What is Section 10 of Income Tax Act?

According to RBI data (2026), digital financial transactions in India are projected to reach ₹100 trillion by the end of the fiscal year, highlighting the nation’s rapid economic formalisation. This growth underscores the increasing importance for every Indian to understand their financial obligations and available tax benefits.

This article will explain what Section 10 of the Income Tax Act, 1961, means, exploring various income exemptions it offers. You will learn how these provisions can significantly reduce your taxable income, helping you manage your finances more effectively in 2026.

Understanding Section 10 of the Income Tax Act, 1961

According to the Income Tax Act, 1961, Section 10 outlines specific types of income that are not included in your total taxable income. These are known as exemptions, meaning you do not pay tax on these amounts, even though you receive them. Understanding these provisions is crucial for effective tax planning and reducing your overall tax liability.

The primary purpose of Section 10 is to provide relief to taxpayers and encourage certain financial behaviours or support specific categories of individuals. It ensures that certain essential or policy-driven incomes remain untaxed, promoting economic stability and social welfare. For instance, benefits like House Rent Allowance (HRA) or Leave Travel Concession (LTC) are partially or fully exempt under this section.

These exemptions differ from deductions, which are amounts you subtract from your gross total income to arrive at your taxable income. Exemptions are directly excluded from the income itself, offering a direct reduction in your assessable earnings. Knowing the difference helps you correctly file your income tax returns.

• Reduces overall tax liability by excluding certain incomes.
• Supports specific financial activities like savings or travel.
• Provides relief for certain essential expenses.
• Promotes social welfare by exempting income for specific groups.

Key Exemptions for Salaried Individuals Under Section 10

This section will detail the most common exemptions available to salaried employees, helping them significantly lower their tax burden. Each sub-section of Section 10 addresses a particular type of income or allowance, providing specific conditions for its exemption. It is important to meet these conditions to claim the benefits correctly.

Section 10(5) – Leave Travel Concession (LTC)

Section 10(5) allows employees to claim an exemption for travel expenses incurred while on leave, covering journeys within India. This benefit extends to the employee and their family members, including their spouse, children, and dependent parents or siblings. The exemption is available for two journeys in a block of four calendar years, with the current block being 2022-2025 (next block 2026-2029).

The amount of exemption depends on the mode of travel and the actual expenses incurred. For air travel, the exemption is limited to the economy class airfare of the national carrier via the shortest route. If you travel by rail, it is limited to the air-conditioned first-class rail fare by the shortest route.

If your journey is by any other recognised public transport, the exemption is the first-class or deluxe class fare by the shortest route. Should there be no recognised public transport for a part of the journey, a deemed first-class AC rail fare for that distance is considered. Arjun, a startup founder, plans a trip to Ladakh in 2026 and can claim this exemption for his family’s travel costs.

Section 10(10A) – Commuted Pension

Under Section 10(10A), a portion of your commuted pension can be exempt from tax, depending on whether you are a government or non-government employee. Commuted pension refers to a lump sum payment received in exchange for giving up a portion of your monthly pension. This provision aims to provide financial relief during retirement.

For government employees, the entire commuted pension amount received as a lump sum is fully exempt from tax. However, this exemption does not apply to the regular monthly pension payments, which remain taxable. This offers a significant benefit for public sector retirees.

Non-government employees receive a partial exemption for their commuted pension. If they also receive gratuity, one-third of the total commuted pension is exempt; if they do not receive gratuity, half of the total commuted pension is exempt. It’s crucial to calculate this carefully based on your specific situation.

Section 10(10C) – Voluntary Retirement Compensation

Section 10(10C) provides a tax exemption for compensation received at the time of voluntary retirement or termination of service. This exemption is subject to certain conditions and a maximum limit, making it a valuable benefit for employees opting for early retirement. The intent is to ease the financial transition during such career changes.

The maximum exemption amount allowed under this section is ₹5,00,000. To qualify, the compensation must be received under a scheme of voluntary retirement or separation, approved by the Income Tax Department. The scheme must also meet specific criteria related to employee eligibility and the period of service.

Step 1: Check if your employer’s voluntary retirement scheme is approved by the Income Tax Department.

Step 2: Ensure your compensation does not exceed the ₹5,00,000 exemption limit.

Step 3: Verify that you meet the scheme’s eligibility criteria, such as minimum service period.

Section 10(11A) – Sukanya Samriddhi Account (SSA) Payments

Any payment received from an account opened in accordance with the Sukanya Samriddhi Account Rules, 2014, is fully exempt from tax under Section 10(11A). This includes both the interest earned on the deposits and the withdrawals made from the account. The SSA scheme is a government-backed savings initiative designed for the welfare of girl children.

This exemption encourages parents and guardians to save for their daughter’s education and marriage, providing a significant tax-free return on investment. The scheme allows deposits for up to 15 years from the account opening date, with maturity after 21 years or upon the girl’s marriage after she turns 18. Arjun opened an SSA for his daughter in 2018, and all future payments will be tax-free.

Section 10(12B) – Partial Withdrawal from NPS

Section 10(12B) permits tax-free partial withdrawals from the National Pension System (NPS), subject to specific conditions. The NPS is a long-term investment product designed to help individuals save for retirement. This provision allows for flexibility while maintaining the scheme’s primary goal.

To qualify for this exemption, the withdrawn amount must not exceed 25% of the employee’s total contributions to the NPS account. Furthermore, the withdrawal can only be made for specific purposes, such as higher education or marriage of children, purchase or construction of a house, or treatment of critical illnesses. You can make up to three partial withdrawals during the entire NPS tenure.

Section 10(10D) – Life Insurance Policy Proceeds

Under Section 10(10D), any sum received under a life insurance policy, including any bonus, is generally exempt from tax. This exemption applies to the maturity proceeds as well as amounts received upon the death of the insured. This provision aims to promote life insurance as a means of financial security for families.

For policies issued on or after April 1, 2012, the premium payable for any year must not exceed 10% of the actual capital sum assured. If the premium exceeds this limit, the proceeds will be taxable. For policies issued between April 1, 2003, and March 31, 2012, the premium limit was 20% of the sum assured.

The exemption under Section 10(10D) is not applicable to any sum received under a Keyman insurance policy or from a policy issued under Section 80DD(3) or Section 80DDA(3). However, any sum received upon the death of the insured person remains entirely tax-exempt without any conditions, regardless of the premium paid.

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

Section 10(13A) provides a significant tax exemption for House Rent Allowance (HRA) received by salaried employees living in rented accommodation. This allowance is a common component of salary packages and offers substantial tax relief. The exemption amount depends on several factors, including your salary, the rent paid, and your city of residence.

The HRA exemption is the least of the following three amounts:

• Actual HRA received from your employer.
• 50% of your salary if you live in Mumbai, Kolkata, Delhi, or Chennai (metro cities); 40% of salary for any other city.
• Actual rent paid minus 10% of your salary.

For HRA calculation, ‘salary’ includes basic pay, dearness allowance (if it forms part of retirement benefits), and commission based on a fixed percentage of turnover achieved by the employee. Other allowances and perquisites are not considered. Arjun, living in Delhi, can claim 50% of his basic salary for HRA exemption.

Section 10(14) – Special Allowances

Section 10(14) allows for exemptions on various special allowances or benefits provided to employees, subject to specific limits or conditions. These allowances are typically granted to meet expenses wholly, necessarily, and exclusively incurred in the performance of duties. It’s crucial to understand the individual limits for each.

The exemption for these allowances is generally limited to the actual amount spent for the official purpose or the specified statutory limit, whichever is lower. This ensures that only the portion used for work-related activities is exempt, preventing misuse. Many such allowances are designed to compensate for specific working conditions or additional costs.

Exemptions for Specific Income Types and Entities

Beyond salaried individuals, Section 10 also extends exemptions to various other income types and specific entities, reflecting broader policy objectives. These provisions ensure that certain incomes, often linked to public welfare, education, or specific geographical regions, remain untaxed. Understanding these allows for a comprehensive view of tax-exempt income.

Section 10(16) – Educational Scholarship

Under Section 10(16), any amount received as an educational scholarship is fully exempt from tax for the recipient. This exemption applies as long as the scholarship is specifically intended to cover the cost of education. It encourages academic pursuits by ensuring that financial aid does not become a taxable income.

This means that whether the scholarship covers tuition fees, hostel expenses, or other educational costs, the entire amount is not included in the recipient’s taxable income. There is no monetary limit specified for this exemption, making it highly beneficial for students. Arjun’s nephew received a scholarship for his engineering studies in 2026, and it is fully tax-exempt.

Section 10(23C) – Income of Educational Institutions and Hospitals

Section 10(23C) grants tax exemption to the income of certain universities, educational institutions, and hospitals. This provision applies if these organisations exist solely for educational or philanthropic purposes and not for profit. It supports the vital role these institutions play in society.

For an educational institution or hospital to qualify, its total annual receipts must not exceed ₹5 crore. If the receipts exceed this limit, the institution needs to apply for specific approval from the prescribed authority to claim the exemption. This encourages smaller, non-profit entities.

Section 10(26) – Income of a Member of a Scheduled Tribe

As per Section 10(26) of the Income Tax Act, income derived by a member of a Scheduled Tribe residing in specific areas is exempt from tax. This provision is aligned with Article 366(25) of the Constitution, recognising the unique socio-economic context of these communities. It aims to provide economic support and stability.

The exemption applies to income earned from any source within the states of Nagaland, Manipur, Tripura, Arunachal Pradesh, Mizoram, or specific districts like North Cachar Hills, Mikir Hills, Khasi Hills, Jaintia Hills, and Garo Hills. It also covers income from dividends or interest on securities from any area, provided the individual resides in these specified regions.

Section 10(26AAA) – Income of a ‘Sikkimese’ Individual

Section 10(26AAA) provides a specific tax exemption for the income of individuals who are defined as ‘Sikkimese’. This includes any income earned within the state of Sikkim itself, promoting economic activity and well-being within the region. This special provision acknowledges the historical context of Sikkim’s merger with India.

Income in the form of dividends or interest on securities, whether generated in Sikkim or elsewhere, is also exempt from tax for Sikkimese individuals. This broad exemption offers significant financial relief to residents of Sikkim. However, it does not apply to a Sikkimese woman who marries a non-Sikkimese individual on or after April 1, 2008.

Section 10(37) – Capital Gains on Compulsory Acquisition of Urban Agricultural Land

Under Section 10(37), individuals or Hindu Undivided Families (HUFs) can claim an exemption from capital gains tax when their urban agricultural land is compulsorily acquired. This exemption applies if compensation for such acquisition is received on or after April 1, 2004. It prevents a tax burden on individuals losing their primary source of livelihood.

To qualify, the land must have been used for agricultural purposes by the taxpayer, or their parents in the case of an individual, for at least two years immediately preceding the date of transfer. This ensures the exemption benefits genuine farmers whose land is acquired for public purposes. The acquired land must be classified as urban agricultural land as per the Income Tax Act.

Understanding Maximum Exemption Limits for Individuals

While Section 10 details various specific income exemptions, it’s also important to understand the basic exemption limits that apply to individuals based on their age and residency status. These limits determine the threshold below which an individual’s income is not subject to income tax. This forms the foundational layer of tax relief.

The basic exemption limit refers to the maximum amount of income that is completely free from tax. Any income exceeding this limit becomes taxable according to the applicable tax slabs. These limits are periodically revised by the government to account for inflation and economic changes.

For the financial year 2025-26 (Assessment Year 2026-27), the basic exemption limits are structured by age. These limits are crucial for every taxpayer to know as they directly impact their tax calculation. Arjun, being under 60, benefits from the standard limit.

It is vital to note that the higher exemption limits for senior and super senior citizens only apply to individuals who are residents in India. Non-resident senior citizens, regardless of age, are subject to the basic exemption limit of ₹2,50,000. Always verify your residency status as per tax laws for accurate calculations.

Conclusion

Section 10 of the Income Tax Act, 1961, serves as a cornerstone of tax planning, offering crucial exemptions that can significantly reduce your taxable income. From common benefits like HRA and LTC for salaried individuals to specific provisions for educational scholarships and certain regional incomes, these exemptions are designed to provide financial relief. Understanding and correctly applying these provisions is essential for every taxpayer to optimise their tax liability in 2026.