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Exempted income and its relevance while filing returns

  • Marisha Bhatt
  • 22 Sep
  • 5 minutes

The Income Tax Act,1961 has laid in detail the taxable income of assessees and the relevant heads of incomes under which they are taxed. Apart from these provisions, the Act also specifies the exempt incomes that can be deducted from the taxable income. Such incomes reduce the tax burden on the taxpayers, however, it is important that such income be declared in the tax returns to avoid any future confusion or consequences. 

Given below is the meaning of exempt income and why it is important to declare the same in the ITR. 

What is exempt income? 

Exempt income is the income of the taxpayers that are outside the purview of taxation as per the provisions of the Income Tax Act, 1961. These incomes are usually mentioned under the provisions of section 10 of the Act and its subsections. Such exemptions are provided to grant relief from taxation to the taxpayers belonging to key sectors of the economy or to help economically backward sections or boost the economic activities in a particular area or industry. An exemption can be provided on the total income of the taxpayer or on a partial income as per the relevant provisions of the Act depending on the nature of the income. 

Why is it important to file exempt income in ITR?

Many taxpayers believe that exempt income need not be filed under the Income Tax laws. However, that is not the case. The department insists that taxpayers duly file the relevant ITRs in either of the following class,

  1. If the taxpayer is out of the ambit of taxation on account of their income being up to the basic exemption limit as per the applicable tax laws, or,
  2. If their income is exempt under any provisions of the Act.

 

This helps the Department get clarity on the exempt income and the source of such income even if there is no tax revenue generated on the same. 

Some of the key reasons why filing exempt income in the ITR is important are discussed below.

  • Transparency 

The prime reason for filing exempt income even if they are not taxable is the need for transparency of all the sources of income. The provisions of the Income Tax Act, 1961, mandate the assessee to declare all their sources of income irrespective of their taxability. This will further help them escape any penal provisions in the future relating to any accusations of undisclosed income and avoid any future hassles. 

  • Clarity of intention of taxpayers 

The intention of the taxpayer will not be questioned at any point if they have duly disclosed their exempt income in the relevant ITRs. There will be no possibilities or accusations of mens rea by the Department, which will further ease the burden on both parties. 

  • Completion of the ITR 

As the provisions of the Income Tax Act, 1961 requires the assessee to provide all the sources of their income in the ITR, non-compliance with the same will deem the returns filed incomplete. The consequences of filing an incomplete ITR are severe and the assessee may also be liable to pay a penalty for the same. Therefore, it is important to file exempt income in the ITR even if the tax liability is nil. 

  • Curbing any possibility of black money 

Non-filing of exempt income may lead to hoarding of assets and may also lead to the accumulation of black money. The perils of black money in the economy are multifaceted and have been faced since the time of independence. Hence, to curb any possibility of creating wealth through black money, and concentration of power in the hands of a few, the department insists that the taxpayers file even their exempt income in the relevant ITRs on the respective due dates for the same. 

What are some of the common exempt incomes as per the Income Tax Act,1961?

The list of exempt income as per the Income Tax Act is quite extensive. Some of the common exemptions that are often availed by the taxpayers are listed below. 

Section Description 
10(1)Income from agriculture and allied activities. 
10(2)An amount received by a person through HUF
10(2A)Income received by partners through a firm
10(10)Gratuity income
10(10B)Compensation to victims of Bhopal Gas Leak Disaster Act 1985
10(10BC)Compensation obtained by victims in the event of a disaster
10(10D)LIC Policy Receipts
10(13A)House Rent Allowance
10(5) Leave travel Concession
10(43)Reverse Mortgage
10(13)Amount received from a superannuation fund 
10(18)Amount received as a family pension or pension of gallantry-award recipients
10(37)Capital gains from the transfer of agricultural land

Conclusion

Exempt income is essentially the non-taxable income that is outside the purview of taxation as per the Income Tax Act, 1961. This income may be exempt but has to be included in the ITR to ensure the completion of the return. This will ensure that the income is duly disclosed and accounted for in the Income tax records. 

FAQs

Is every exempt income 100% exempt?

The exempt income can be fully exempt (100% exempt) or partially exempt depending on the nature of the income.

What is the difference between exempt income and deduction from income?

Exempt income is income that is not taxable and therefore is not included in the Gross taxable income. Deduction from income is the income or expenses that are reduced from the Gross Taxable Income to derive the Net Taxable income of the taxpayer.

 Is agriculture income fully exempt?

Yes, agriculture income is fully exempt i.e., 100% exempt from income tax.

Are expenses from the income source that is exempt from taxation deductible under any other head of income?

No. If the income or gains from any particular source is exempt from taxation, the expenses incurred to derive such income cannot be deducted or adjusted against any other income of the taxpayer.

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Marisha Bhatt