Exempted Incomes & Agricultural Income | UGC NET Commerce Preparation Course PDF Download

Understanding Exempted Income in Taxation Laws

Taxation laws are crucial for comprehending earnings, tax responsibilities, and net income. While taxes are inevitable, government relaxations can bolster purchasing power. Exempt income stands out as a key relaxation, enabling individuals to evade income tax on specific earnings. Deductions serve a similar purpose, allowing individuals to subtract certain expenses from their income, thereby reducing tax burdens. Exempted incomes play a pivotal role in any tax framework, fulfilling diverse economic, social, and policy objectives.

Significance of Exempted Income

• Exempted income aids in achieving economic, social, and policy goals.
• It encourages specific behaviors, supports targeted groups, and stimulates economic activities.

What is Exempt Income? 

A business or individual can earn revenue or income from several sources. There will be different types of incomes invested in varying assets. The exempted income in income tax is the one that is not taxable under the country's laws.

• Every country has tax laws that cover the rules. Exempted income under Income Tax Act is essential for taxpayers. It covers the revenue streams which are tax-free.

 Exempted income under Income Tax Act 

• The person doesn't have to pay any tax to the government. The major goal behind exempt income in ITR (Income tax) is reducing tax obligation. Also, it encourages investment in different avenues.
• Income exempt in India includes a list of streams where taxpayers can increase their income.

Income exempt in India: The income tax exemption list includes several revenues; find a few below.

• Employer-Sponsored Insurance: Employer-Sponsored Insurance refers to insurance provided by employers to their employees, such as life or health insurance. This benefit is exempt from income tax.
• Income By Local Bodies Or Government: Income received by local bodies or government institutions, earmarked for specific purposes, is exempt from income tax. This includes funds generated through research and other government activities.
• Health Benefit Plans Sponsored By The Employer: Health Benefit Plans Sponsored By The Employer encompass healthcare plans that cover treatments and insurance for employees. This income is not subject to tax.
• Income Earned By Individuals In Governing Positions: Individuals serving in government positions receive salaries for their contributions to development and governance. This income is exempt from taxation.
• Income Of Government Scientific Research Bodies: Government-sanctioned scientific research bodies are not required to pay taxes on their revenues or profits, making their income tax-exempt.
• Ex-Gratia Income: Ex-Gratia Income comprises voluntary payments made for claims or reliefs, which are considered exempt income and not subject to taxation.
• Individual Retirement Benefits: Individual Retirement Benefits are payments or monetary benefits provided to employees upon reaching retirement age. These benefits are tax-exempt.
• Income Of Bodies Like Employees' Provident Funds: Institutions managing employee provident funds earn exempt income, which is not taxed, providing financial security for employees.

These examples highlight various sources of income that are exempt from income tax in India, preventing tax implications for earnings from these sources.

Types of Exempt Income

Exempted income under section 10 of the Indian Income Tax Act. Chapter 3 contains these income sources. It includes the following list of exempted income:

Exempted Income under Section 10

• Agricultural Income Earned By Individuals From Farming And Agricultural Activities
• Revenue Received By A Member Of HUF (Hindu Undivided Family)
• The Compensation Received Under Industrial Disputes Act 1947 By Any Workman
• Gratuity Income Received Under The Changed Pension Rule Of The Central Government
• Compensation For Disasters
• Statutory Provident Fund
• House Rent Allowance
• Recognized Provident Fund
• Superannuation Fund
• Income Of Investor Protection Fund
• The Income Of The Mutual Fund
• Allowance For MP, MLAs
• Superannuation And Provident Fund Income
• Exempted Dividend Income By An Indian Company (Limit To ₹10 Lakhs)
• Employee State Insurance Fund Income
• Mutual Fund Units Income
• Scholarship
• Securitization Trust Income
• Local Authority Income

Difference between Exemptions and Deductions 

Exemptions and deductions play a crucial role in helping individuals and taxpayers minimize their tax liabilities. Understanding the variance between exempted income under section 10 and deductions is essential for maximizing earning potential.

 List of Exempted Income under Section 10 

Which Income Tax Act Governs Exempt Income? 

Exempt income falls under the purview of the Income Tax Act of India, 1961, specifically detailed in Chapter 3 and Section 10 of the act. Explore common streams of exempt income below.

• Agriculture Income: Agriculture income encompasses revenue generated directly from agricultural activities. This also includes income from assets related to agriculture such as land, buildings, and horticultural produce. For instance, revenue from renting out a farm utilized for agricultural production, income from selling seeds or saplings.
• Income received as a member of HUF: In a Hindu Undivided Family (HUF), where there are multiple members forming a distinct entity, the HUF is subject to taxation, relieving individual members from filing separate tax returns. If these members do not earn from other sources, the income received by an HUF member from the family income is not taxed as their total income. This exemption spares individuals from paying income tax.

Exempt Income Categories

• Gratuity Income Received Under The Changed Pension Rule: Gratuity income received under the revised pension rule of the Central Government is now non-taxable for taxpayers. This exemption helps individuals lower their tax liabilities.
• Income of Local Authority:  Income generated by a local authority is considered exempt. This applies when the income stems from business activities benefitting a specific jurisdiction, such as providing essential services like water or electricity to the community.
• Income of Scientific Research Institutions: Revenue earned by government scientific research institutions is also exempt from taxation. Whether it's a research or educational organization, the funds allocated to these institutions must be used entirely for their specified purposes to qualify for this exempt status.
• House Rent Allowance: One of the income tax exemptions for salaried employees in 2021-22 is the house rent allowance. Employers provide this allowance to employees who rent accommodations for work purposes, boosting their take-home pay without being subject to taxation.

Income Tax Exemption for Senior Citizens

Senior citizens in the country are entitled to special income tax exemption benefits under the Income Tax Act. This provision acknowledges their age, respect, and reduced capacity to work effectively. At this stage of life, senior citizens often require more rest and less work to maintain good health. Here are the key exempt income benefits they receive:

• Senior citizens enjoy a basic income tax exemption limit of ₹3,00,000. Additionally, the tax rate for income between ₹3-5 lakhs is only 5%.
• Senior citizens have the option to engage in reverse mortgage schemes on their property, generating monthly payments. A portion of these payments is considered exempt income.

These exemptions provide senior citizens with more disposable income for their expenses.

Investments with Exempt Income

The government encourages savings by offering various investments with exempt income. These investments need to be made within the financial year, and the maturity amount is tax-free when received. The aim is to raise funds for specific departments and foster investment habits among the public. Here are some options for exempt income:

• Employee Pensions Fund: Pension benefits are provided to employees post-retirement, often as monthly payments based on a portion of their salary.
• Post Office Deposit: Individuals can deposit money in government post office schemes, where the interest income is considered exempt.
• Tax Savings Fixed Deposits: These fixed deposits have extended lock-in periods, enabling investors to earn interest and maturity proceeds without tax implications.
• Employee Provident Fund: This fund consists of contributions from both employees and employers, offering tax-exempt income.
• Life Insurance Policies: Investing in insurance policies provides financial protection for loved ones.
• Tax-Saving Mutual Funds: Investors can participate in mutual funds across various companies, including registered tax-saving funds for earning exempt income.
• Tax-Free Bonds of the Government: The government issues bonds periodically to raise capital, allowing for tax savings.
• ELSS (Equity Linked Savings Scheme) Investments: ELSS, a type of mutual fund, aids in claiming deductions on taxable income.

These investments typically have longer-term horizons with lock-in periods ranging from five to fifteen years.

Conclusion:

Exempt income plays a crucial role for both individuals and the government. It helps channel investments and generate funds, while also encouraging public habits of saving and investing. Understanding these exemptions can assist in reducing tax liabilities. When filing taxes, individuals must report their earnings and any exempt income benefits they’ve received. In many countries, exempt income is a key aspect of the taxation system, used to support specific social, economic, and policy goals. By excluding certain earnings from taxation, individuals or entities can retain a portion of their income tax-free.