Exempt Income: Definition, Meaning, and Tax Exemptions

What is Exempt Income

Exempt income refers to the income that is not subject to any tax by the state or central government. This concept plays a crucial role in the tax system as it impacts how much individuals and entities are required to pay in taxes. 

Exempt income is income that, despite being received by an individual or entity, is not included in taxable income calculations. The purpose of exempt income provisions is to support certain activities, encourage specific behaviors, or provide relief for particular groups. By excluding these types of income from taxation, the government aims to achieve policy objectives, promote social welfare, or address economic needs.

Income Exemptions as per Section 10

Following are some examples of exemptions under Section 10 of Income Tax Act:

• Agricultural Income (Section 10(1))
• Foreign Income of a Non-Resident (Section 10(4))
• Income from House Rent Allowance (HRA) (Section 10(13A))
• Income for HUF: Funds received by a member from the income of an HUF or from an impartible estate are exempted under Section 10(2).
• Partner’s Share from a Firm: Profits distributed to a partner is exempted under Section 10(2A).

Exempt Income: Examples

To understand the concept better, following are 2 examples of exempt income:

• An individual earns ₹3,00,000 from farming activities on their land. This income is classified as agricultural income and is fully exempt from tax. If the individual’s total non-agricultural income (such as salary or business income) is less than the threshold set by the government, the agricultural income remains exempt and does not impact the taxability of their other income.
• A partner in a firm receives ₹2,00,000 as their share of the firm’s profits. This amount is exempt from additional taxation in the hands of the partner, as the firm itself is taxed on the profits.

Where to Disclose Exempt Income in ITR

For taxpayers with a different source of income including agricultural income, the disclosure needs to be done under Schedule EI.

For any salaried employee, the disclosure of exempt income is mandatory under Schedule-S of the income tax return.