Tax Exemptions In India
- 7m0•
- 27 Mar 2023
The Indian government offers a wide range of tax exemptions to boost investments and promote specific economic activities – for example, it offers an exemption on insurance premiums to encourage more people to purchase life cover.
For taxpayers, exemptions are a practical way to reduce their taxable income and save tax, and make some good long-term investments. By claiming tax exemptions, a taxpayer can save all or part of his tax amount.
Tax Exemptions After Union Budgets Of 2019 And 2020
-
The government has proposed a new tax regime under Section 115BAC. Taxpayers can either opt for the new regime or continue to pay taxes according to the existing regime.
-
Individuals earning up to Rs 5 lakh per year will be eligible for a rebate (under Section 87A) of up to Rs 12,500 on tax payable.
-
Deductions on transport allowance and medical allowance are no longer available. They have been replaced by standard deduction of Rs 50,000.
-
Deductions on health insurance premiums and medical expenses remain at Rs 50,000 under Section 80D.
-
Health and education cess is to be levied at 4% on the sum of income tax and surcharge wherever applicable.
-
Corporate tax has been minimised to 25% for companies with turnover of up to Rs 250 crore and 30% for turnover above Rs 250 crore.
Tax Exemptions
Tax exemptions in India are offered under various categories. Some are fully exempt; others are partially exempt.
Fully Exempt Incomes
| Section | Type of Income |
|---|---|
10 (1) | Income from agriculture |
10 (2) | Share from income of Hindu Undivided Family (HUF) |
10 (2A) | Profit from a firm if it files separate income returns |
10 (3) | Income up to Rs. 5,000 received casually. For income through horse race, should not exceed Rs. 2,500 |
10 (4) | Interest from notified bonds or NRE account |
10 (6) | Income of foreign citizens such as diplomats and ambassadors of foreign countries |
10 (7) | Perks received while serving the Indian government abroad |
10 (8) | Payments received from foreign governments for duties in India provided it is under cooperative technical assistance programmes. The exemption also applies to income from outside India provided tax on that income is paid by the government |
10 (10) | Gratuity received by a government employee on retirement or death |
10 (10A) | Commuted pension received from the government or statutory body |
10 (10AA) | Leave encashment for state and central government employees |
10 (10B) | Compensation received by employees for retrenchment |
10 (10d) | Income from life insurance policy |
10 (11) | Income from EPF |
10 (12) | Amount received from recognised provident funds to the extent provided in rule 8 of Part A of 4th schedule |
10(15)(i)(iib)(iic) | Interests, premiums, redemptions or any other payments from notified securities, bonds, capital investment bonds, relief bonds, etc. |
10(15)(iv)(h) | Interest paid on bonds, debentures by public sector company |
10(15)(iv)(i) | Interest paid by the government on deposits made by employees of central and state government or public sector employees for retirement under notified schemes. |
10(15)(vi) | Interest received on notified gold deposit bonds |
10(15)(vii) | Interest received on notified local authorities’ bonds |
10 (16) | Scholarship to meet the cost of education |
10 (17A) | Approved awards, rewards from state or central government |
10(18) | Pension received by winners of gallantry awards |
10 (19) | Pension received by the family of armed forces personnel |
10 (23D) | Income from tax-free mutual funds |
10 (26) | Income earned in the states of the North East or Ladakh by members of scheduled tribes |
10 (26A) | Income earned by a resident or Ladakh in Ladakh or outside India |
10 (30) | Subsidy from the Tea Board |
10 (31) | Replantation subsidy approved by a board |
10 (32) | Up to Rs 1500 in income of a minor when clubbed with an adult’s income |
10 (34A) | Income from buyback of shares (under 115QA) |
10 (35) | Income or dividends from UTI and MFs |
10 (37) | Income from the acquisition of agricultural land by the government |
10 (38) | Income from sale or transfer of shares on which STT has been paid |
10 (A) | 10 years of profits of companies operating in free trade zones and electronic, software or technology park |
10 (B) | Profits from the export of manufactured products or software for 10 years |
10 (C) | Profits from new undertakings in IIDC or IGC in the North East for 10 years |
10 (18) | Pension |
Partially Exempt Incomes
| 10 (5) | LTA or Leave Travel Allowance |
|---|---|
10 (10) | Income received by non-government employees through pension, gratuity, leave encashment or retrenchment compensation is subject to prescribed limits |
10 (13A) | House rent allowance |
10 (13) | Payments received from approved superannuation funds |
10 (14) | Allowances like Children’s Education Allowance, Transport Allowance etc |
TDS Exemption
TDS stands for tax deducted at source. It is the tax deducted by a payer for payments made to you – whether as salary or professional fee. Banks, too, deduct tax at source when they pay out interest. The payer then deposits the tax with the government and the amount is credited to your tax account. You can adjust it against the tax amount you are liable to pay or claim a refund if the TDS exceeds your tax. (Read more about How to Calculate TDS)
Due to the COVID- 19 lockdowns, TDS rates have been reduced by 25% for up to 23 non-salaried payments to Indian residents who hold valid PAN cards. This includes TDS applicable on contracts, professional fees, interest, rent, dividend, commission, and brokerage, among others. The relief will be available from 14 May 2020 until 31 March 2021.
| Nature of Payment | Existing TDS Rate | New TDS Rate (valid from 14 May 2020-31 March 2021) |
|---|---|---|
Interest on securities | 10% | 7.5% |
Dividend | 10% | 7.5% |
Interest other than interest on securities | 10% | 7.5% |
Payment of contractors and sub-contractors | 1% (individual/HUF) 2% (others) | 0.75% (individual/HUF) 1.5% (others) |
Insurance commission | 5% | 3.75% |
Payment in respect of life insurance policy | 5% | 3.75% |
Payments in respect of deposits under National Savings Scheme | 10% | 7.5% |
Payments on account of re-purchase of units by mutual funds or UTI | 20% | 15% |
Commission, prize etc., on sale of lottery tickets | 5% | 3.75% |
Commission or brokerage | 5% | 3.75% |
Rent for plant and machinery | 2% | 1.5% |
Rent for immovable property | 10% | 7.5% |
Payment for acquisition of immovable property | 1% | 0.75% |
Payment of rent by individual or HUFy | 5% | 3.75% |
Payment for joint development agreements | 10% | 7.5% |
Fee for professional or technical services (FTS), royalty, etc. | 2% (Certain royalties, FTS) 10% (others) | 1.5% 7.5% (others) |
Payment of dividend by mutual funds | 10% | 7.5% |
Payment of compensation on acquisition of immovable property | 10% | 7.5% |
Payment of income by business trust | 10% | 7.5% |
Payment of income by investment fund | 10% | 7.5% |
Income by securitisation trust | 25% (Individual/HUF) 30% (Others) | 18.75% (Individual/HUF) 22.5% (Others) |
Income by securitisation trust | 25% (Individual/HUF) 30% (Others) | 18.75% (Individual/HUF) 22.5% (Others) |
Payment to commission, brokerage etc. by Individual and HUF | 5% | 3.75% |
TDS on e-commerce participants | 1% (w.e.f.1.10.2020) | 0.75%% |
TAX Exemption - HRA
Employers offer a house rent allowance (HRA) to employees as part of their salary to pay for accommodation. The Income Tax Act allows an exemption on the amount. However, employees cannot claim the exemption if they live in a home they own. The HRA exemption is the minimum of:
- The actual HRA paid to the employee
- Actual rent paid minus 10% of (Basic Salary+ Dearness Allowance)
- 50% of (Basic Salary+ Dearness Allowance) if rented accommodation is in a metro city OR
- 40% of (Basic Salary+ Dearness Allowance) if rented accommodation is in a non-metro city
Tax Exemption On Education Loan
If you are an individual taxpayer, you can claim a deduction on interest paid on an education loan. However, you must fulfil the following conditions:
- The loan should be from a financial institution or an approved charitable institution
- The loan should be taken towards higher education for yourself or your spouse or children or a student to whom you are a legal guardian
- The interest on the loan is to be paid from income that is subject to tax
The deduction is valid until the loan is paid or for 8 years, whichever is sooner.
Tax Exemption On Car Loan
Tax benefits on interest paid on car loan can be availed only by businessmen or self-employed individuals, provided you declare the profit earned and show that the vehicle is used for business purposes. A salaried individual cannot claim this tax benefit.
Tax Exemption - LTA
Leave Travel Allowance (LTA) is paid to employees for travel within India with their families. The amount is tax-free, if proof of travel is given as evidence. The exemption is valid only on travel cost. The exemption applies for two journeys in 4 years.
For air journeys, the LTA cannot be more than the amount for economy airfare (of employer and family) on the national carrier. For rail journey, it is the AC first class ticket fare. The cost is calculated on the shortest route between two destinations.
Income Tax Exemption Limit
The Indian tax laws exempt income up to a certain limit from income tax based on your age. This does not include standard deduction and other tax exemptions you can claim by showing investments and expenses. The table below outlines tax slabs for different groups of individuals. Read more about Income Tax Slabs
| Income | General | Senior Citizens (between 60 and 80 years) | Super citizens (above 80 years) |
|---|---|---|---|
Up to Rs 2,50,000 lakh | Nil | Nil | Nil |
Rs 2,50,001–Rs 3,00,000 | 5% | NIL | Nil |
Rs 3,00,001–Rs 5,00,000 | 5% | 5% | Nil |
Rs 5,00,001–Rs 10,00,000 | 20% | 20% | 20% |
Above Rs 10,00,000 | 30% | 30% | 30% |
-
If your annual income does not exceed Rs 5 lakh, you are eligible for a tax rebate of up to Rs 12,500.
-
Surcharge is applicable on annual incomes of Rs 50 lakh and above. The rates are:
-
10% on income between Rs 50 lakh and Rs 1 crore
-
15% on income between Rs 1 crore and Rs 2 crore
-
25% on income between Rs 2 crore and Rs 5 crore
-
37% on income above Rs 5 crore
-
4% health and education cess is levied on the sum of income tax and surcharge
While the above rates are applicable to FY 2020–21 as well, taxpayers can also opt for a new taxation regime that offers lower rates. The income tax slabs under the optional regime is the same for all individual taxpayers regardless of age.
Have a look at the income tax slabs under the special new regime:
| Taxable Income | Tax Rate |
|---|---|
Up to Rs 2,50,000 | Nil |
Rs 2,50,000–Rs 5,00,000 | 5% |
Rs 5,00,000–Rs 7,50,000 | 10% |
Rs 7,50,000–Rs 10,00,000 | 15% |
Rs 10,00,000–Rs 12,50,000 | 20% |
Rs 12,50,000–Rs 15,00,000 | 25% |
Above Rs 15,00,000 | 30% |
The rebate on earnings under Rs 5 lakh will still apply. So will surcharge rates as well as the health and education cess.
However, if you choose the new rates, you would be waiving several exemptions and deductions, such as (among others):
-
Exemptions on various allowances (e.g. LTA, HRA, conveyance allowance, relocation allowance, etc.), children’s tuition fees, and other special allowances under Section 10(14)
-
Standard deduction
-
Deduction on housing loan interest payment under Section 24
-
Deductions available under Chapter VI-A (Sections 80C,80D, 80E, etc.)
In case you are unsure about which regime to choose for FY2020–21, compute your tax liability using both systems. You could even use an income tax calculator to make it simpler. Then compare the results to figure out which regime helps you reduce your tax burden.
