Section 10 – Tax Exemptions, Allowances & How to Claim

Overview

Section 10 of the Income Tax Act, 1961 provides a list of exemptions on certain types of income such as House Rent Allowance (HRA), Leave Travel Allowance (LTA), interest on provident fund, gratuity, agricultural income, and more. It is important to disclose all exempt income in the Income Tax Return (ITR). Some exemptions under Section 10 are available only under the old tax regime, while the new tax regime introduced in 2020 may not cover them.

What Are Section 10 Exemptions?

Certain incomes of an individual are exempt from tax and do not form part of the total taxable income. Section 10 outlines these exemptions, which taxpayers can claim while calculating their income tax liability.

For employees, exemptions under Section 10 can be broadly classified into allowances and other exempt income:

Exemption on Allowances

Section 10(13A) – House Rent Allowance (HRA): Exemption on HRA received from the employer.
Section 10(14)(ii) – Children’s Education Allowance: Tax-free allowance for children’s education.
Section 10(5) – Leave Travel Allowance (LTA): Exemption for travel expenses incurred on leave travel.
Section 10(14) – Special Allowances: Certain allowances granted to meet specific expenses are exempt.

Other Exemptions on Salaried Income

Section 10(11) – Provident Fund & Sukanya Samriddhi Account Interest: Tax-free interest income from PF and Sukanya Samriddhi Account.
Section 10(10) – Gratuity: Exemption on gratuity received on retirement.
Section 10(10AA) – Leave Encashment: Tax-free leave encashment on retirement.
Section 10(10A) – Commuted Pension: Exemption on commuted pension received by a retiree.
Section 10(10B) – Retrenchment Compensation: Tax-free compensation received on retrenchment.
Section 10(10C) – Voluntary Retirement Compensation: Exemption for compensation received under voluntary retirement schemes.
Section 10(10D) – Life Insurance Policy: Tax exemption on maturity proceeds of life insurance policies.

These exemptions help reduce the taxable income of individuals and employees, ensuring they pay tax only on the portion of income that is not covered under Section 10.

Exemption on Other Income under Section 10

Section 10 of the Income Tax Act also provides exemptions on various types of income apart from salaries. Key exemptions include:

Section 10(1) – Agricultural Income: Income earned from agricultural activities is fully exempt from tax.
Section 10(2A) – Partner’s Share in Profits: Share of profits received by a partner from a partnership firm is exempt.
Section 10(15) – Interest on Savings Certificates: Interest earned on notified savings certificates is tax-exempt.
Section 10(23C) – Educational and Medical Institutions: Tax exemption for income earned by approved charitable or educational institutions.
Section 10(26) – Scheduled Tribe Members: Exemption for income of certain tribal individuals in specific Northeastern states.
Section 10(26AAA) – Sikkimese Individuals: Exemption for income of individuals from Sikkim.
Section 10(34) – Dividends: Dividend income from domestic companies is exempt.
Section 10(34A) – Buy-Back of Shares: Tax-free income on share buy-back under specified conditions.
Section 10(35) – Specified Mutual Funds: Exemption on income from designated mutual fund schemes.
Section 10(37) – Compulsory Acquisition of Urban Agricultural Land: Capital gains from such acquisition are exempt.
Section 10(38) – Long-Term Capital Gains: Exemption on LTCG from sale of equity shares and equity-oriented mutual funds under specified conditions.
Section 10AA – Units in Special Economic Zones (SEZs): Tax exemption on income from SEZ units.

Section 43B of the Income Tax Act, 1961

Income Tax Exemptions under Section 10 – Detailed Examples

1. Life Insurance Policy – Section 10(10D)

Income received from a life insurance policy or bonuses is exempt under Section 10(10D). However, certain policies are excluded:

Policies taken on a specially-abled dependent family member.
Keyman insurance policies.
Policies where the premium exceeds 10% of the sum assured.

2. House Rent Allowance (HRA) – Section 10(13A)

HRA received from an employer is partially or fully exempt under Section 10(13A) to cover rent and accommodation expenses. Exemption is calculated as the least of the following three amounts:

Actual HRA received.
50% of [Basic Salary + DA] for metro cities (Delhi, Mumbai, Chennai, Kolkata) or 40% for other cities.
Actual rent paid minus 10% of [Basic Salary + DA].

Eligible Expenses for HRA Exemption:

Rent Paid: Actual rent for the residential accommodation occupied.
Brokerage/Commission: Paid to a broker or agent to secure the rented property.
Maintenance Charges: Society or common area maintenance fees.
Lease Agreement Costs: Costs of preparing or registering the rental agreement.

Example:
An employee in Mumbai has a basic salary of ₹40,000/month, receives HRA of ₹20,000/month, and pays rent of ₹15,000/month.

Condition 1: Actual HRA received = ₹2,40,000 (₹20,000 × 12)
Condition 2: 50% of [Basic + DA] = ₹2,40,000 (50% of ₹4,80,000)
Condition 3: Actual rent paid minus 10% of [Basic + DA] = ₹1,32,000 (₹1,80,000 – ₹48,000)

Result: Exempt HRA = ₹1,32,000; HRA taxable = ₹1,08,000 (₹2,40,000 – ₹1,32,000).

This calculation ensures only the portion of HRA linked to actual rent expenses is exempt from income tax.

Children Education Allowance Exemption – Section 10(14)(ii)

Taxpayers receiving a children’s education allowance can claim an exemption of ₹100 per month per child, applicable for up to two children each year.

In cases where the taxpayer is blind, deaf and dumb, or handicapped, and receives a transport allowance, they can also claim an exemption of ₹3,200 per month.

Section 17(5) of the CGST Act – Blocked Credit under GST

Exemption of Special Allowance – Section 10(14)

Section 10(14) provides exemptions on various special allowances granted by the employer:

Food Allowance: Tax exemption of up to ₹26,400 per year, assuming two meals a day and 22 working days per month.
Internet Allowance: Employer-provided internet allowance is also exempt from tax.
Business Expenses: Exemptions are available for expenses incurred for official purposes such as travel, conveyance, research allowance, and others, provided the expenditure is actually incurred for the specified purpose.

Leave Travel Allowance (LTA) Exemption – Section 10(5)

The LTA exemption applies to domestic travel expenses for employees, including airfare, train, or bus fares. Expenses such as local transportation, sightseeing, hotels, and food are not eligible for exemption.

The exemption is limited to the LTA component in the employee’s CTC.

Example:
If an employee receives an LTA of ₹30,000 and spends ₹20,000 on eligible travel, only ₹20,000 will be exempt, and the remaining ₹10,000 will be considered taxable income.

Exemption on Payment to Provident Fund and Sukanya Samriddhi Account – Section 10(11)

Section 10(11) allows exemptions on interest earned from provident funds and contributions to the Sukanya Samriddhi Account upon resignation or retirement.

Note: From 1st April 2021, interest income accrued during the previous year on contributions exceeding ₹2,50,000 will not be eligible for exemption. This limit applies to contributions made by an individual or employee to the fund in any previous year.

Gratuity Exemption – Section 10(10)
Gratuity received by an individual is fully exempt for government employees. For private sector employees, the exemption depends on whether they are covered under the Payment of Gratuity Act, 1972. Gratuity received under the act is eligible for tax exemption subject to specified limits.

Leave Encashment Exemption – Section 10(10AA)

Employees are entitled to a certain number of leaves during their service. These leaves can either be availed, carried forward, or encashed.

During Service: If leave is encashed while the employee is still in service, it is fully taxable.
At Resignation/Retirement: Leave encashment at the time of retirement or resignation is eligible for tax exemption under Section 10(10AA).

Exemption Limits:

Government Employees: Fully exempt.
Non-Government Employees: Exemption is the lower of the following:
1. ₹25,00,000
2. Leave salary actually received
3. Average salary of the last 10 months
4. Cash equivalent of unavailed leave at the time of retirement

Summary Table – Taxability of Leave Encashment

Scenario	Taxability
Leave Encashment During Service	Fully Taxable
Leave Encashment at Resignation/Retirement – Government Employee	Fully Exempt
Leave Encashment at Resignation/Retirement – Non-Government Employee	Exempt up to the lower of the above-mentioned limits

This ensures that employees receive partial or full tax benefits on leave encashment depending on their employment type and timing of encashment.

Exemption on Commuted Pension – Section 10(10A)
Government employees can claim tax exemption on the commuted pension received from accumulated pension amounts under Section 10(10A).

Exemption on Retrenchment Compensation – Section 10(10B)

Retrenchment compensation is paid to an employee during termination of employment or closure of an industrial undertaking. Exemption under Section 10(10B) is allowed on the lower of the following amounts:

Actual compensation received
₹5,00,000
15 days’ average pay × completed years of service

Exemption on Voluntary Retirement – Section 10(10C)

Any amount received on voluntary retirement is considered profit in lieu of salary. Tax exemption under Section 10(10C) is available on the least of the following:

Actual compensation received
₹5,00,000
3 months’ salary × completed years of service
Last drawn salary × remaining months of service

Exemption on Agricultural Income – Section 10(1)

Agricultural income is fully exempt under Section 10(1), including:

Sale of agricultural produce
Income from agricultural operations such as sowing, cultivation, and tilling
Rent or revenue from agricultural land in India
Earnings from farm buildings used for agricultural purposes
Income from operations for preservation and growth, such as weeding, pruning, and cutting

Exemption on Partner’s Share in Profits – Section 10(2A)

A partner’s share of profits from a partnership firm or Limited Liability Partnership (LLP) is fully exempt from tax.

Interest Exemption on Savings Certificates – Section 10(15)

Interest earned on post office savings accounts, notified securities, bonds, annuity certificates, or savings certificates is exempt up to:

₹3,500 for individuals
₹7,000 for joint account holders

Tax Exemption for Educational and Medical Institutions – Section 10(23C)
Educational and medical institutions with annual receipts up to ₹5 crore are eligible for income tax exemption under this section.

Tax Exemptions for Scheduled Tribe Members in Specific Northeastern States – Section 10(26)
Members of Scheduled Tribes in Tripura, Nagaland, Mizoram, Manipur, and Arunachal Pradesh can claim exemptions on income earned from any source within these states, including dividends or interest on securities, under Section 10(26).

Tax Exemption for Sikkimese Individuals – Section 10(26AAA)
Sikkimese individuals earning income within Sikkim or receiving dividends or interest on securities are eligible for tax exemption under Section 10(26AAA).

Exemption on Dividends – Section 10(34)
Dividends received from investments in an Indian company are exempt up to ₹10,000. Any amount above this limit is taxable.
Note: This exemption applies only to dividends received till 31st March 2020.

Exemption on Buy-Back of Shares – Section 10(34A)
Income from shares bought back by a domestic company before 1st October 2024 is fully exempt under Section 10(34A).

Exemption on Income from Specified Mutual Funds – Section 10(35)
Any income earned from the sale of specified mutual fund units is exempt from tax.
Note: This exemption applies only to income earned till 31st March 2020.

Exemption on Capital Gains from Compulsory Acquisition of Urban Agricultural Land – Section 10(37)
Capital gains arising from the compulsory acquisition of urban agricultural land are exempt if the following conditions are met:

The land was used for agricultural purposes for at least 2 years prior to the sale.
The acquisition is part of a central government or RBI-approved scheme.

Exemption on Long-Term Capital Gains from Sale of Equity Shares and Equity-Oriented Mutual Funds – Section 10(38)
Long-term capital gains (LTCG) from selling equity shares or equity-oriented mutual funds are exempt from income tax.
Note: Securities Transaction Tax (STT) must be paid, and this exemption applies only to LTCG earned till 31st March 2018.

Exemption for Units in Special Economic Zones (SEZ) – Section 10AA
Entrepreneurs operating in an SEZ set up after 1st April 2006 and before 1st April 2021 can claim deductions as follows:

First 5 consecutive assessment years: 100% deduction of profits and gains from exports.
Next 5 assessment years: 50% deduction of profits and gains.
Next 5 years: 50% of profits credited to reserves and debited in the profit and loss account is allowed as a deduction.

This provides substantial tax relief to businesses operating within SEZs while encouraging export-oriented activities.

Summary of Income Tax Exemptions Under Section 10

Section	Exemption	Description
10(1)	Agricultural Income	Income from rent/revenue of agricultural land, cultivation, operations, and farm buildings is fully exempt.
10(2A)	Partner’s Profit Share	Profit share received by a partner from a firm/LLP is fully exempt.
10(5)	Leave Travel Allowance (LTA)	Exemption on domestic travel fare (air/train/bus) under CTC; other travel expenses are taxable.
10(10)	Gratuity	Fully exempt for government employees; private sector exemption depends on Payment of Gratuity Act coverage.
10(10A)	Commuted Pension	Commuted pension for government employees is fully exempt.
10(10AA)	Leave Encashment	Government employees: fully exempt. Non-government: exempt up to the least of ₹25 lakh, leave salary received, 10-month average salary, or cash equivalent of unavailed leave at retirement.
10(10B)	Retrenchment Compensation	Exempt up to the lower of actual compensation, ₹5 lakh, or 15 days’ average pay × completed years of service.
10(10C)	Voluntary Retirement	Exempt up to least of actual compensation, ₹5 lakh, 3 months’ salary × years served, or last drawn salary × remaining months till retirement.
10(10D)	Life Insurance Proceeds	Maturity proceeds exempt unless policy conditions are breached (e.g., keyman insurance, high premium).
10(11)	Provident Fund & Sukanya Samriddhi	Interest is exempt; contributions exceeding ₹2.5 lakh/year (from FY 2021-22) are taxable.
10(13A)	House Rent Allowance (HRA)	Exempt up to least of HRA received, 40/50% of salary (Basic + DA), or actual rent paid minus 10% of salary.
10(14)	Special Allowances	Includes food allowance (₹26,400/year), internet, conveyance, research allowance, if spent for official work.
10(14)(ii)	Education & Disability Transport Allowance	Rs. 100/month per child (max 2); transport allowance for disabled: ₹3,200/month.
10(15)	Interest on Savings Certificates	Exempt up to ₹3,500 (individual) or ₹7,000 (joint) on post office savings and specified securities.
10(23C)	Educational/Medical Institutions	Institutions with annual receipts ≤ ₹5 crore are exempt.
10(26)	ST Income (NE States)	Exemption for Scheduled Tribe members on income from specified northeastern states.
10(26AAA)	Sikkimese Individuals	Income from Sikkim or from securities/dividends received by Sikkimese individuals is exempt.
10(34)	Dividend Income	Dividends up to ₹10,000 received till 31st March 2020 are exempt.
10(34A)	Buy-Back of Shares	Buy-back amounts received from domestic companies before 01.10.2024 are exempt.
10(35)	Mutual Fund Income	Income from specified mutual funds exempt till 31st March 2020.
10(37)	Urban Agricultural Land Acquisition	Capital gains from compulsory acquisition exempt if land used for agriculture ≥ 2 years and acquired under a government scheme.
10(38)	LTCG on Equity	Long-term capital gains from listed shares/mutual funds exempt if STT paid (till 31st March 2018).
10AA	SEZ Units	100% deduction on export profit for first 5 years, 50% for next 5 years, then 50% of retained earnings for next 5 years.

How to Claim Section 10 Exemptions

To claim exemptions under Section 10 while filing your income tax return:

Disclose all income sources accurately in your ITR.
Maintain proper documentation, such as Form 16, salary slips, and supporting documents.
Apply the exemptions while calculating total taxable income.
Select the appropriate ITR form based on your income sources.
Submit and e-verify the ITR before the due date to avoid penalties and interest.

Conclusion

Section 10 offers multiple exemptions that reduce taxable income, helping taxpayers lower their tax liability. Understanding these exemptions, their conditions, and proper documentation is essential to maximize benefits while filing income tax returns.

FAQs on Tax Exemptions under Section 10 of the Income Tax Act

1. Is House Rent Allowance (HRA) fully exempt from tax?
No, HRA is not fully exempt. Under Section 10(13A) of the Income Tax Act, only a portion of the House Rent Allowance is exempt based on certain conditions such as salary, rent paid, and city of residence.

2. What does Section 10(9) exempt?
Section 10(9) provides exemption for the income received by family members of foreign employees working in India under the Cooperative Technical Assistance Program.

3. Is the amount received from a Sukanya Samriddhi Account on maturity exempt?
Yes, the amount received on maturity of a Sukanya Samriddhi Account, including the interest earned, is completely tax-free without any upper limit.

4. What is the eligibility criteria for exemption under Section 10(10D)?
To claim exemption under Section 10(10D), you must have a valid life insurance policy. The entire amount received on maturity, including bonuses, is exempt, provided the premium conditions are satisfied.

5. Is the National Pension System (NPS) exempt from tax?
Yes, under Section 10(12A), up to 60% of the total corpus received upon retirement or closure of an NPS account is exempt from tax. Additionally, up to 25% of the employee’s own contribution is tax-free on partial withdrawal.

6. What does Section 10(10C) exempt?
Section 10(10C) provides exemption up to ₹5 lakh for the compensation received by an employee on voluntary retirement or separation, subject to specific conditions.

7. Can I claim exemptions under Section 10 if I opt for the new tax regime?
No, most exemptions and deductions under Section 10 are not available if you choose the new tax regime under Section 115BAC.

8. Is gratuity received at retirement exempt from tax?
Yes, under Section 10(10), gratuity received by a government employee is fully exempt. For non-government employees, it is exempt up to a prescribed limit, depending on whether they are covered under the Payment of Gratuity Act.

9. Is leave encashment at retirement taxable?
Leave encashment received by government employees is fully exempt under Section 10(10AA). For private employees, exemption is available up to a specific limit.

10. Are scholarships exempt from tax?
Yes, any scholarship granted to meet the cost of education is fully exempt from tax under Section 10(16).

11. Is agricultural income taxable?
Agricultural income is exempt under Section 10(1) of the Income Tax Act. However, it may be considered for rate purposes if you have non-agricultural income.

12. Are allowances or perquisites for government employees abroad exempt?
Yes, under Section 10(7), allowances or perquisites paid by the Government of India to its citizens working outside India are fully exempt from tax.

Section 10 – Tax Exemptions, Allowances & How to Claim

Overview