Income Tax Act Section 10 – Allowances, Exemptions, and Process to Claim

Every individual in India with a taxable income has to pay income tax on their annual earnings. To lower the burden of tax on individuals, the government presents certain deductions in the form of exemptions under different sections of the IT Act of 1961.  One such section of Income Tax is section 10, which discusses such exemptions and their terms and conditions. In this post, let’s understand these exemptions under section 10 of the IT Act.
Before discussing exemptions under section 10, let’s talk about income tax returns or ITR.

What is an Income Tax Return (ITR)

ITR or Income Tax Return is a form that a taxpayer has to submit to the income tax department of India offering information on their income and their tax liability. As per the tax liability of an individual, they pay the amount of tax to the IT dept. This tax is calculated on the income of the taxpayer. However, if taxpayers pay excess tax, they can receive a refund from the IT department by filing an ITR.

What Is Section 10 Of the Income Tax Act?

Section 10 of the Income Tax Act 1961 consists of various deductions available to taxpayers, which they can avail of at the time of paying income tax. This section emphasizes the income sources that don’t form a part of the total income of the taxpayer.

Exemptions Available Under Section 10

There is a wide list of exemptions available u/s 10 of the Income Tax Act 1961 as listed under:

1. Exemptions under Section 10(1)

Section 10(1) exempts income earned from agricultural land located in India, including rent/revenue earned from the land, earnings from cultivation, sowing, weeding, pruning, etc., revenue earned from the sale of agricultural produce, and revenue earned from farm building for agriculture.

2. Exemptions Under Section 10 (13A)

The (13A) clause of section 10 of the IT Act covers HRA or House Rent Allowance. As per this clause, the HRA part of your salary that you receive to cover your cost of accommodation or house rent is exempted from taxation. These exemptions are available with some exclusions included in Rule 2A of Section 10 (13A).

The deduction under section 10 (13A) applies to the least of the below amounts:

• Actual amount of HRA received
• 50% of [basic salary + DA] for residents of Delhi, Mumbai, Chennai, Kolkata
• 40% of [basic salary + DA] for residents of other cities, or
• Actual rent paid (-) 10% of basic salary + DA

3. Exemptions Under Section 10 (5)

Clause (5) of section 10 discusses the exemptions of leave travel allowance (LTA) that taxpayers can avail of. Employees who incur costs on domestic travel, including air/train/bus fare, can avail of the limited LTA exemptions within the salary coverage offered by your employer. However, LTA doesn’t cover other expenses such as hotel stays, food, or transport costs within a city. Let’s take an example: if your employer offers you an LTA of INR 40,000 and you incur travel expenses worth INR 30,000. You can avail of the exemption on the amount incurred on your travel, which is INR 30,000, while the remaining INR 10,000 will be taxed.

4. Exemptions Under Section 10 (26)

Clause (26) of section 10 allows tax exemption to people of scheduled tribes belonging to the Indian states of Arunachal Pradesh, Nagaland, Manipur, Mizoram, and Tripura.

5. Exemptions Under Section 10 (14) (I)

As per section 10 (14) (I), you are eligible for exemptions for costs incurred on research, travel, conveyance, etc., of your employer’s business.

6. Exemptions Under Section 10 (11)

Clause (11) of section 10 of the Income Tax Act 1961 allows exemptions on the interest amount earned from the provident fund after retirement. Also, it provides exemptions on payments made from SSA or Sukanya Samriddhi Account.

7. Exemptions Under Section 10 (34)

Clause (34) of section 10 includes exemptions earned from dividends by investing in an Indian company for up to INR 10,000 only. Any amount exceeding that requires you to pay tax.

8. Exemptions Under Section 10 (26AAA)

If you are a resident of Sikkim earning there or through security dividends/interest, etc., you can avail of exemptions on that part of your earning u/s 10 (26AAA)

9. Exemptions Under Section 10 (38)

Clause (38) of section 10 allows taxpayers exemption on capital gains over the long-term using equity shares of equity-oriented mutual funds. However, you must pay the tax on securities transactions.

10. Exemptions Under Section 10 (23C)

Section 10 (23C) allows tax exemptions for educational or medical institutions whose overall yearly income does not exceed INR 5 crore.

11. Exemptions Under Section 10 (37)

Section 10 (37) allows exemptions on capital gains caused by compulsory acquisition of urban agricultural land.

12. Exemptions Under Section 10 (10A)

Government employees can earn tax exemption under section 10 (10A) on the amount earned from accrued pensions.

13. Exemptions Under Section 10 (10D)

Section 10 (10D) allows taxpayers to avail of an exemption for the income earned from a life insurance policy or bonus.

14. Exemptions Under Section 10 (35)

Section 10 (35) of the Income Tax Act allows you to gain exemption from the sale of definite mutual fund units.

General Provident Fund (GPF) exemption under Section 10 of the Income Tax Act

Section 10(11) and 10(12) of the Income Tax Act allow taxpayers to avail of an exemption of GPF amount of INR 2.5 lakh.

1. Exemption on Internet allowance u/s 10 of Income Tax Act

Section 10 clause (14) of the Income Tax Act provides tax exemption on internet allowance offered by employers.

2. Exemption of Food allowance under Section 10 of the IT Act

Clause (14) of Section 10 offers an exemption of INR 26,400 in a year on tax for food allowance provided by employers

3. Maximum Limit of Exemptions Available Under Section 10

The total amount of exemption under section 10 of the IT Act is up to INR 2.5 lakh for taxpayers below the age of 60 years. This limit is INR 3 lakh for taxpayers above 60 years and below 80 years of age, while it is INR 5 lakh for super-senior citizens of 80 years and above provided, they are Indian residents.

The Process to Claim Exemptions Under Section 10 

To claim a tax exemption u/s 10 of the Income Tax Act, you may simply file an ITR or income tax return.

Section 10 Allowances

Total exemptions that a taxpayer can earn under the Income Tax Act of India are mentioned under section 10, including travel, gratuity, rent, education, children’s allowance, and more.

Does Income Tax Allow Exemption of Leave Encashment?

Your employment considers whether your leave encashment is exempted under income tax or not. If you are a central or state government employee, the income you earned from leave encashment at the time of resignation will not be taxable.

On the other hand, the government considers income from leave encashment for private sector employees after retirement/resignation as taxable ‘Income from salary’. However, they can avail of exemptions u/s 10(10AA) of the Income Tax Act and may pay tax on the amount that is remaining after exemption.  

So, leave encashment earned as part of one’s employment is completely taxable and is considered a part of ‘salary income’ for private job holders.

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To Sum Up
Section 10 of the Income Tax Act discusses exemptions on tax enjoyed by salaried residents of India. Several sub-sections of section 10 allow taxpayers to legally avoid paying taxes as per the allowances. It is crucial to know these sub-sections to be able to enjoy tax exemptions to the maximum limit.

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