Section 10 of the Income Tax Act allows for calculating certain tax-exempt earnings. Section 10 is summarised below in this article.
The Income Tax Act of 1961 requires all Indian citizens who earn more than a certain amount to pay taxes. As a result, as each fiscal year approaches, taxpayers strive to minimise their tax obligations.
Certain income types are exempt from taxation to reduce the burden on taxpayers and encourage them to save, invest, and pay taxes. The exemptions get listed under Section 10 of the Act, such as Section 10(10a) of the Income Tax Act.
What exactly is income tax?
The government imposes an obligatory monetary charge on income, goods, services, and transactions. Taxation is the government’s immediate revenue source, used for the general welfare of the populace through government policies, arrangements, and practices.
Taxation was implemented in India in 1860 to combat the 1857 financial crisis. As a result, the Income Tax Act of 1961 is still in effect in India.
Need for income tax in India
Income tax is a tax levied on the earnings of an individual or entity, and income tax is the primary source of revenue for the government to carry out its functions.
Defence, ordinance and law, and welfare and development in health, education, and rural development are all examples of government functions.
The government must also bear the administration cost, and these activities necessitate a significant amount of public money raised through taxation.
The reason for taxation
The revenue generated by tax collection is utilised to fund the construction of roads, schools, and hospitals, as well as market regulations and legal systems.
Redistribution of resources from the wealthy to the less fortunate sections of society
To eliminate externalities, specific products, such as tobacco taxes, are taxed to discourage smoking.
What exactly is Section 10 of the Act?
Section 10 of the Income Tax Act includes several allowances for salaried employees, ranging from housing allowance and leave travel allowance, research/academic allowance to uniform allowance.
Salaried employees get a set of money or other allowances in addition to their salary for their specific needs. Unless they are eligible for a special exemption under the IT Act, most allowances get included in total income. Employees are compensated for their services or for working in unusual conditions.
Most exempt allowances get listed under section 10 of the act. However, special allowances fall under Section 10(14) of the Income Tax Act.
Exemptions as listed under section 10 of the act
Section 10(1) – Agricultural income exemption
Section 10 states that agricultural revenue is exempt from taxation. In this case, agricultural land must be in India. The following sources of income out of the agricultural land can get exempted:
Rent or earnings from agricultural land in India.
Cultivation, tilling, planting or carrying out other basic agricultural processes.
Additional procedures for the product’s growth and maintenance, such as weeding, cutting, and pruning, among others
Agricultural produce sales
Farm structure earnings are critical to agricultural operations.
Section 10(2) – Income received from a HUF
Revenue received by a taxpayer in their capacity as HUF members is exempt under Section 10(2). As a result, any income received by a member of the HUF is tax-free. Here the following criteria should be met for the income to be exempted:
The individual’s payment must get deducted from the family’s total revenue.
In an inheritable estate, the income must be paid from the estate’s income.
Section 10(2A) – Income from a partnership firm
Section 10 provides that partnership income is tax-free (2A). In this case, the partnership must be taxed as a partnership under the Income Tax Act. The proportion of profit or revenue allocated to the taxpayer must correspond to the proportion specified in the partnership agreement.
Section 10(5) Leave travel allowance
As per section 10, the leave travel concession received by an individual taxpayer gets exempted. The concession or assistance must come from one of the following sources:
The current employer will reimburse the employee and their family for travel expenses incurred during the fiscal year.
Employers, current or former, regarding their upcoming travel—This trip comes after he has retired or completed his military service.
In this case, the exemption amount cannot exceed the amount spent by the individual on travel.
This section considers the following:
The individual’s spouse and children
Parents, brothers, sisters, or any of them. Furthermore, they are entirely or primarily dependent on the individual.
Section 10 (10a) Exemption towards the commuted value of pension
Section 10(10A) provides an exemption from the commuted value of a pension.
The employee’s pension is the amount received after retirement. The pension can get divided into two parts based on the type of payment-
- Commuted Pension
- Lump sum pension received
- Non-commutable pension
- Regular pension received (monthly, quarterly or annually).
The pension would be taxable under the ‘Salary’ heading. Furthermore, if the family pension is received (after the employee’s death) by the legal heir, it is taxable under the heading ‘Income from other sources.’
It is important to note that the periodical payment of a pension or uncommuted pension is fully taxable under the Income Tax for all types of employees. However, under section 10(10A) of the Income Tax Act, an exemption for a commuted pension is available.
The commutated pension is exempt under section 10(10A) for the following government employees:
- Central government employees.
- State government employees
- Employees of the local government
- Statutory corporation employees
Any other employees’ commuted value of pension would get exempted in the following way:
- Cases in which employees receive a gratuity.
The commuted value is one-third of the employee’s standard pension entitlement.
- Other employees
The commuted value of one-half of the employee’s standard pension entitlement
- Daily Allowance (Section 10(14)) (Partially Exempt Income)
When on tour or during a job transfer, the employee receives a daily allowance to help him meet his daily expenses. This allowance is exempt under section 10(14) of the Income Tax Act.
Salary under the Income Tax Act Section 17(1)
Salary includes wages, advance salary, fee, commission, perquisites, and profits instead of or in addition to the salary/wage received in the previous year, according to Section 17(1) of the Income Tax Act.
Furthermore, an employer-employee relationship is required to tax a specific receipt under the heading “Salaries.”
Section 17(1) of the Income Tax Act classifies the following income as salary:
- Wages
- An annuity or a pension
- Gratuity
- Fees, commissions, gratuities, or profits in place of or in addition to any compensation or pay
- Any advance payment
- Compensation for unused leaves
- Contributions to the National Pension Scheme made by the federal government or other employers
- The taxable annual increase in an employee’s balance at the credit of a recognised provident fund
To summarise:
Tax is a mandatory charge imposed by the government on an individual. The Income Tax Act includes several provisions for taxpayers based on their needs. Depending on whether it’s an individual, HUF, an ordinary resident, a company, a non-ordinary resident, or a non-resident person, the government has provided various forms to pay income tax.
Even though everyone is required to pay tax to the Indian government each fiscal year, Section 10 of the Income Tax Act provides relief in the form of exemptions. Various sub-sections are developed under Section 10 to give different types of exemptions by the government.
Section 10(10A) of the Income Tax Act exempts the income earned in the form of a pension. Before applying for exemptions, it is good to familiarise yourself with all the provisions of section 10 and requirements of section 10(10A).