What Is Exempted Income? List Out Exempted Income By Proper Classification

INTRODUCTION

As per the Income Tax Act, 1961, each person who earns an income in India should pay income tax on such earning. That is the reason the income that you create in a fiscal year from all potential sources is charged at specified tax rates. Despite the fact that the income earned is taxable, the Act additionally takes into consideration various kinds of exclusions that help a person in bringing down their available income. These exceptions permit explicit salaries to be tax-exempt in nature. Thusly, the excluded income isn’t added to one’s gross total income which decreases his liability on tax.

Exempted income means particular sorts or measures of income do not expose to government personal assessment. A few kinds of income may likewise be excluded from state personal duty. The IRS figures out which sorts of incomes are excluded from government personal duty just as the conditions for each.[1]

The principles and guidelines that oversee exempt income vary from nation to nation – and even by locale inside a nation. In any case, they are made as various kinds of incentives and breaks to encourage particular sorts of development and financial prosperity. Various kinds of income can be excluded, partially exempt, or non-exempted. It is a significant qualification to make while setting up a tax return and seeing how to work a little or huge business. Understanding exempted income can permit one to legitimately and precisely see how to utilize tax collection benefits.

SECTION 10

Section 10 of the Income Tax Act permits a list of exemptions that are accessible to citizens, both salaried just as non-salaried people. You can guarantee an exception under Section 10 for various kinds of salaries that you acquire in a fiscal year. Section 10 contains different subsections which permit exceptions on various sorts of earnings. These exceptions can be asserted by the accompanying sorts of the assessee-

1. Individuals including both salaried as well as non-salaried
2. Body of persons
3. Associations
4. Hindu Undivided Families (HUFs)
5. Trusts
6. Companies
7. Foreign Companies, etc.

Following are some of the incomes that are regarded as tax-free under the Income-tax Act, 1961-

1. Section 10(1)- Agricultural income

1. Rent or income acquired from a land situated in India which is utilized for rural purposes.
2. Income acquired from horticultural land situated in India by doing agrarian exercises. These horticultural exercises likewise incorporate handling of the farming products to make them fit available to be purchased in the market.
3. Income procured from a farmhouse gave explicit conditions are satisfied.
4. In addition, income acquired from saplings or seedlings which are filled in a nursery would likewise be considered as a rural income.

2. Section 10(2)- Income received by a coparcener from the HUF

If you are a coparcener in a Hindu Undivided Family (HUF), a portion of income got from family income or income got from a fair family domain would be excluded from the charge. For example, in a fiscal year, you acquire INR 50,000 as compensation from your HUF. Also, the HUF acquired a pay of INR 60,000 out of which you got INR 20,000 as your offer. For this situation, your compensation pay would be obligated to burden yet the portion of the benefit that you got from the HUF, for example, INR 20,000 would be exempted from the charge.

3. Section 10(2A)- Profit received by a partner from a firm

In a partnership firm or in a LLP (Limited Liability Partnership), the portion of the profit that a partner gets from the firm or LLP would be excluded from tax. This exclusion would be permitted uniquely on the portion of profit received. Some other sum received via compensation or interest on capital would not be excluded.

4. Section 10(4)- Interest received by a non-resident

1. Wherein interest got by a non-resident individual on explicit securities or bonds and the excellent procured on reclamation on such bonds is permitted as an exemption.
2. Wherein interest acquired by a non-resident on the Non-Resident External Account (NRE Account) is permitted as exclusion. The NRE record can be kept up with any bank according to the Foreign Exchange Management Act, 1999 (FEMA).

5. Section 10(5)- Leave Travel allowance/concession paid to an employee

The various rules for claiming LTA/LTC exemption includes the following-

i. The actual expense of travel would be permitted as exclusion subject to the greatest allowance paid by the business. [2]For example- Mr. Verma, a worker, gets LTA of INR 50,000 from his boss. He goes out traveling with his wife and two children and the total expense of travel tickets comes to INR 40,000. For this situation, the LTA exemption would be taken into account INR 40,000 which is the actual expense of the excursion. Be that as it may, if the travel tickets added up to INR 60,000, the exception would have been accessible just for INR 50,000 which is the most extreme LTA paid by the business. The leftover INR 10,000 would be burdened in the possession of the representative.

ii. The exclusion can be guaranteed either when the worker disappears from work and ventures or if the representative has resigned or left the work prior to voyaging.

iii. The travel ought to be taken inside India.

iv. The travel cost of the relatives can likewise be guaranteed as an exception. Relatives incorporate life partners, youngsters, guardians and kin. On account of youngsters, the exception is considered up to 2 kids brought into the world on or after first October 1998. For youngsters brought into the world before, notwithstanding, there is no greatest breaking point.

v. Costs brought about on tour, food, and so forth would not be permitted as an exclusion under LTA.

vi. In the event that the excursion is finished via air, the greatest exclusion would be the economy class return airfare for the briefest course assumed from the position of root to the spot of the objective.

vii. In the event that the excursion is finished by some other mode (besides via air) when there is train availability, the greatest exclusion would be restricted to the return admission of top-of-the-line AC train ticket for the briefest conceivable course, etc.

6. Section 10(7)- Perquisites and allowances paid by the Government to its employees outside India

If an Indian resident is working outside India for the Government, any perquisite or allowance paid by the Government to such workers would be excluded from tax. The salary of the employee would be considered to accumulate in India on which the worker would be burdened. In any case, the perquisites and allowances paid to the employee would not be burdened. To guarantee exception, the payment ought to be taxed under the head ‘Salary Income’ and it ought to be paid by the Government to an Indian resident (regardless of whether inhabitant or non-occupant) for the services delivered outside India.

7. Section 10(8)- Income paid to employees of foreign countries working in India

Where a foreign citizen is working in India under the plan of co-employable specialized help projects and there is an arrangement between the Government of India and the Government of the foreign State, the income acquired by the individual would be excluded from tax. The salary ought to be paid by the Government of the foreign State and the individual ought not to have any income emerging in India.

If a person who is a non-resident, not an Indian resident or a resident but rather not customarily resident in India is an advisor from a global association, any tax or remuneration procured by him would be excluded from tax under Section 10 (8A).

If a consultant utilizes and pays an individual any remuneration for services delivered in India under the specialized help program, such compensation would be tax exempted under Section 10 (8B).

8. Section 10(10)- Gratuity income received by an employee

Where a worker has finished five years of service with a business, the business pays a gratuity to the employee on retirement or on the demise of the employee. Gratuity is paid as an affirmation of the past help delivered by the employee. In the event that gratuity is paid on the retirement of the employee, the measure of gratuity is recorded under ‘Income from salary. Sub-section (10) excludes the gratuity received by the worker up as far as possible. Such as-

1. any gratuity paid to a Government employee on death or retirement would be tax-exempt,
2. gratuity paid to a non-government employee by an organization, of which a certain portion is been exempted from tax[3]

9. Section 10(10C)- Compensation received at the time of voluntary retirement

The exemption is allowed to employees in following organizations-

1. public sector company
2. local authority
3. any other non-public sector company
4. cooperative society
5. the authority or university established under Provincial, State or Central Act, etc.

However, there are certain exemptions on tax that have been left unaltered in the Finance Bill, 2020. Given underneath is the rundown of income that are excluded from income tax under the new tax system that has become effective from April 1, 2020:

i. Interest received on post office savings account balance

Chartered Accounted, Naveen Wadhwa said, In the discretionary new tax structure, people won’t have the option to benefit of allowance under section 80TTA, i.e., derivation on interest got from a savings account held with bank and post office.[4]

ii. Gratuity received from the employer

An employee is qualified to get gratuity on the off chance that he/she has worked for over five years in an association.

In FY 2020-21, in the event that an individual gets gratuity, at that point the maximum tax-exempt gratuity will be Rs 20 lakh in his/her lifetime for non-government representatives. Gratuity got because of the passing of an employee will remain tax-exempt in the new tax structure too with no greatest breaking point.

iii. Employer’s contribution to an individual’s EPF/NPS account

From FY 2020-21, commitments made by the business to the employee’s EPF, NPS, as well as superannuation account, will be absolved from tax gave the yearly contribution to all the accounts (regarding worker) doesn’t surpass Rs 7.5 lakh in a fiscal year.[5]

iv. Amount received on maturity of life interest

The tax benefit on paying life insurance premiums to bring down the assessment obligation under section 80C isn’t accessible in the new tax slab structure. “In any case, development continues got from a life insurance company keeps on being absolved from tax under section 10(10D) in the new tax regime.

v. Interest and maturity amount received from PPF

Under the new tax system, an individual can’t avail the profit of tax cuts under section 80C on the contribution made to his/her PPF account. Be that as it may, any premium accumulated or development sum got from the PPF account keeps on being tax-exempt in the new tax structure too.

vi. Gift received from employer

The gift received from employer upto 5,000 INR remains exempted from tax under both new and existing systems.

There are many more incomes that are left unaltered by the new Amendment Bill, 2020.

Also, there are a number of tax deductions under the most popular provision of Income Tax Act i.e. section 80C of Chapter VIA. The assessee can avail of deductions only if he has made tax-saving investments or incurred eligible expenses. Some other preferred deductions under this chapter are sections 80D, 80E, 80G, 80DDB, etc.

A person can claim an allowance of Rs 1.5 lakh of his absolute income under section 80C. In straightforward terms, he can decrease up to Rs 1,50,000/- from his total taxable income, and it is accessible for people and HUFs.

If he had made good on overabundance tax, however, have put resources into LIC, PPF, Medical claim, paid his kids’ educational expenses, and so forth, and have missed claiming a deduction for the equivalent, he can do as such while recording his Income Tax Return. The Income Tax Department will discount the overabundance cash to his financial balance. [6]

CASES

Income Tax Officer v/s Dr. Ramalingham Swami (1983 6 ITD 491 Delhi)[7]

Facts– Where the assessing officer dismissed the assessee’s case for half deduction under section 80R, nonetheless, Commissioner (Appeals) permitted full exemption under section 10(16), the same was defended.

Held– Only in light of the fact that the assessee claimed a lesser advantage before the Income Tax Officer, he was unable to be blocked from asserting his legal right before the appellate authority. It is the obligation of the revenue authorities to permit all advantages to the assessees who are because of them under the law is guaranteed. The grant obviously fell under section 10(16) and, in this way, the Commissioner (Appeals) was directly in permitting full exemption.

Sun Outsourcing Solutions Pvt. Ltd. v/s CIT ((2018) 407 ITR 0480)[8]

Facts– the assessee was occupied with the matter of software development, having its office at Hyderabad and branch office in London, UK. Over the span of execution of software projects in the UK, the assessee deputed some local people of Hyderabad to London to work in its branch office and it had likewise utilized nearby faculty in UK. As respects the stipends paid to the staff deputed to the UK and the compensation installment made to the nearby workforce occupied with the UK, the assessee didn’t influence TDS.

The AO in the activity of his forces under section 201(1), charged tax on the sums paid to the staff deputed to the UK and on the salaries paid to the faculty connected with there. CIT put aside the interest raised under sections 201(1) and 201(1A) to the degree it relates to the assessment charged and interest required on the installments made to the non-resident’s consultants working abroad. With respect to the remittances paid to the residents of India deputed to work abroad, the sets of the AO were maintained. The Tribal excused the assessee’s appeal.

Held– There was no uncertainty that the lump sum amount sums payable to the workers are via presenting an extra bit of benefit to employees to empower them to meet the significant expense towards convenience and other personal use. Such use can’t be treated as having being caused regarding the release of their obligations inside the significance of section 10(14). Further, the sums payable to the workers in the UK have not been given nor is it conceived that the costs so caused are reimbursable. The sums in debate draw in the meaning of essential in section 17(2) and don’t fall inside the exemption of section 10(14). The assessee neglected to deduct charges on the installments made, section 201(1A) is consequently pulled in and regardless of whether the assessee was real in not making such allowance, it was in any case obligated to pay taxes.

OBSERVATION

The objectives of tax exemption examined in these sections fluctuate from reducing authoritative liability on taxpayers to encouraging exercises that advantage the community. Since results related with these ideal objectives are regularly difficult to measure, the information required for examination intentions is frequently missing, and little exploration exists to manage strategy here.

For tax purposes, all taxpayers get exclusions, including you and your spouse. To the Internal Revenue Service (IRS), these are the individuals mentioned in the paper for whom you are monetarily responsible. A higher number of exemptions diminish your taxable income.

[1] Julia Kagan, Exempt Income (July 1, 2020), Investopedia; https://www.investopedia.com/terms/e/exemptincome.asp

[2] Income Tax Act 1961, Bare Act

[3] Supra 2

[4] Preeti Motiani, Incomea that are exempted from under the news tax regime, The Economic Times (Dec 14, 2020)

[5] Supra 4

[6] Deductions on 80C, 80CCC, 80CCD & 80D, Cleartax (Jan 6, 2021); https://cleartax.in/s/80c-80-deductions

[7] Indian Kanoon; https://indiankanoon.org/doc/1618827/

[8] https://taxpublishers.in/Ency_DT/DT_Judg_Show?88324000?a0

This Article is Authored by Malini Raj, 3rd Year BBA LLB Student at University of Petroleum and Energy Studies, Dehradun.