Exempt Income and Income Tax Return

Exempt Income, the income that is not taxable. There is lot of confusion on what is exempt Income, whether the income needs to be reported while filing Income Tax Return. For FY 2012-13(AY 2013-14) one has to be careful as the new rules for tax filing announced this year states that if the total exempt income during the year exceeded Rs 5000, you will have to use ITR 2 and not ITR1. This article explains what is exempt Income, examples of exempt Income, How to show in Income Tax return? What is difference between tax exemption and tax deduction?

What is exempt Income?

The word exempt means free from an obligation from doing something. In the case of income tax, Exempt income refers to income which though is earned and received during the financial year is not taxable. Certain type income can be exempted from tax provided certain conditions are met which are defined in Income Tax Act. Exempt income includes tax-free sources of income, such as the interest on PPF, tax-free bonds and dividends . The long-term capital gains from stocks and equity funds, the agricultural income and gifts from specified relatives.

What is the difference between tax exemption and tax deduction?

In the case of income tax, Exempt income refers to income which though is earned and received during the financial year is not taxable. You get tax exemption on income.

The word deduct means to subtract or take away for the total. In Income Tax the word deduction, means the amount is taken away or reduced from the total taxable income. Usually when the government wants to encourage savings, they offer deductions for investing in certain instruments and hence lower your taxable income,income on which tax is due), by that extent. You get tax deduction on spending the income. For example

  • Investment under Section 80C which includes EPF,PPF,Life insurance policies, Equity linked savings scheme(ELSS) are available for deduction up to Rs 1 lakh  .
  • Health insurance premiums paid for self, spouse or children, also get a tax deduction benefit under Section 80 D.
  • Under Section 80 E you get a deduction on repayment of education loan (only interest)

For example, if your gross income is Rs 7 lakh and you invest Rs 1 lakh in an instrument that offers deduction, your total taxable income reduces to Rs 6 lakh. So for FY 2012-13(AY 2-13-14), your tax liability from 72,100 Rs after accounting for deduction, comes down to 51,500 you will pay Rs 20,600 less in income-tax.

Why you should be more cautious of exempt income in FY 2012-13 or AY 2013-14?

The new rules for tax filing announced this year states that if the total exempt income during the year exceeded Rs 5000, you will have to use ITR 2 to file your return and not ITR1. More clarity is needed on whether  the Rs 5,000 limit for exempt income include HRA, LTA and other allowances that a taxpayer receives from an employer as part of the salary package? Ref: EconomicTimes Five tax filing mistakes to avoid this year

Which Act of Income Tax governs Exempt Income?

Section 10 of the Income Tax Act contains provisions regarding most of the exempt incomes. For details you can check law.incometaxindia.gov.in Section 10 or TaxFaq List of Income that is Exempt from Income Tax

Which incomes come under exempt income?

Some of the income which are exempted from Indian Income Tax and their sections are given below.

  •  Agriculture Income [Sec. 10(1)]
  • Payments received from family income by a member of HUF [Sec. 10(2)]
  • Leave travel concession provided by as employer to his Indian citizen employee [Sec. 10(5)]
  • Any sum received on life insurance policy (including bonus) is not chargeable to tax Any sum (including bonus) on life insurance policy (not being a keyman insurance policy) [Sec. 10(10D)]
  • Any amount from provident fund paid to retiring employee [Sec. 10(11)]
  • Amount from an approved superannuation fund to legal heirs of the employee [Sec. 10(13)]
  • House rent allowance subject to certain limits [Sec. 10(13A)]
  • Interest from certain exempted securities [Sec. 10(15)]
  • Scholarship granted to meet the cost of education [Sec. 10(16)]
  • Family pension received by family members of armed forces [Sec. 10(19)]
  • Income of a minor child up to Rs. 1,500 in respect of each minor child whose income is included under section 64(1A) [Section 10(32)]
  • Dividend on or after April, 2003 from domestic companies [Section 10(34)]
  • Income on units of Mutual Funds on or after April 1, 2003 [Section 10(35)]

Image given below shows some of the income (Ref Economic Times Know the new rules of filing tax returns & how they impact you )

Examples of Exempt Income

Examples of Exempt Income

Do I need to show it in my tax return?

Even though these are tax-free, all exempt incomes must be mentioned in the tax return. Ignore this at your peril.

Exempt Income in ITR1 excel  from Fill Excel ITR1: 80G, Exempt Income,Calculation of Tax

Exempt Income in ITR1

Exempt Income in ITR1

EI section(worksheet) in ITR2 for exempt income is shown in picture below.

Exempt Income in ITR2

Exempt Income in ITR2

How to show exempt income?
  • Interest income : Income from PPF, Income From Tax Free Bonds comes here (Note: Interest from Fixed Deposit, Saving Bank Account are taxable and come under Income from Other Sources). Add all such income and show it here
  • Dividend Income : Any dividend received from Shares/Stocks or Mutual Funds etc needs to be added together and shown here.
  • Long Term capital gains on which Securities Transaction Tax has been paid : Equity mutual funds  where more than 65% of the holding is equity,for example Balanced Fund, don’t have long term cap gains tax currently, and neither does stock held for over a year. You pay Securities Transaction Tax on the sale.
    • For example an investor buys an equity oriented scheme on Dec 1, 2010 of 1,000 units at Rs 12 per unit. If he sells the units on Mar 2, 2012  at Rs 15 per unit (after STT) then there is a gain of Rs 3,000 for investor as long term capital gain. He has to show this gain a sLong Term capital gains on which Securities Transaction Tax has been paid.
  • Agricultural income comes here
  • Others (Including exempt  income from minor child) : If your income does not fall in above mentioned category it comes here.
  • Exempt Income from Minor Child : If investment is done on parents’s income in name of minor child(age less than 18 years) is clubbed with parents income and has to be shown in parent’s Income Tax Return
    • A minor’s income is clubbed with that of the parent with the higher income or if the parents of the minor child are separated, then the minor child’s income will be included in the income of the parent who is maintaining the child
    • A minor’s income is clubbed after an exemption of Rs. 1,500/- per child per annum
    • So if you have say opened a saving bank account in name of your minor child, interest earned on that would be exempted upto Rs 1500 and needs to be shown here.
    • Ex: if you have earned say Rs 465 as interest on saving bank account in name of child. Add Rs 465  to others in Exempt Income.
    • Ex: Ex: if you have earned say Rs 1285 as interest on saving bank account in name of child. Add Rs 1500  to others in Exempt Income here and remaining show it in Schedule SPI: Income of specified persons(spouse, minor child etc) includable in income of the assessee

Related articles :

15 Responses to Exempt Income and Income Tax Return

  1. mahender says:

    your article clarify my one question that what itr should be used for showing the gift but please clarify following question also:

    my mother got Rs5000monthally from my brother
    can this money can be shown as gift income in my mother’s ITR?{i am asking because somewhere i read that as the money is given regularly so it cannot be shown as gift; is it so?}

    to proof the gift, transaction should be by cheque/dd or deed ;please tell?
    Is my brother also needed to show the gift amount in his ITR as mentioning that he gifted that amount to mother?

    • Kirti says:

      Mahendra, Sorry for delay in replying. I am not sure and has asked my CA.
      After filing of IT returns my CA is on break. Hopefully will get the answer
      today/tomorrow so shall update you!

    • Kirti says:

      Mahendra Exempt income is shown as break up in ITR2.
      Acutally people don’t show the money received as gift from relatives.
      The person who gives the gift doesn’t show as there is no income on it.
      The person who receives the gift can show as exempt income as others if amount is big or need not show it but have a letter from the donor saying given as gift just in case income tax authorities ask.

      In case of your mother if she is not filing the returns she need to do anything.

      • mahender says:

        thanks for reply
        my mother need to file itr because tds is deducted on commission recived from post office and to get refund.
        I want to know as my mother is reciving about Rs5000 per month regularly from my brother ,can we show this income as gift income because somewhere i read that money which recived regularly, we cannot show that money as gift recived ?

  2. Ankit says:

    1) Sold tax-gain mututal funds after 3 years lock in period.As the whole amount is tax-free, where to mention this amount in ITR-2?
    2) Withdrew EPF amount from previous employer after completing 5 years of continuous service. As this amount is also tax-free ,where do we mention this amount in ITR-2?

    • Kirti says:

      I hope Tax filling is not keeping you awake (Question was asked at 2:25 AM)
      Sold tax-gain mutual funds after 3 years lock in period
      I think you are talking about Equity Linked Savings Schemes (ELSS).
      Due to change in NAV of the mutual fund you would have either
      1. got a profit if NAV at selling time is more than at buying time
      2. got a loss if NAV at selling time is less than at buying time
      Check whether you have got a loss or a profit due to investing in ELSS. For example you bought 100 units of ELSS fund at Rs 12 and now after 3 years it is at Rs 14. So your net gain is (Rs 14-12) * 100 = 200
      if there is a long term capital loss that is incurred then the individual will have to discard this from the tax calculation because the loss cannot be set off against any other income.
      If there is a long term gain it will be tax free in the hands of the receiver as there is no tax that is levied on equity oriented funds that have been held for a period of more than one year and securities transaction tax has been paid. STT has to be paid at the time of the sale of the units but the fund will deduct this amount and give the remaining figure to the investor.
      Show this long term capital gain in part 3 of the Exempt Income
      3 Long-term capital gains from transactions on which Securities Transaction Tax is paid
      EPF amount
      Show it in Exempt income in others 5 Others, including exempt income of minor children

  3. Vaibhav says:

    Hello,

    Thanks for this useful info. One small question – while filing ITR2 now, where do I mention my savings bank account interest (Income from other sources or exempt income)?

    Regards,
    -Vaibhav

  4. That there’s helluva difference between exempt and deduction at source is explained nicely. Thanks for sharing.

  5. Sunil says:

    Dear Be Money Aware,

    I am clear on all the things except on House Rent Allowance, as salarieed employees we get HRA included in our payslips and we show the rent receipts and we get exempted from paying tx (Upto some limit) – So my questions is should we show this under exempt income and go for ITR-2 instead of ITR-1.

    Please clarify and thanks for the article.

    -Sunil

    • Kirti says:

      HRA is not shown as exempt income in ITR. As shown in ITR2 picture exempt income to be shown is Interest( from PPF etc), Dividends (from stock and Mutual funds) etc.
      This time there is confusion on who can use ITR1 due to the exemption clause. So if your interest income (from PPF) or dividends etc are less than 5000 go for ITR1 else ITR2. This is my suggestion, please get it verified by some CA before you proceed.

      • Mohammed says:

        Interest on the balance gets credited every year in the PPF account. There are few interest incomes that are TAX exempt.

        1. Saving bank interest ( less than 10K)
        2. Interest on TAx saving bonds
        3. Interest on PPF balance for the year
        4. Interest of EPF balance for the year( This info will not be ready as it gets updated very late. What do we do in this case)
        There is no provision to explain this and put in the EI schedule of ITR. Should we club all the above and put in the interest section of EI schedule )

        Second I have a LIC policy that got matured during the FY. Maturity proceeds are TAX EXEMPT.
        Where and how do we put the maturity proceeds in the EI schedule.

        Can you and the group help me with above.

        • Kirti says:

          Saving Bank interest comes under section 80TTA. SHow it in Interest part of income from other sources and claim upto 10,000 in section 80TTA
          Interest on tax saving bonds: taxable as income from other sources in Interest part
          PPF balance, EPF balance : Exempt income,Interest Typically we get this information in Apr-May in a slip.
          LiC policy is exempt from tax Under the provisions of section 10(10D) of the Income-tax Act, 1961, However any sum (not including the premium paid by the assessee) received under an insurance policy issued on or after the 1st day of April, 2003 in respect of which the premium payable for any of the years during the term of the policy exceeds 20% of the actual capital sum assured will no longer be exempted under this section.
          Show it in others of Exempt Income

          • Mohammed says:

            Thanks Kirti,

            1. Should we mention full amount of LIC policy proceeds or Only (Total amount received – the premiums paid)

          • Kirti says:

            One should mention full amount as it may also include bonus. Premium paid would be taken care in earlier years(if claimed under section 80C)
            Maturity proceeds are exempt under section 10(10D) :P ayment on a Life Insurance Policy, including bonus thereon but excluding therefrom amounts received u/s 80DDA(3).
            If you can get it verified by another person it would be great!

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