Section 10 – Tax Exemptions, Allowances & How to Claim

Section 10 of the Income Tax Act states an array of tax exemptions that help reduce the overall tax liability of taxpayers. Incomes like house rent allowance, leave travel allowance, interest on provident fund (subject to limits), gratuity, agricultural income, and more are exempted, meaning such income will generally not be included while calculating the taxable income of the individual.

Such tax exemptions help individuals reduce their overall tax burden. However, taxpayers should understand that Section 10 is divided into various sub-sections like Section 10(5), Section 10(10D), Section 10(13A), Section 10(26), etc., each offering a different exemption that can be claimed if an individual meets the eligibility conditions.

In this blog, we will explore Section 10 of the Income Tax Act, including its sub-sections, and explain how to claim exemptions under this section.

What is Section 10 of the Income Tax Act?

Section 10 of the Income Tax Act, 1961 lists various types of income that are exempt from taxation either fully or partially. These exemptions are not limited only to salaried individuals but may also apply to partners in firms, investors, agricultural income earners, NRIs, and other taxpayers depending on the nature of income.

Some commonly claimed tax exemptions include house rent allowance, children’s education allowance, leave travel allowance, agricultural income, gratuity, provident fund interest (within limits), and life insurance policy maturity benefits under Section 10(10D).

By offering such tax exemptions, the government aims to promote savings, financial security, insurance coverage, investments, and responsible financial planning among taxpayers.

In a nutshell, Section 10 helps reduce taxable income legally while encouraging financial stability and long-term planning.

Who Can Claim an Income Tax Exemption Under Section 10?

Section 10 benefits eligible taxpayers based on the nature of their income and compliance with specific conditions. These exemptions are not restricted only to salaried individuals.

The table below shows the basic income tax exemption limits under the tax slab system (these are not Section 10 exemptions):

Please note that most salary-related exemptions under Section 10 are generally available only under the old tax regime. Taxpayers opting for the new tax regime may not be able to claim several of these exemptions.

What Are the Available Tax Exemptions Under Section 10?

Following is a list of tax exemptions provided under Section 10 of the Income Tax Act.

Section 10(13A) – House Rent Allowance

This section covers house rent allowance received by an employee. The portion of salary received for rent and accommodation expenses can be exempt from income tax subject to prescribed conditions.

The exemption is calculated as the least of:

• Actual HRA received
• 50% of basic salary + DA (for Mumbai, Delhi, Chennai, Kolkata)
• 40% of basic salary + DA (other cities)
• Actual rent paid minus 10% of basic salary + DA

Expenses considered under HRA exemption may include:

• Actual rent paid
• Brokerage or commission paid to secure rented accommodation
• Maintenance charges related to rented accommodation
• Lease agreement registration expenses

Section 10(5) – Leave Travel Allowance

Leave Travel Allowance applies to domestic travel expenses incurred by employees. Eligible expenses generally include airfare, train fare, or bus fare.

Expenses such as hotel accommodation, sightseeing, food, and local conveyance are not covered.

The exemption is restricted to:

• Actual travel expenses incurred, or
• LTA amount provided by employer (whichever is lower).

Section 10(14)(ii) – Children Education Allowance

Taxpayers receiving children’s education allowance can claim:

• ₹100 per month per child (maximum two children)
• Hostel allowance up to ₹300 per month per child
• Transport allowance up to ₹3,200 per month for disabled employees.

Section 10(11) – Provident Fund and Sukanya Samriddhi Account

Interest earned on recognized provident funds and Sukanya Samriddhi Accounts is generally exempt.

However, from April 2021:

• Interest on employee contributions exceeding ₹2,50,000 per year (₹5,00,000 where no employer contribution exists) is taxable.

Section 10(10) – Gratuity

Gratuity received by government employees is fully exempt.

For private sector employees, exemption depends on whether covered under the Payment of Gratuity Act and is subject to prescribed limits.

Section 10(10AA) – Leave Encashment

Employees may encash unused leave:

• During service → fully taxable
• At retirement/resignation:

Government employees → fully exempt
Non-government employees → exemption limited to the least of:

• ₹25,00,000
• Leave salary actually received
• Average 10 months’ salary
• Cash equivalent of unavailed leave.

Section 10(10A) – Commuted Pension

Commuted pension received by government employees is fully exempt.

For non-government employees, exemption depends on whether gratuity is received and is subject to prescribed limits.

Section 10(1) – Agricultural Income

Agricultural income earned from land situated in India is exempt. This includes:

• Rent or revenue from agricultural land
• Income from cultivation and agricultural operations
• Processing necessary to make produce marketable
• Farm buildings used for agricultural purposes

Activities like dairy or poultry farming are generally not treated as agricultural income unless directly linked to agricultural operations.

Section 10(10B) – Retrenchment Compensation

Retrenchment compensation received during closure or transfer of employment is exempt up to the least of:

• Compensation received
• ₹5,00,000
• 15 days’ average pay × completed years of service.

Section 10(10C) – Voluntary Retirement

Compensation received on voluntary retirement is exempt up to the least of:

• Compensation received
• ₹5,00,000
• 3 months’ salary × completed years of service
• Last drawn salary × remaining months until retirement.

Section 10(10D) – Life Insurance Policy Exemption

Income received from life insurance policy maturity or bonus is exempt subject to conditions.

• Exemption may not apply in cases like:
• Keyman insurance policies
• Premium exceeding prescribed percentage of sum assured
• Certain high-premium ULIPs as per recent amendments.

Section 10(2A) – Partner’s Share in Profits

Share of profit received by a partner from a firm or LLP is fully exempt. However, interest or salary received from the firm is taxable.

Section 10(14) – Special Allowance

Tax exemption is available for certain allowances such as:

• Food allowance (subject to prescribed limits)
• Internet allowance provided for official purposes
• Conveyance, research, and travel allowances incurred for employer’s business.

Section 10(15) – Interest on Savings Certificates

Interest income earned from specified securities, savings certificates, and certain deposits (including some NRI deposits) may be exempt subject to prescribed limits and conditions.

Section 10(23C) - Exemption from taxes for medical and educational institutions.

Educational or medical institutions with annual receipts not exceeding ₹5 crore may claim exemption subject to compliance requirements.

Section 10(26) – Scheduled Tribe Members in North-Eastern States

Members of Scheduled Tribes residing in specified North-Eastern states may claim exemption on income earned within those states, subject to conditions.

Section 10(26AAA) – Sikkimese Individuals

Income earned by Sikkimese individuals from sources within Sikkim or specified securities may be exempt subject to eligibility conditions.

Section 10(34) – Dividend Income (Historical Provision)

Section 10(34) talks about the exemption on the dividend income that you have received by investing in an Indian company. However, this ensures that the list of exemptions is capped at Rs 10,000. If the limit exceeds, the rest will be taxable.

Please note that this exemption is only applicable for dividends received up to March 31, 2020.

Section 10(34A) – Buy-Back of Shares

Amount received on buy-back of shares by a domestic company before 1 October 2024 is generally exempt in shareholders’ hands.

Section 10(35) – Mutual Fund Income (Historical Provision)

Income from specified mutual funds was exempt until 31 March 2020. Tax rules have changed thereafter.

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

Exemption applies if:

• Land used for agriculture for at least 2 years before acquisition
• Acquisition approved by government/RBI.

Section 10(38) – Long-Term Capital Gains (Historical Provision)

Exemption applied to long-term capital gains on equity shares/equity mutual funds until FY 2017-18.

Currently, gains exceeding ₹1 lakh are taxed under Section 112A.

Key Tax Exemptions for NRIs Under Section 10

Below are some of the key tax exemptions for NRIs under Section 10 of the Income Tax Act.

Section 10(4)(ii) – Interest on NRE Accounts

For non-resident Indians, one of the most important tax benefits is the exemption on interest earned from NRE bank accounts. The interests earned from these accounts are fully tax exempt in India; hence, NRE accounts are a preferred space for NRIs to park their funds.

However, the taxpayer must ensure that these exemptions are only available as long as they qualify as a person resident outside India under FEMA. Once the residential status of the taxpayer changes, the tax exemptions will no longer be applicable.

Section 10(15)(iv)(fa) – FCNR Account Interest

The interest earned on a foreign currency non-resident account (FCNR) is also fully exempted from taxes in India under section 10 (15)(iv)(fa) of the Income Tax Act.

Another good part about this section is that these benefits of tax exemption on FCNR account interest are not limited only to the non-resident Indian(NRIs) but also to the person classified as "Resident but not ordinarily Resident" (RNOR).

Section 10(6)(iv) – Remuneration to Foreign Citizens

However, the provision under this section is not specifically for NRIs, but it is somehow relevant for foreign nationals working in India for a short duration.

The section states that if a foreign citizen comes to India for employment and the period of their stay remains within the timeframe of 90 days in a financial year, the remuneration they get is exempt from income tax in India, provided certain conditions are met.

How to Claim Section 10 Exemptions

To claim exemptions:

• Disclose exempt income in ITR
• Maintain documentation (Form 16, salary slips, travel bills, rent receipts, etc.)
• Choose correct ITR form
• File and e-verify before the deadline.

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Note: This guide is for informational purposes only. The views expressed in this guide are personal and do not constitute the views of Savetaxs. Savetaxs or the author will not be responsible for any direct or indirect loss incurred by the reader for taking any decision based on the information or the contents. It is advisable to consult with either a Chartered Accountant (CA) or a professional Company Secretary (CS) from the Savetaxs team, as they are familiar with the current regulations and help you make accurate decisions and maintain accuracy throughout the whole process.