political, international and other considerations and the contents and scope of the exemptions change from time to time.

Conti
Broadly, Section 10 provides exemptions to various categories of persons and to various types of income such as :

These are :
a) certain incomes of non-residents and non-citizens (Remuneration or fees, interest on notified securities) b) certain incomes of salaried employees (pension, gratuity, HRA, LTC, VRS etc.) c) income from certain specific securities, bonds, certificates etc. (such as Govt. Relief Bonds, PPF Interest) d) Income of certain type of notified bodies, funds and institution

e) Subsidies to promote business f) Certain income for social, political reasons (such as agricultural income) g) Avoidence of Double Taxation (Share of profit from partnership firm & amt. received from HUF)

Section-10(1)
Agricultural Income is exempt from tax if it comes within the definition of agricultural income as given in Section 2(1A)

Section 10(2)
Any Sum Received from HUF : Subject to the provisions of 64(2), any sum received by an individual as a member of a HUF, where such sum has been paid out of the income of the family, or, in the case of any impartibly estate, where such sum has been paid out of the income of the estate belonging to the family.

Section 10(2A)
Share of Profit from the Partnership Firm : In the case of a person being a partner of a firm which is separately assessed as such, his share in the total income of the firm. (upto A.Y. 92-93 it is taxable)

Section 10(10D)
Amount paid on Life Insurance Policies

Any sum received on life insurance policies (including bonus) is exempt. Exclusions : a. any sum received u/s. 80DD(3) b. any sum received under a Keyman Insurance Policy c. any sum received under an insurance policy (issued after 31.03.2003) in respect of which the premium paid in any year during the term of policy, exceeds 20% of the actual sum assured However, sum received under such policy on the death of a person shall continue to be exempt . Actual sum assured does not include any premiums agreed to be returned or any benefits by way of bonus .

Section 10(32)
Income of Minor: In case the income of an : individual includes the income of his minor child in terms of section 64(1A), such an individual shall be entitled to exemption of Rs. 1,500/- in respect of each minor child if the income of such minor is includible under section 64(1A) exceeds that amount.

Section 10(33)
Capital Gain on Transfer of US 64 : Any income arising from the transfer of a capital asset being a unit of US 64and where the transfer of such assets takes place on or after 1.04.2002, shall be exempt from tax. This exemption is applicable whether US 64 Unit is long term capital asset or short term capital asset.

Section 10(34)
Income from Dividends referred in Sec. 115-O :
Any income by way of dividends received from Domestic Company. As per Section 2(22A), Domestic Company means an Indian Company, or any other company which, in respect of its income liable to tax under this Act, has made the prescribed arrangements for the declaration and payment, within India, of the dividends (including dividends on preference shares) payable out of such income.

Section 10(35)
Income from Units:
a) Income received in respect of units of Mutual Fund specified under clause (23D); or b) Income received in respect of units from the Administrator of the specified undertaking; or c) Income received in respect of units from the specified company
(It may please be noted that Transfer of the abovementioned Unites are not exempt under this provision.)

Section 10(37)
Income from transfer of Agricultural Land :
Income from transfer of Agricultural Land is exempt if following conditions are fulfilled : a. such land is situate in any area referred to in item (a) or item (b) of sub-clause (iii) of clause (14) of Section 2
(land within Municipality, cantonment board having more than 10000 population, within 8 kms from local limits or municipality are not covered)

Section 10(37) : Contd.

such land, during the period of two years immediately preceding the date of transfer, was being used for agricultural purposes by such HUF or individual or a parent of his. such transfer is by way of compulsory acquisition under any low or a transfer the consideration for which is determined or approved by the Central Government or the Reserve Bank of India.

Such income has arisen form the compensation or consideration for such transfer received by such assessee on or after the 01.04.2004

Section 10(38)
LTCG on transfer of equity shares/units chargeable to STT :
Long Term Capital Gains arising on transfer of equity shares or units of equity oriented mutual fund is not chargeable to tax from the assessment year 2005-06 if such transaction is covered by securities transaction tax. Mutual Fund as defined u/s. 10(23D) i.e. Mutual fund registered under the SEBI Act, 1992, Mutual fund set up by Public Sector Bank, Public Financial Institution or Authorized by the RBI and subject to such conditions as the Central Govt. may by notification in the Official Gazette, specify in this behalf

Section 10(10)
Gratuity :
Gratuity exempt u/s. 10(10) are as under for different class of employee : (a) Government Employee Fully exempt (b) Non Govt. Employee covered by the Payment of Gratuity Act, 1970 : (i) 15 days salary based on salary last drawn for each year of service (ii) Rs. 3,50,000 (iii) Gratuity actually received Least of the above three is exempt.

Section 10(10) : Contd (c) Non-Govt. employee and not covered by payment of Gratuity Act, 1970 (i) Rs. 3,50,000 (ii) Half months average salary for each completed year of service (iii) Gratuity actually received Least of the above three is exempt. the

Section 10(10C)
Amount received at the time of VRS : Amount received (Compensation) at the time of voluntary retirement or separation is exempt from tax if the following conditions are satisfied : Compensation is received at the time retirement or termination. Compensation is received by an employee of the specified undertakings. Compensation is received in accordance with the scheme of voluntary retirement/separation which is framed in accordance with prescribed guidelines. Maximum amount of exemption is Rs. 5,00,000/-.

(a) (b) (c)

(d)

Section 10(13A)
House Rent Allowance :
The least of the following three is exempt from tax : (a) An amount equal to 50% of salary where residential house is situated in Metro Cities and an amount equal to 40% of salary where residential house is situated at any other places. (b) HRA received by the employee in respect of the period during which rental accommodation is occupied by the employee during the previous year. (c) The excess of rent paid over 10% of salary

22

RATES OF INCOME TAX (Assessment Year 20011-12)

1.

In case of every Individual/ HUF/ AOP/BOI artificial juridical Person.

INCOME (A.Y. 2009-10) Up to 150000 Next 150000 Next 200000 Above 500000

INCOME (A.Y. 20010-11) Up to 160000 Next 140000 Next 200000 Above 500000

TAX RATE NIL 10% 20% 30%

23

Contd
2. In case of resident women below 65 years of age.
INCOME (A.Y. 2009-10) Up to 180000 Next 120000 INCOME (A.Y. 2010-11) Up to 190000 Next 110000 TAX RATE NIL 10%

Next 200000 Above 500000

Next 200000 Above 500000

20% 30%

24

Contd
3. In case of resident senior citizen i.e. age of 65 years or above
INCOME (A.Y. 2009-10) Up to 225000 Next 75000 Next 200000 Above 500000 INCOME (A.Y. 2010-11) Up to 240000 Next 60000 Next 200000 Above 500000 TAX RATE NIL 10% 20% 30%

25

Contd
PERSONS TAX RATE

FIRMS
DOMESTIC COMPANY FOREIGN COMPANY LOCAL AUTHORITIES CO-OPERATIVE SOCIETIES Up to 10000 10000-20000 Above 20000

30%
30% 40% 30%

10% 20% 30%

26

Surcharge & Cess

Person Rate of surcharge

Individual / AOP / BOI / HUF / 10% of tax liability if income exceeds rs 10 lacs artificial juridical person
Firm 10% of tax liability, if income exceeds rs. 1 crore

Domestic company Foreign company

Co-operative society Local authority

10% of tax liability, if income exceeds rs. 1 crore 2.5% of tax liability, if income exceeds rs. 1 crore
N.A. N.A.

Education cess and secondary & higher education cess is applicable on every person @ 2% & 1% respectively on tax liability and surcharge applicable, if any.
27

28

Meaning
Salary includes [section17(1)] :i. Wages ii. Any annuity on pension iii.Any gratuity iv.Any fees, commission, bonus, perquisite on profits in lieu of or in addition to any salary on wages v. Any advance of salary vi.Any earned leave vii.Employers contribution (taxable) towards recognized provident fund.
29

BASIS OF CHARGE
Income is taxable under head Salaries, only if there exists Employer - Employee Relationship between the payer and the payee.

The following incomes shall be chargeable to income-tax under the head Salaries:1.Salary Due 2.Advance Salary [u/s 17(1)(v)] 3.Arrears of Salary ((Note: (i)Salary is chargeable on due basis or receipt basis, whichever is earlier. (ii)Advance salary and Arrears of salary are chargeable to tax on receipt basis only.)))
30

Allowances
Allowance is generally defined as a fixed quantity of money or other substance given regularly in addition to salary for the purpose of meeting some particular requirement connected with the services rendered by the employee or as compensation for unusual conditions of that service. 1.Dearness Allowance - It is Always Taxable. 2.City Compensatory Allowance - It is Always Taxable.
31

Contd
3.

House Rent Allowance

Exemption In Respect Of House Rent allowance is regulated by rule 2A. The least of the three given below is Exempt from Tax.

An amount equal to 50 % of salary. Where residential house in situated at bombay, calcutta, delhi or madras and an amount equal to 40 % of salary where residential house is situated at any other place. House rent allowance received by the employee in respect of the period during which rental accommodation is occupied by the employee during the previous year. The excess of rent paid over 10 % of salary.
32

Contd
4. Entertainment allowance [sec.169(ii)]Entertainment allowance is first included in salary in come under the head salaries and thereafter a deduction is given on the basis enumerated below:
Status of Employee

Non- Government

Government
Least of the Following is deductible : 1. Rs. 5000 2. 20 % of basic salary 3. Amount of entertainment allowance grated during the previous year

Nothing is deductible

33

Contd
5. Special allowances prescribed as exempt under section 10(14) In the cases given below the
amount of exemption under section 10(14) is :
i. The amount of the allowance ; or ii. The amount utilized for the specific purpose for which allowance is given. Whichever is lower.

34

Exemption is available on the aforesaid basis in the case of following

allowances :NAME OF ALLOWANCE Travelling Allowance/ Transfer Allowance

Conveyance Allowance Daily Allowance
NATURE OF ALLOWANCE

Any allowance granted to meet the cost of travel on tour or on transfer (including sum paid in connection with transfer, packing and transportation of personal effects on such transfer). Conveyance allowance granted to meet the expenditure on conveyance in performance of duties of an office (expenditure for covering the journey between office and residence is not to be included). Any allowance whether granted on tour or for the period of journey in connection with transfer, to meet the ordinary daily charges incurred by an employee on account of absence from kamal maghani 35 this normal place of duty.

Contd
6. When exemption does not depend upon expenditure - In the cases given below, the amount of exemption
does not depend upon expenditure incurred by the employee. Regardless of the amount of expenditure, the allowances given below are exempt to the extent of
i. the amount of allowance ; or ii. the amount specified in rule 2BB,

Whichever is lower.
36

Contd
Name of allowance Special Compensatory (Hill Areas) Allowance Exemption as specifiedin rule 2BB Amount exempt from tax varies from Rs. 300 per mount to Rs. 7,000 per month The amount of exemption varies from Rs. 200 Per month to Rs. 1,300 per month

Border area allowance

Tribal areas/ scheduled areas Rs. 200 Per Month allowance The amount of exemption isAllowance for transport a.70 per cent of such allowance; or employees b.Rs. 6,000 per month, whichever is lower. The amount exempt is limited to Rs. 100 per month per child up to Children education allowance a maximum of two children. It is exempt from tax to the extent of Rs. 300 per month per child Hostel expenditure allowance up to a maximum of two children. Compensatory field area allowance Exemption is limited to Rs. 2,600 per month in some cases.
37

Contd
Name of Allowance Exemption as Specified in Rule 2BB Compensatory modified area Exemption is limited to Rs.1,000 per month in some cases. allowance Counter insurgency Exemption is limited to Rs.3,900 per month in some cases. allowance It is exempt up to Rs. 800 per month (Rs. 1,600 per month in the Transport allowance case of an employee who is blind or orthopedically handicapped) Underground allowance High altitude allowance Highly active field area allowance Island duty allowance Exemption is limited to Rs. 800 per month. It is exempt from tax up to Rs. 1,060 per month (for altitude of 9,000 to 15,000 feet) or Rs. 1,600 per month (for altitude above 15,000 feet). It is exempt from tax up to Rs. 4,200 per month.

It is exempt up to Rs. 3,250 per month.

38

Contd
7. Allowance to Government employees outside India [Sec. 10( 7)] - Any allowance paid or allowed outside
India by the Government to an Indian citizen for rendering service outside India is wholly exempt from tax. 8. Tiffin allowance - It is taxable. 9. Fixed medical allowance It is taxable. 10. Servant allowance - It is taxable.

39

Contd
11. Allowance to High Court and Supreme Court Judges Any allowance paid to High Court Judges under section & 22C of the High Court Judges (Conditions of Service) Act, 1954 is not chargeable to tax. 12. Allowance received from a United Nations Organization - Allowance paid by a United Nations Organization to its employees is not taxable by virtue of section 2 of the UN (Privileges and Immunities) Act, 1974.

40

TERMINAL BENEFITS
1. Gratuity [Sec.10(10)] Gratuity is a retirement benefit. It is
generally payable at the time of cessation of employment and on the basis of duration of service. Tax treatment of gratuity is given below: Status of Employee

Government Employee

Non-government employee covered by the payment of Gratuity Act, 1972

Non-government employee not covered by the payment of Gratuity Act, 1972

It is fully exempt from tax under section 10(10)(i)

Least of following is exempt: 1) 15 days salary x Length of service 2) Rs. 3, 50, 000 3) Gratuity actually received.

Least of following is exempt: 1) month avg. salary x Length of service 2) Rs. 3, 50, 000 3) Gratuity actually received.
41

Contd
2. PENSION [SEC. 17(1)(ii)] - Pension is chargeable tax
as follows :COMMUTED PENSION

UNCOMMUTED

Government Employee

Non-Government Employee
If Gratuity Received 1/3 of commuted pension is exempt If Gratuity not Received

Entire Commuted Pension is exempt whether or not Gratuity received.

Taxable for Government as well as Non-Government employees

1/2 of commuted pension is exempt 42

Contd
3. Annuity [Sec. 17(1)(ii)] An annuity payable by a present employer
is taxable as salary even if it is paid voluntarily without any contractual obligation of the employer. An annuity received from an ex-employer is taxed as profit in lieu of salary. 4. Retrenchment compensation [Sec. 10(10B)] Compensation received by a workman at the time of retrenchment is exempt from tax to the extent of the lower of the following:
a. an amount calculated in accordance with the provisions of sec. 25F(b) of the Industrial Disputes Act, 1947; o b. such amount as notified by the Government (i.e., Rs, 5, 00, 000); or c. the amount received.

43

Contd
5. Compensation received at the time of Voluntary Retirement [sec.10 (10C)] Compensation received at the time of voluntary retirement is exempt from tax, subject to certain conditions. Maximum amount of exemption is Rs. 500000.

44

Provident Fund
Provident Fund Scheme is a welfare scheme for the benefit of employees. The employee contributes certain sum to this fund every month and the employer also contributes certain sum to the provident fund in employees A/c. the employers contribution to the extent of 12% is not chargeable to tax.

45

LEAVE SALARY
Encashment of leave by surrendering leave standing to ones credit is known as leave salary.
LEAVE ENCASHMENT

During Employment

Retirement / Leaving the Job

Chargeable to Tax

Government Employee

Non-Government Employee

Fully Exempt

Least of following is exempt :1) Earned Leave on the basis of Average Salary 2) 10 x Average monthly salary 3) Rs. 300000 4) Leave Salary Received
46

Deductions Admissible in Computing Income under head SALARIES

1. Entertainment allowance granted by employer [Sec.16(ii)]: This deduction is available in case

of Government employees only.

2. Employment Tax / Professional Tax [Sec.16(iii)]: Any sum paid by assessee on

account of a tax on employment within the meaning of Article 276(2). Under the said article employment tax cannot exceed Rs. 2500 p.a.
47

Relief in respect of Advance or Arrears of Salary u/s 89 When an assessee is in receipt of a sum in the nature of salary, being paid in arrears or in advance, due to which his total income is assessed at a rate higher than that at which it would otherwise have been assessed, Relief is granted on an application made by the assessee to the assessing officer.
48

49

Basis of Charge [sec. 28]

The following income is chargeable to tax under the head Profits and gains of business or profession: 1.Profits and gains of any business or profession; 2.Any compensation or other payments due to or received by any person specified in section 28(ii); 3.Income derived by a trade, professional or similar association from specific services performed for its members; 4.The value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession; 50

Contd
5. any profit on transfer of the Duty Entitlement Pass Book Scheme. 6. Any profit on the transfer of the duty free replenishment certificate; 7. Export incentive available to exporters; 8. Any interest, salary, bonus, commission or remuneration received by a partner from firm; Any sum received for not carrying out any activity in relation to any business or not to share any know-how, patent, copyright, trademark, etc.

51

Contd
9. Any sum received under a Keyman insurance policy including bonus; 10. Profits and gains of managing agency; and 11. Income from speculative transaction. Income from the aforesaid activities is computed in accordance with the provisions laid down in section 29 to 44D.

52

Expenses Expressly Allowed

1. Rent, rates, taxes, repairs and insurance for building [Sec. 30] 2. Repairs and insurance of machinery, plant and furniture [Sec. 31] 3. Depreciation allowance [Sec. 32] 4. Tea/coffee/rubber development account [Sec. 33AB] 5. Expenditure on acquisition of patent rights and copyrights [Sec. 35A] 6. Insurance premium [Sec. 36 (1) (i)] 7. Premier for insurance on health of employees [Sec. 36(1) (ib)]
53

Contd
8. Bonus or commission to employees [Sec. 36(1)(ii)] 9. Interest on borrowed capital [Sec. 36(1)(iii)] 10. Employers contribution to recognized provident fund and approved superannuation fund [Sec. 36(1)(iv)] 11. Contribution towards approved gratuity fund [Sec. 36(1)(v)] 12. Employees contribution towards staff welfare schemes 13. Bad debts [Sec. 36(1)(vii)] 14. Family planning expenditure [Sec. 36(1) (ix)]
54

Contd
15. Banking cash transaction tax, securities transaction tax and commodities transaction tax. 16. Advertisement expenses [Sec. 37(2B)]. 17. General Deduction [Sec. 37(1)].

55

SPECIFIC DISALLOWANCES
1. Interest, Royalty, fees for Technical Services payable outside India,if on such amount tax is deductible but tax has not been deducted or deposited with Government. [Sec. 40(a)(i)] 2. Fringe Benefit Tax [Sec. 40(a)(ic)] 3. Income-Tax [Sec. 40(a)(ii)] 4. Salary Payable Outside India without Tax Deduction [sec. 40(a)(iii)] 5. Provident Fund Payment without tax Deduction at Source [Sec. 40(a)(iv)] 6. Certain specified expenses in case of Partnership Firm 56

Contd
7. Interest paid by an AOP/ BOI to its members is not allowed as deduction by virtue of sec. 40(ba) 8. Payment to relatives in excess of fair value not deductible [Section 40A(2)] 9. Expenditure in excess of Rs. 20,000 in aggregate in a day paid otherwise than by account payee cheque drawn on a bank or account payee bank draft Not allowable [Section 40A(3))] 10. Amount not deductible in respect of certain unpaid liabilities [Sec.43B]
57

Books of Accounts to be maintained [Section 44AA]

The persons carrying on specified professions are required to maintain specified books of account only if the gross receipts of their profession have exceeded Rs. 1,50,000 Every other person carrying on business or profession shall keep and maintain such books of account and other documents as may enable the Assessing Officer to compute his total income in accordance with the provisions of this Act.
a) If his income from business or profession exceeds Rs. 1,20,000; b) Total sales/turnover/gross receipts thereof exceeds Rs.10,00,000 c) the assessee has claimed his income lower 58 than deemed profits

Tax Audit u/s 44AB

This section applies to following :Person carrying on Business Profession Accounts are to be audited for previous year in which Total sales, turnover or gross receipts exceed Rs. 40,00,000 Gross receipts exceed Rs. 10,00,000

Business covered u/s He has claimed his income to be lower than the 44AB, 44AE, 44AF, profits or gains so deemed under the respective 4BB and 44BBB section.

The assessee is required to get his accounts of such previous year audited by a Chartered Accountant before 30th September of the assessment year.
59

Special Provisions for Computing Income on Estimated Basis 44AD, 44AE & 44AF
Not withstanding anything contained in Sections 28 to 43C, the following provisions will apply.
Sec. 44 AD Sec. 44 AE Sec. 44AF

Business of Assessee
This Section applies if

Civil construction supply of labour for it.

or Plying, hiring or leasing Retail trade in any goods carriages owned by goods or him. merchandise.
Total business turnover in that previous year doesnt exceed Rs. 40 lacs. 5% of Gross receipts or such higher sum as declared by him in his Return of Income. 60

Gross receipts of such Goods carriages owned by business during the assessee at any time during previous year do not previous year doesnt exceed exceed Rs. 40 lacs. 10 lacs 8% of Gross receipts (No. of heavy goods vehicle x Rs. 3500 x NM) + (No. of other vehicles x Rs. 3150 x NM) NM = No. of months

Deemed Profits

61

General [Section 56(1)]

Income of every kind, which is not to be excluded from the total income and not chargeable to tax under any other head, shall be chargeable under the head Income from Other Sources.
62

Specific Income [Section 56(2)]

1. Dividends. 2. Lottery winnings etc.: Winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever. 3. Any sum received by an employer-assessee from his employees as contributions to any welfare fund, if the same is not chargeable under the head Profits and Gains of Business or Profession. 4. Income by way of interest on securities if not chargeable as Profits and Gains of Business or Profession
63

Contd
5. Income from letting on hire of Plant, machinery or furniture belonging to the assessee, if not chargeable to under the head Profits and Gains of Business or Profession. 6. Income from letting on hire of machinery, plant or furniture and also buildings, and the letting of buildings is inseparable from letting of such machinery, plant or furniture, if the same is not chargeable to income tax under the head Profits and Gains of Business or Profession. 7. Interest on bank deposits and loans
64

Contd
8. Any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy, if the same is not chargeable to income-tax under the head Profits and Gains of Business or Profession or under the head Salaries. 9. Cash Gifts exceeding Rs. 50,000 10. Interest on foreign government securities 11. Agricultural income received from outside India 12. Income from sub-letting 13. Directors fee 14. Income of race establishment
65

Thank you

66