Exempt Income, the income that is not taxable. 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?
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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.
Do I need to show Exempt Income 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.
For AY 2019-20(FY 2018-19) in ITR-1, tax-exempt incomes have to be reported in the tab, ‘Computation of income and tax’. For AY 2018-19(FY 2017-18) one had to report tax exempt incomes under the tab ‘Taxes Paid & Verification’.
A separate head for reporting exempt incomes is given after the details related to income and tax-saving deductions under sections 80C to 80U is mentioned. The drop-down provides 16 sub-heads
Exempt Income in ITR1 is on Excel sheet Taxes Paid and Verification Row 27 from Fill Excel ITR1: 80G, Exempt Income,Calculation of Tax as shown in image below
Exempt Income: Income by way of dividend from Indian company [Section 10(34)]
If dividend received by a resident shareholder exceeds Rs 10 lakh then it will be taxable at the rate of 10 percent.
if you have received dividend from a foreign company, then these will be chargeable under the head ‘Income from other sources’ at the tax rates applicable to you.
Any dividend received from Shares/Stocks and/or Mutual Funds etc needs to be added together and shown here. Check your emails or statements sent by the Mutual Fund or the company.
Exempt Income: PPF Interest (Any Other)
if you have received income such as interest from Public Provident fund (PPF) or maturity proceeds from PPF, then you are required to report such income by selecting – ‘Any Other’ option and providing description in respect of that income.
Exempt Income: Income of Child Clubbed U/s 64 (IA) [Section 10(32)]
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 upto 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 1885 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
Exempt Income: Amount received under a Life Insurance Policy [Section 10(10D)]
Do keep in mind that maturity proceeds received from an insurance policy is exempt from tax if it satisfies certain conditions. As per the rules, maturity amount will be tax-exempt if:
a) Premium paid during any year does not exceed 20 percent of the actual sum assured for a policy issued on or after April 1, 2003 but on or before March 31, 2012.
b) The premium paid during any year does not exceed 10 percent of the actual sum assured for policy issued on or after April 1, 2012.
Exempt Income: Recognized Provident Fund [Section 10(12)]
Private sector employees are usually covered under the Recognised Provident Fund (RPF) under the Employees’ Provident Fund Act. If you have withdrawn money from your EPF account, then you are required to report the same by selecting – ‘Section 10(12) Recognised Provident Fund‘ from the drop-down menu.
Remember, withdrawal from PF account will be tax-exempt only if you have completed five years of service. The five years can be completed with one or more employer. Any withdrawal before the completion of five years will be taxable in your hands unless the amount is withdrawn on termination of job by reason of ill health or discontinuance of employer’s business or reasons beyond the control of the employee or if amount standing in his account is transferred to his pension scheme under Section 80CCD.
Any amount received at the time of retirement from PF account is exempt from tax.
Exempt Income: Statutory Provident Fund [Section 10(11)]
Statutory Provident Fund (SPF) is meant for employees working in Government or Semi-Government organisations, local authorities, universities, recognised educational institutions or railways. Any withdrawal made by an employee from SPF if tax-exempt is required to be reported.
Exempt Income: Superannuation Fund [Section 10(13)]
Superannuation fund is a retirement benefit provided by the employer to an employee. To build the superannuation fund, the employer makes a contribution every year to the group superannuation policy.
Exempt Income: Agriculture Income [Section 10(1)]
If you have earned any sort of agriculture income which does not exceed Rs 5,000 in FY 2018-19, report it as exempt Income.
Other Exempt Income
- Section 10 (10 BC): Any amount from the Central/State Govt/local authority by way of compensation on account of any disaster
- Section 10 (16): Scholarships granted to meet the cost of education
- Section 10 (17): Allowance to MP/MLA/MLC
- Section 10 (17A): Award instituted by Government
- Section 10(18): Pension received by winner of Param Vir Chakra or Maha Vir Chakra or Vir Chakra or any other gallantry award
- Defence medical disability pension
- Section 10(19): Armed forces family pension in case of death during operational duty
- Section 10(26): Any income as referred to in Section 10(26), i.e., income received by scheduled tribes residing in specified areas
- Any income as referred to in section 10(26AAA), i.e., income of a Sikkimese individual from any source in the State of Sikkim.
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.
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
Exempt Income in ITR2
EI section(worksheet) in ITR2 for exempt income is shown in picture below.
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- Fill Excel ITR1: 80G, Exempt Income,Calculation of Tax
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- Paying Income Tax : Challan 280