Incomes which do not form part of total income | Commerce & Accountancy Optional Notes for UPSC PDF Download

Meaning of Exempted Income

Exempted income is that income on which income tax is not chargeable. Such incomes are classified as under: 

1. Incomes which do not form part of total income nor is income tax payable on them. They are called fully exempted incomes. 
2. Incomes which are included in the total income but are exempt from income tax at the average rate of income tax applicable to the total income. They are called partially exempted incomes. 
3. Incomes of certain Institutions or authorities are exempted subject to fulfilment of the required conditions.

List of Exempted Incomes (Section 10)

1. Agricultural income [Sec.10 (1)] 
   • Agricultural income from the land situated in India is fully exempted from income tax (Agricultural income definition given under Income Tax Act.) 
2. Sum received by a member from Hindu undivided family [Sec.10 (2)] 
   • Any sum received by a member of Hindu undivided family at the time of division is tax free. 
3. Share of a partner in firm’s income [Sec.10 (2A)] 
   • The share of a partner in firms’ profit is fully tax free. 
4. Profit of newly established industrial undertaking in free trade zone [Sec.10AA]. 
5. Compensation received by victims of Bhopal gas leak disaster [Sec.10 (10BB)] 
   • Any compensation paid under any Plan of Bhopal Gas Leak Disaster (Processing of claims Act, 1985) is exempted from tax. 
6. Sum received from life insurance [Sec.10 (10D)] 
   • Any sum received from life Insurance Corporation as the maturity of insurance policy is fully exempt from tax, even bonus received is fully exempted. But, Keyman Insurance Policy and any sum received under u/s 80DD (3) will not be exempted. 
7. Sum received from Public Provident Fund [Sec.10 (11)] 
   • Any sum received from public provident fund (in State Bank and head offices) is fully exempted.
8. Payment from Sukanya Samridhi account [Sec.10 (11A)] 
   • Any sum received from Sukanya Samridhi Account rules, 2014 made under Government Saving Bank Act, 1873 is fully exempt from tax.
9. Payment from National Payment System Trust [Sec.10 (12A)] 
   • Any payment from National Payment System trust u/s 80(CCD), if it does not exceed 40% of total amount, payable to assessee at time of closure of the scheme is exempt from tax. 
10. Partial withdrawal from National Pension System Trust [Sec.10 (12B)] Any withdrawal by the assessee from National Pension System trust, upto 25% is tax free. 
11. Interest, premium or bonus on specified investments [Sec.10(15)] 
    • Like Annuity certificates, National Saving Certificates, Post Office Savings, Bank Account, Interest on relief Bonds, Post office cash certificates etc are fully exempt from tax. 
12. Scholarships [Sec.10 (16)] 
    • Any fellowship or scholarship granted by Government for education and research work will be exempted. 
13. Allowances of M.Ps and MLA’s [Sec.10 (17)] 
    • Daily allowances, constituency allowance, of MPs and MLAs shall be exempt fully. 
14. Award or reward [Sec.10 (17A)] 
    • Any award in form of cash or kind granted by Central or State Government for work of literature or scientific shall be exempted. Any award from any other institution apart from Government, shall be exempted from tax provided, such exemption is approved by Central Government. 
15. Pension to an individual awarded by ‘Vir Chakra’ [Sec.10 (18)] 
    • Any amount in form of pension received by an individual or family who had been a Central or State Government employee and was awarded ‘Param Veer Chakra, Vir Chakra, Mahavir Chakra, shall be exempted. 
16. Family pension to family members of armed forces [Sec.10 (19)] 
    • Family pension to widow or children or nominated pension of a member of the armed forces died during operational duty shall be exempted. 
17. Annual value of a palace of the Ex-rulers [Sec.10 (19A)] 
18. Incomes of scheduled tribes [Sec.10 (26)] 
    • Any income accrued to scheduled tribes living in tribal areas (as given in VI schedule of constitution) of State of Manipur, Sikkim, Tripura, Mizoram, Nagaland and Arunachal Pradesh shall be exempted. 
19. Subsidy received from Tea Board [Sec.10(30)] 
    • Any subsidy received from Tea Board to the assessee, carrying on the business of growing and manufacturing tea in India, shall be exempt from tax, provided the certificate of exemption has been presented to Income Tax officers.
20.  Subsidy received by planters [Sec.10(31)] 
    • Any subsidy from Rubber Board office or spice board to the assessee, under any scheme for replantation of rubber plants or coffee plants etc. shall be exempt. 
21. Income of minor child [Sec.10 (32)] 
    • Income upto Rs.1,500/- in respect of minor is exempt from tax and any excess of that amount is included in parent’s income whose income is greater. 
22. Capital gain on transfer of units of US-64 [Sec.10(33)] 
    • Any capital gain on transfer of units US-64 shall be exempted provided such transfer is done on or after 1/4/2002. 
23. Any income received in respect of units of a mutual fund, Units from the administrator of the specified undertaking or units from the specified company [Sec.10 (35)] 
    • This income is exempt with effect from AY 2004-05. 
24. Long term capital gain on eligible equity shares [Sec.10(36)] 
    • This exemption is applicable only when shares have been held for at least 12 months and when investment have been made on or after 1/3/2003 and not later on 31st March 2004. 
25. Exemption of capital gains on compensation received on compulsory acquisition of agricultural land situated within specified urban cities [Sec.10 (37)].
    • Such exemption is available to an individual or Hindu undivided family, on short- or long-term capital gain, provided such compensation should be received on or after 1/4/2004 and land is used for agriculture preceding 2 years from compulsory acquisition. 
26. Exemption of specified income from international sporting event held in India (with effect from Assessment Year 2006-07) [Sec.10 (39)]. 
27. Exemption in respect of grant etc. received by a subsidiary company from its holding company engaged in business of distribution of power [Sec.10 (40)] (with effect from AY 2006-07). 
28. Exemption of capital gain to undertakings engaged in business of generation of power (with effect from Assessment Year 2006-07) [Sec.10 (41)]. 
29. Exemption of specified income of certain bodies or authorities (with effect from Assessment Year 2006-07) [Sec.10 (42)].
30. Exemption of amount received by an individual as loan under reserve mortgage scheme [Sec.10 (43)] 
    • Such exemption is available to senior citizen, who does not make payment of principal amount and interest throughout his life under the scheme. 
31. Exemption of sum received by an individual on behalf of new pension scheme trust [Sec.10 (44)]. 
32. Exemption of a specified income of notified body or authority or trust or board or commission [Sec.10 (46)]. 
33. Income of infrastructure debt fund [Sec.10 (47)] 
    • Such exemption can be availed only if return of income is filed as per section 139. 
34. Income of foreign company [Sec.10 (48)] 
    • Such exemption is allowed to a foreign company in India, only if any income is received by sale of crude oil (in Indian currency). 
35. Income of foreign company on account of storage of crude oil [Sec.10 (48A)]. 
36. Income of National Financial Holdings Company Limited [Sec.10 (49)]. 
    • Such company must have been set up by central Government relating to the AY on or before 1st April 2014.

 Certain Exempted Incomes In The Hands of An Individual

Income of a salaried personnel The details of these incomes have been given under head ‘Income from salaries’ 

1. Leave travel concession [Sec.10(5)] 
2. Allowances and perquisites received abroad [Sec.10(7)] 
3. Death-cum retirement gratuity [Sec.10(10)] 
4. Commuted amount of pension [Sec.10(10A)] 
5. Encashment of earned leave [Sec.10(10AA)] 
6. Compensation due to retrenchment [Sec.10(10B)] 
7. Income tax paid by employer on perquisites [Sec.10(10CC)] 
8. Any sum received from statutory provident fund [Sec.10(11)] 
9. Any income received from recognized provident fund [Sec.10(12)] 
10. Payment from national pension system trust [Sec.10(12A)] 
11. Tax exempt on partial withdraw from national pension system [Sec.10(12B)] 
12. Any sum received from approved superannuation fund [Sec.10(13)] 
13. Transfer of account of employee under pension scheme [Sec.10(13)(v)]
14. House rent allowance [Sec.10(13A)] 
15. Special allowance for official duties [Sec.10(14)]  

Exempted Incomes of Certain Institutions And Funds

1. Income of a Local Authority. [Sec.10 (20)]
   • It includes municipality, Nagar Nigam, village panchayat etc. 
2. Income of Scientific Research Association [Sec.10 (21)] 
   • Such exemption is allowed only when the association is approved by the Central Government, and it utilizes its income to achieve its objectives. 
3. Income of News Agency [Sec. 10(22B)] 
   • Such news agency must be notified by the central Government and is established in India. 
4. Income of certain Professional Institutions [Sec.10 (23A)]
   • Exemption is allowed only when such professional institutions of medical, engineering, advocacy etc. are approved by Central Government. 
5. Income of regimental fund of the Armed Forces [Sec.10 (23AA)] 
   • Such income is exempt only if such fund is set up for the welfare of past and present members or their dependents. 
6. Income of funds established for the welfare of employees and their dependents [Sec.10(23AAA)] 
7. Income of funds set-up by Life Insurance Corporation of India [Sec.10 (23AAB)] 
   • Such exemption is allowed only when the receiver of the pension contributes to this fund. 
8. Income of Khadi and Village Industries Association [Sec.10 (23B)] 
   • Such exemption is allowed only when such association is non-profit and is approved by khadi and village industries commissions. 
9. Income of an authority known as Khadi and Village Industries Board etc. [Sec.10 (23BB)]
   • This exemption is allowed only when such authority is established under state or provincial Act. 
10. Income of statutory authority administering public religious activities [Sec.10 (23BBA)] 
    • Such authorities or trusts like temples, mosques, church, Gurudwara etc. must be established under Central or State Act. 
11. Income of European Economic Community [Sec.10 (23BBB)] 
    • Such community must have been established under treaty of Rome on 25th March 1957. Such exemption can be availed only when income is received through interest or dividend. 
12. Income of South Asian Association of Republican Countries (SAARC) fund [Sec.10 (23BBC)] (With effect from AY 1992-93) 
    • Any such income is exempt only when such income is used in local projects of SAARC Fund. 
13. Income of Insurance Regulatory and Development Authority (IDRA) [Sec.10 (23BBE)]
14. Income of the Central Electricity Regulatory Commission [Sec.10 (23BBG)]. 
15. Income of Prasar Bharti [Sec.10 (23BBH)](with effect from AY 2013- 2014). 
16. Income of the certain National Funds [Sec.10(23C)]
    • It includes National Foundation for communal harmony, Prime minister’s relief fund, Prime minister’s Student Aid fund, Income from Swachh Bharat Kosh and Clean Ganga fund, Prime Minister’s Fund for Promotion of Folk Art, etc. 
17. Income of notified Mutual Funds [Sec.10(23D)]
    • Such mutual funds should be authorized by bank of public sector, public financial institution or India Reserve Bank and is registered under SEBI Act, 1992. 
18. Income of notified Investor’s Protection Fund [Sec.10 (23EA)] 
    • Such fund should be set up by a recognized stock exchange in India. 
19. Income of a Venture Capital Fund or a Venture Capital Company (if investment done in venture capital undertaking) [Sec.10 (23FB)] (with effect from AY 2002-03) 
    • Such income is exempted only when the venture capital fund is approved by prescribed authority and the fund or company has purchased equity shares. This exemption is not allowed if such shares are not transferred within 3 years of purchase. 
20. Income of Registered Trade Unions [Sec.10 (24)] 
    • Such trade unions shall be registered under Trade Unions Act, 1926. 
21. Income of Provident Funds [Sec.10(25)]
    • It includes income of deposit linked insurance fund, income of recognized provident fund, approved gratuity fund, approved superannuation fund and interest on securities purchased under statutory provident fund and capital gain on sale of those securities. 
22. Income of Employees’ State Insurance Fund [Sec.10 (25A)] 
    • This provision is with effect from 1/4/1962 and was brought under finance Act, 1995. 
23. Income of member of Scheduled Tribe of certain specified areas [Sec.10 (26)]
    • Such exemption is allowed to the member of scheduled tribe under the Article 366(25) of the Constitution. 
24. Income of a Corporation or a Body established for Scheduled Caste and Tribes [Sec.10 (26B)] 
    • This exemption is allowed only when such corporation is set up under central or provincial Act and work for the welfare of above-mentioned castes. 
25. Income of a Corporation established for promoting the interests of members of a Minority Community [Sec.10 (26BB)] 
    • Such community must have been notified by Central Government. 
26. Income of Corporation established for upliftment of Ex-servicemen [Sec.10(26BBB)] 
27. Income of Cooperative Societies [Sec.10 (27)] 
    • Such society should have been established for the interests of schedule castes and schedule tribes and their financial arrangements must have been done by the Government  
28. Income of Foreign Company in Foreign Currency [Sec. 10(48)] 
    • Such income should be under an agreement as approved by the Central Government. 
29. Payment from an Approved Superannuation Fund [Sec. 10(13)] 
    • Such payment is made under a pension scheme as u/s 80CCD or on the death of beneficiary or on retirement etc. 
30. Income of certain Boards [Sec.10 (29)] 
    • It includes the Spice Board (Spice Board Act, 1986), the Coffee Board (Coffee Act, 1942), the Tobacco Board (Tobacco Board Act, 1975), the Rubber Board (Rubber Board Act, 1947) and the Tea Board (Tea Board Act, 1953). 

Income of Charitable And Religious Trusts And Political Parties

• Sections 11, 12, 13 and 13A deal with the incomes of charitable and religious trusts and the income of political parties. The income of Charitable and Religious Trust and political parties are exempt under ‘Income Tax Act’. Let us now explain in detail the provisions of Sec. 11, 12, 13 and 13A. 

Income of Charitable and Religious Trusts 

With a view to encouraging public charitable and religious trusts, special provisions have been made in the Income Tax Act for granting exemption to the income of such trusts. Sections 11, 12 and 13 of the Act deal mainly with the exemption and assessment of the income of Public Charitable Trusts. 

Charitable purposes Sec. 2(15) 

Charitable purposes include the following: 

• Relief to the poor 
• Promotion of Education or literacy 
• Hospital or Medical facilities to public at no cost 
• any other activity in the category of charitable purpose. 

Religious purposes 

Religious purposes mean a trust for the advancement, support, or propagation of a particular religion. But it must be a public religious trust. 

Formation of Religious and Charitable Trusts 

It is not compulsory that the trust should have a deed, but it is better if it has an agreement between trustees or members of the trust. The trust should work for Charitable or religious purposes, then only the income of the Public Charitable Trust is entitled for exemption from tax provided the following conditions are satisfied: 

• The trust should get itself registered with the Commissioner of income tax within one year from the establishment of the trust. 
• If the total income of the trust exceeds Rs. 25,000 in any previous year, the accounts must be audited by a chartered accountant and the report of such audits should be attached with the return of the income.
• The funds of the trust should be invested or deposited in any one or more of the specified modes mentioned in Section 11(5) of the Act. 

Tax Exemption for Trusts - (Section 11 and 12) 

The following incomes of a trust are exempt from tax: 

1. Income derived from property held under trust or any other legal obligation for charitable or religious purposes. 
2. Income derived from voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution. 

The above said incomes are exempt from tax, provided the following conditions are satisfied: 

a) The property from which the income is derived must be held under trust or other legal obligation. But the profit and gains of any business carried on by such trusts, institutions, etc. is not exempt from tax unless: 

• The business consists of printing and publishing of religious books and other materials. 
• The business carried on by the trust is wholly for charitable purpose.
• The books of accounts of such business are maintained separately by the trust or institution.

b) The income from property held under trust will be exempt from tax only when at least 75% of such income is applied to the charitable or religious purposes of the trust in India either during the year in which the income is received or in the next year. 

c) However, in case where at least 75% of the income has not been applied for religious or charitable purposes in India during the prescribed period but is accumulated or set apart either wholly or in part, the amount of income so accumulated will be exempt from tax provided the accumulation is not intended for a period of more than 10 years and the trustees have given written notice to Assessment Officer giving details of accumulation: It is also necessary that the accumulated money has to be deposited in Central/ State Government securities, post office, savings-bank account, any bank, Unit Trust of India, Industrial Development Bank of India or immovable property etc. Otherwise, the income of trust will be taxable. 

Any voluntary contribution received by a trust created wholly for charitable or religious purposes is exempt if the trust fulfils the above three conditions (a, b, c) 

Income of Political Parties - Section 13(A) 

Political Party means “an association or body of individual citizens of India registered with the Election Commission of India as a political party and includes a political party deemed to be registered with the Commission.”
Political parties are liable to pay tax on their income and they are assessed as ‘an association of persons’ However, the income derived by these parties as donations and subscriptions is treated as receipt meant for mutual benefits or capital receipts and hence, not liable to tax. Further, Sec. 13A exempts the following income of a political party: 

• Income from House Property 
• Income from other sources 
• Voluntary contribution from any person. 

However, the income shall be exempt subject to the following conditions: 

• The party keeps and maintains its books of accounts and other documents properly. 
• The accounts of the party are audited by a chartered accountant. 
• In respect of each contribution more than Rs. 20,000, the party keeps and maintains a record of such contributions and the names and addresses of the persons who have made such contributions.

Exempted Income For Non-Citizen And/Or Non-Resident Assessee

1. Income of interest on some securities or bonds by a non-resident [Sec.10 (4)] (with effect from 2006-07).
2. Interest on saving certificates [Sec.10 (4B)] -This exemption is available to non-resident individuals of Indian origin or Indian citizens who have purchased saving certificates from outside India by foreign currency. 
3. Tax paid on remuneration to foreign technicians [Sec.10 (5B)] -It is not exempt with effect from AY 2003-04. 
4. Income as an employee of a foreign enterprise [Sec.10(6)(vi)]-This exemption is allowed if such employee stays in India for more than 90 days during PY and such enterprise has no trade of foreign concern in India. 
5. Remuneration during training period [Sec.10 (6) (xi)] -It should be received by an employee of foreign company from foreign Government. 
6. Tax paid on behalf of foreign companies in respect of certain income [Sec.10 (6)] -Such income should be received between 1/4/1976 and 31/3/ 2002 and the tax liability should be in form of royalty or technical fee received from Indian Government. 
7. Income of foreign companies for providing technical services in enterprises connected security in India [Sec.10(6c)] 
8. Allowances or perquisites outside India [Sec.10 (7)] - Such allowances or perquisites are given by the Government of India to citizen of India. 
9. Remuneration received from Foreign Government under Cooperative Technical Assistance Programme [Sec.10 (8)]. 
10. Income of an advisor [Sec. 10(8A)] This exemption is allowed for the appointment of advisor under agreement between International Organization and Central Government and remuneration is paid to him out of its technical Assistance grant.