While you get ready to deal with the daunting task of preparing your taxes, we have prepared a list of exempt incomes and allowances so that you can minimize your taxation liability. There are few incomes that aren’t taxable at all, whereas some others are exempted to a certain limit. Taking one at a time, we will cover both incomes and allowances that are exempt from taxation. For easy computation we have taken the lowest exemption slab of Rs 2.5 lakhs, which can vary depending on your age.

Incomes Exempt from Taxation

Income that is exempted from taxation is shown in image below:

Income exempted from taxation

Agriculture: Income from agriculture is exempted. If the income is less than Rs 5,000 then the entire amount is exempt from taxation. Whereas any amount exceeding that is included for the limited purpose of determining the tax rate. For example if your income is Rs 12 Lakhs that comprises of agricultural income of Rs 1 lakh and salary of Rs 11 lakh, then the tax liability would be calculated as follows:

• Step 1. Calculate total tax liability on income of Rs 12 lakhs which amounts to 1.85 Lakhs.
• Step 2. Add the tax benefit, which is Rs 2.5 lakhs as basic slab and Rs 1 lakh as agriculture income. Hence the total tax concession works out to be Rs 10,000
• Step 3. Subtract total tax benefit from the total tax liability, Rs 1, 85,000 – Rs 10,000 = Rs 1,75,000 Hence Rs 1.75 Lakhs would be the liability in this case.

Hindu Undivided Family (HUF): Any amount received from HUF entity which includes money received through inheritance is exempted under section 10(2) of Income Tax Act.

Interest from Bank – Interest up to Rs 10,000 received through your savings bank account is fully exempted.

Share of profits from partnership firm: It is exempted under section 10(2). However any other income such as wages or interest is taxable.

Long term capital gains: Profit from shares and mutual funds held over a year is called long-term capital gain. Any income from Long-Term capital gains is exempted under section 10(36) of the Income tax act.

Gratuity: It is the amount paid by employer as a gratitude to employee’s meritorious service. Gratuity amount is fully exempted from taxes.

Amount received under voluntary retirement: Amount received by an employee in any organization where the scheme of voluntary retirement is framed according to section 10(16) of IT act 1961, will qualify for full tax exemption.

Scholarship: Any amount awarded to a student to meet the cost of education is fully exempt from taxation.

Allowances Exempted

Now that we have covered the incomes, let us go over the allowances that are exempted

Housing Rent allowance (HRA): You can only claim it if you live on rent. It should be minimum of these three options

1.  Actual HRA received.
2. Actual rent paid by you minus 10% of your basic salary.
3. 50% of your basic salary if you live in metro and 40% in non-metro.

Leave Travel Allowance: It covers total cost of trip and includes you and your family, and it only covers domestic travels

Education of children: There are two allowances that are exempted for children’s education, and this exemption is limited to a maximum of two children.

1. Education allowance : Rs 100 per month
2. Hostel subsidy: Rs 300 per month

Allowance of Foreign Services: Any allowance received by an individual rendering services to the country while residing outside India is tax free. Hence the allowance received by IFS (Indian Foreign Service) personnel serving outside India is tax free.

By keeping the above exemptions in mind, you will be on the top of the tax return filing process. We encourage you to fulfil your moral and legal obligation of paying income tax with confidence and pride. #ProudToPayTax

Note: This year, the deadline to file income tax returns (ITR) has been extended to 31 August from 31 July.

Disclaimer: All information in this article has been provided by Quicko.com. Quicko.com is engaged in assisting in online ITR preparation and filing of income tax returns online for free. The author can be contacted at anand@quicko.com.