Income Tax Act Guide
Exempt Income Under Section 10
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Your house rent allowance. Your gratuity at retirement. The income from your farm. Most taxpayers pay tax on money the law never intended to tax.
Section 10 of the Income Tax Act is the legal list of incomes that stay outside your tax calculation entirely. If you're a salaried employee, a retiree, an HUF member, or a farmer, at least some of your income qualifies. The question is whether you're claiming correctly.
This guide covers what exempt income means, which incomes qualify under Section 10, how exemptions differ from deductions, what documents you need, and how to report everything in your ITR — without triggering a notice.
Quick Overview: Key Facts About Exempt Income Under Section 10
- Exempt income is never added to your total taxable income. It sits outside the tax calculation from the start.
- Section 10 of the Income Tax Act, 1961 is the legal provision listing all exempt incomes — fully or partially.
- Common examples include HRA, LTA, agricultural income, gratuity, PF withdrawals, life insurance proceeds, Sukanya Samriddhi payouts, and scholarships.
- Exemptions work differently from deductions. Exemptions keep income out from the beginning; deductions pull income back down after it's been counted.
- Most Section 10 exemptions are only available under the old tax regime. Choosing the new regime means losing many of these benefits.
- Exempt income must still be declared in your ITR, even though it isn't taxed. Omitting it can trigger a mismatch notice.
- Limits and conditions are updated with each Union Budget. Always verify current figures before filing.
What Is Exempt Income?
Exempt income is money you earn that is never counted as part of your taxable income. It sits completely outside the tax calculation.
Think of it this way. Your taxable income is the number the government uses to work out what you owe. Exempt income lives beside that number — not included, not taxed. Your HRA, your farm earnings, your PF withdrawal on retirement — they simply don't enter your tax bill.
What Is Section 10 of the Income Tax Act?
Section 10 is the part of the Income Tax Act, 1961 that formally lists all "incomes not included in total income." Every exemption this guide covers is rooted in that section.
It sits under Chapter III of the Act. This is where Parliament specifies which earnings are tax-free, and under what conditions. Every clause in Section 10 comes with its own rules, monetary limits, and sometimes eligibility criteria.
Section 10 covers two types of exemptions:
- Fully exempt income — like agricultural income, which is not taxed at all
- Partially exempt income — like HRA, where only a calculated portion stays outside the tax net
Understanding which category applies to you is the first step to claiming correctly.
Exempt Income vs. Deductions: What Is the Difference?
This distinction confuses more taxpayers than it should. Both exemptions and deductions reduce your tax. But they do so at different points in the calculation and under different parts of the law.
An exemption removes income before it's ever counted. A deduction subtracts from income that has already been added in.
Exemptions fall under Section 10. Deductions fall under Chapter VI-A — Section 80C investments, Section 80D health insurance premiums, Section 80G donations, and so on.
| Point of Difference | Exempt Income | Deductions |
|---|---|---|
| What it does | Income is excluded from total income entirely | Amount is subtracted from income already counted |
| Where it's covered | Section 10, Chapter III | Chapter VI-A (Sections 80C, 80D, etc.) |
| Based on | Source or nature of income | Investments, payments, or specified expenses |
| Effect on tax | Never enters the tax calculation | Reduces taxable income after it has been added |
| Example | Agricultural income, HRA exemption | 80C investment, health insurance premium deduction |
Who Can Claim Exemptions Under Section 10 of the Income Tax Act?
Most taxpayers qualify for at least one Section 10 exemption. What you can claim depends on the type of income you earn and whether you meet the conditions for each clause.
Here's who benefits most:
- Salaried individuals — HRA, LTA, gratuity, special allowances
- Self-employed professionals — limited exemptions, based on income type
- Hindu Undivided Families (HUFs) — share of family income
- Pensioners and retirees — commuted pension, leave encashment, gratuity
- NRIs — interest on NRE accounts and specified notified bonds
- Students and scholarship recipients — scholarships for education, regardless of source
- Partners in firms and LLPs — share of profit
- Trusts, educational institutions, and hospitals — where government approval conditions are met
Types of Exempt Income Under Section 10: Full List
Section 10 covers everything from farm income to retirement payouts to disaster compensation. The table below gives you a structured reference.
| Income Type | Section | Exemption Status |
|---|---|---|
| Agricultural income | 10(1) | Fully exempt |
| HUF member's share of family income | 10(2) | Fully exempt |
| Partner's share of profit | 10(2A) | Fully exempt |
| House Rent Allowance (HRA) | 10(13A) | Partially exempt |
| Leave Travel Allowance (LTA) | 10(5) | Partially exempt |
| Gratuity | 10(10) | Fully or partially exempt |
| Leave encashment | 10(10AA) | Fully or partially exempt |
| Commuted pension | 10(10A) | Fully or partially exempt |
| VRS compensation | 10(10C) | Exempt up to ₹5 lakh |
| Life insurance proceeds | 10(10D) | Exempt, subject to conditions |
| Statutory PF withdrawals | 10(11) | Exempt, subject to conditions |
| Recognised PF withdrawals | 10(12) | Exempt, subject to conditions |
| Sukanya Samriddhi payouts | 10(11A) | Fully exempt |
| NPS withdrawals | 10(12A), 10(12B) | Partially exempt |
| Special salary allowances | 10(14) | Partially exempt |
| Scholarships | 10(16) | Fully exempt |
| Gallantry award pensions | 10(18) | Fully exempt |
| Armed forces family pension | 10(19) | Fully exempt |
| Disaster compensation | 10(10BC) | Fully exempt |
| Interest on notified securities | 10(15) | Varies |
| Compulsory acquisition capital gains | 10(37) | Exempt, subject to conditions |
| Share buyback proceeds | 10(34A) | Exempt where Section 115QA applies |
| Scheduled Tribe income in notified areas | 10(26) | Fully exempt |
| Sikkimese individual income | 10(26AAA) | Largely exempt |
| Educational/medical institution income | 10(23C) | Exempt with approval |
| SEZ unit export profits | 10AA | Tax holiday for specified period |
Section-by-Section Exemptions Explained
Agricultural Income — Section 10(1)
Agricultural income earned from land in India is fully exempt. That covers rent from farmland, income from growing and selling crops, and earnings from basic operations like tilling, sowing, and harvesting.
One important point: agricultural income is exempt from direct tax, but it can still affect your tax rate through partial integration. Here's how that works.
HUF Income and Partner's Profit Share — Sections 10(2) and 10(2A)
If you're a member of a Hindu Undivided Family (HUF), your share of the family income is exempt under Section 10(2). This applies as long as the payment comes from the HUF's own income or from an impartible estate.
Partners in firms and LLPs are covered under Section 10(2A). Your share of the firm's profit is exempt because the firm has already paid tax on it. However, any salary or interest on capital you draw from the firm remains taxable in your hands.
House Rent Allowance (HRA) — Section 10(13A)
HRA is one of the most commonly claimed exemptions by salaried employees.
The exempt amount is the lowest of these three figures:
- Actual HRA received from your employer
- Rent paid minus 10% of your basic salary
- 50% of basic salary if you live in a metro city (Mumbai, Delhi, Kolkata, Chennai), or 40% elsewhere
An employee in Delhi earns a basic salary of ₹50,000 per month, receives HRA of ₹20,000, and pays rent of ₹18,000.
| Calculation | Amount |
|---|---|
| Actual HRA received | ₹2,40,000/year |
| Rent paid − 10% of basic salary | ₹18,000 × 12 − ₹60,000 = ₹1,56,000 |
| 50% of basic salary (metro) | ₹3,00,000/year |
| Exempt amount (lowest) | ₹1,56,000 |
The remaining ₹84,000 of HRA received is added to taxable income.
To claim HRA, keep rent receipts (month-by-month), your signed rental agreement, and the landlord's PAN if annual rent exceeds ₹1 lakh.
Leave Travel Allowance (LTA) — Section 10(5)
LTA is exempt on actual domestic travel costs — air, rail, or road fare — for journeys within India taken during leave.
Key rules:
- Available for two journeys in a block of four years
- Covers travel fare only — hotels, food, and local transport are not exempt
- Family members can travel with you, subject to conditions
Special Allowances — Section 10(14)
Section 10(14) covers work-related allowances your employer pays you to meet specific job-related costs:
- Uniform allowance — for maintaining dress required for your job
- Travel allowance — for expenses during official travel
- Conveyance allowance — for commuting for official work
- Children's education allowance — up to ₹100 per month per child, for up to two children
- Hostel allowance — up to ₹300 per month per child, for up to two children
These are exempt only to the extent you actually spend them on the stated purpose.
Gratuity — Section 10(10)
Gratuity is what your employer pays you in recognition of long service — typically at retirement, resignation, or death.
Leave Encashment — Section 10(10AA)
The ceiling is revised by the government — confirm the current limit before you file.
Commuted Pension — Section 10(10A)
Commuted pension is the lump sum you receive in exchange for a portion of your monthly pension.
VRS Compensation — Section 10(10C)
Compensation received on voluntary retirement is exempt up to ₹5 lakh, subject to conditions under Rule 2BA of the Income Tax Rules. This exemption can only be claimed once across all assessment years.
Life Insurance Proceeds — Section 10(10D)
Maturity payouts and bonuses from life insurance policies are generally exempt. Death benefits are exempt in almost all cases.
The exemption does not apply if:
- The policy is a Keyman Insurance Policy
- The annual premium exceeds the prescribed percentage of the sum assured (10% for most policies issued after April 2012; 15% for policies covering individuals with disability or specified illness)
Provident Fund Withdrawals — Sections 10(11) and 10(12)
Withdrawals from statutory and recognised provident funds are exempt, subject to conditions — including a minimum period of continuous service. Withdrawals before the qualifying period may be taxed.
Sukanya Samriddhi Account — Section 10(11A)
Both the interest credited to the account and the amount withdrawn are fully exempt. No conditions on the amount.
NPS Withdrawals — Sections 10(12A) and 10(12B)
Capital Gains Exemptions — Sections 10(37) and 10(34A)
Other Notable Section 10 Exemptions
Scholarships — Section 10(16): Any amount received to meet the cost of education is fully exempt. The source — government, institution, or private body — doesn't matter, as long as the purpose is genuinely educational.
Gallantry award pensions — Section 10(18): Pensions received by recipients of the Param Vir Chakra, Maha Vir Chakra, Vir Chakra, or other notified gallantry awards are fully exempt. Family pensions received by dependants after the recipient's death are also exempt.
Armed forces family pension — Section 10(19): Where a member of the armed or paramilitary forces dies in the line of operational duty, the family pension received by the widow, children, or nominated heirs is fully exempt.
Disaster compensation — Section 10(10BC): Compensation from the Central or State government on account of a disaster is exempt in the recipient's hands. If you've already claimed a deduction under the Act for the same loss, this exemption does not apply.
Specified interest incomes — Section 10(15): Interest on certain notified government securities, bonds, savings certificates, and specified deposits is exempt. The instruments and conditions are notified separately by the government.
Educational and medical institutions — Section 10(23C): Income of approved universities, educational institutions, hospitals, and similar bodies is exempt, subject to government approval and compliance conditions.
Scheduled Tribe members — Section 10(26): Specified income earned in notified north-eastern states and the Ladakh region by members of Scheduled Tribes is exempt, as is dividend and interest income from securities.
Sikkimese individuals — Section 10(26AAA): Income earned from sources within Sikkim, or dividend and interest on securities, is exempt for Sikkimese individuals. A Sikkimese woman who marries a non-Sikkimese individual after April 1, 2008 loses this benefit.
SEZ units — Section 10AA: Units in Special Economic Zones receive a tax holiday on export profits for a defined period, subject to the conditions under the SEZ Act.
Documents Required to Claim Section 10 Exemptions
Supporting documents are not optional. Missing records are the most common reason exemptions are disallowed or challenged. Keep the following ready before you file.
| Exemption | Documents Required |
|---|---|
| HRA | Month-wise rent receipts, signed rental agreement, landlord's PAN if annual rent exceeds ₹1 lakh |
| LTA | Travel tickets (air, rail, or road), boarding passes |
| Salary-linked exemptions | Form 16, salary slips showing individual allowance breakdowns |
| Gratuity / leave encashment | Employer's payout letter, computation sheet showing years of service |
| Life insurance proceeds | Policy document, maturity certificate or claim receipt |
| PF withdrawals | PF passbook or withdrawal statement, Form 10C/10D |
| NPS withdrawals | NPS statement, PFRDA exit or partial withdrawal confirmation |
| Agricultural income | Land ownership or tenancy records, income and expense accounts |
| Scholarships | Award letter or communication from the granting institution |
| Disaster compensation | Government notification or order, payment receipt |
| Scheduled Tribe / Sikkimese | Community certificate, proof of residence in the notified area |
Keep all documents for at least six years. The income tax department can raise queries up to six years from the end of the relevant assessment year.
Exempt Income Under Old vs. New Tax Regime
The tax regime you choose directly determines which Section 10 exemptions you can use. This is one of the most important decisions you make when filing.
The new regime offers lower slab rates, but most exemptions and deductions are no longer available. The old regime preserves your exemptions but applies higher base rates. For taxpayers with large HRA, LTA, or 80C claims, the old regime often results in lower tax overall.
Not available under the new tax regime:
- HRA — Section 10(13A)
- LTA — Section 10(5)
- Children's education and hostel allowance
- Most special salary allowances under Section 10(14)
- Chapter VI-A deductions (80C, 80D, 80G, and most others)
Generally still available under the new tax regime:
- Standard deduction for salaried employees
- Employer's NPS contribution exemption
- Agricultural income (partial integration still applies)
- Gratuity and leave encashment exemptions
- Life insurance maturity proceeds — Section 10(10D)
- NPS withdrawal exemptions
- Scholarships — Section 10(16)
Before choosing your regime, calculate your tax under both using your actual income, exemptions, and deductions. The difference is often significant.
How to Report Exempt Income in Your ITR
Exempt income must be declared in your income tax return. The exemption means you won't be taxed on it — not that you can leave it out.
All declared income must match what appears in your Form 16, AIS (Annual Information Statement), and Form 26AS. A mismatch — even on an amount that's fully exempt — can generate an automated notice.
How to report it correctly:
- List all exempt income received during the year — HRA, LTA, PF withdrawals, agricultural income, scholarship amounts, and any other qualifying items
- Enter it in the "Exempt Income" schedule of your ITR form — most forms have a dedicated field under Schedule EI (Exempt Income)
- Use Form 16 to verify salary-linked exemptions — figures in your ITR must match
- Check your AIS — agricultural income, PF withdrawals, and insurance payouts often appear there and need to be reconciled
- Keep all supporting documents — rent receipts, tickets, policy documents, bank statements — in case they're requested during scrutiny
Common Mistakes to Avoid When Claiming Section 10 Exemptions
Each of these errors is avoidable and costs taxpayers money or invites scrutiny:
- Claiming HRA or LTA under the new tax regime — these exemptions are not available in the new regime
- Filing HRA claims without rent receipts or a signed rental agreement — the claim will not hold up if challenged
- Relying on the old Section 10(38) exemption — that exemption on LTCG from listed equity no longer applies; gains are taxed under Section 112A
- Reporting different numbers in your ITR and Form 16 — inconsistencies trigger automated notices
- Leaving the exempt income schedule blank — even fully exempt income must be declared
- Using outdated exemption limits — gratuity ceilings, leave encashment caps, and NPS thresholds change; verify current figures before filing
- Confusing exemptions with deductions — they operate at different points in your tax calculation and under different parts of the law
Frequently Asked Questions About Exempt Income Under Section 10
What is Section 10 of the Income Tax Act?
Section 10 is the provision in the Income Tax Act, 1961 that lists all incomes not included in total taxable income. It specifies which earnings are exempt — fully or partially — and the conditions under which those exemptions apply.
Is agricultural income fully exempt under Section 10?
Yes, agricultural income from Indian land is fully exempt under Section 10(1). However, it can still affect the tax rate on your other income through partial integration — large farm income alongside a salary can indirectly push your non-farm income into a higher tax bracket.
What is the difference between exempt income and a deduction?
Exempt income is never counted as part of your total income. A deduction subtracts from income that has already been counted. Exemptions fall under Section 10; deductions fall under Chapter VI-A.
Is HRA exempt under the new tax regime?
No. HRA exemption under Section 10(13A) is only available under the old tax regime. If you've opted for the new regime, you cannot claim it.
Do I need to report exempt income in my ITR?
Yes. Even though it isn't taxed, exempt income must be declared in the exempt income schedule of your ITR. Omitting it creates a mismatch with your records and can trigger a notice.
Is the LIC maturity amount tax-free?
Generally yes, under Section 10(10D), as long as the annual premium doesn't exceed the prescribed percentage of the sum assured. Death benefits are exempt in almost all cases. Keyman Insurance Policies are excluded.
Is gratuity fully exempt from tax?
Government employees receive full exemption. For private-sector employees, gratuity is exempt up to a notified limit. Amounts above the cap are taxable. Verify the current ceiling before filing.
Is leave encashment taxable?
Leave encashment at retirement is fully exempt for government employees. For non-government employees, it's partially exempt up to a specified cap under Section 10(10AA). Amounts above the cap are taxable.
Is a partner's share of firm profit exempt?
Yes. A partner's share of profit from a firm or LLP is exempt under Section 10(2A), because the firm has already paid tax on that income. Salary or interest on capital drawn from the firm is still taxable.
Are NPS withdrawals tax-free?
Partial withdrawals are exempt up to 25% of your own contributions. The lump-sum withdrawal at account closure is exempt up to 60% of the total payable amount under Section 10(12A).
Can NRIs claim Section 10 exemptions?
Yes, but only for specific income types — interest from NRE accounts, certain notified bonds, and other specified income, depending on the nature and source of the income.
Does exempt income appear in my AIS or Form 26AS?
It can. Agricultural income, PF withdrawals, insurance payouts, and certain interest income may appear in your AIS even if they're exempt. Reconcile these correctly in the exempt income schedule rather than leaving them unaddressed.
File Accurately. Claim What You're Entitled To.
Exempt income is real money — but only if you claim it correctly, under the right regime, with the right documents in hand. One missing receipt, one incorrect regime choice, or one unchecked exemption limit can cost you a refund or bring a notice to your door.
Limits and conditions change with each Union Budget. What was exempt last year may carry new conditions this year. Always verify your figures against the current provisions before you file.