Exempt Income in Income Tax: Complete Guide for FY 2024–25

When filing your Income Tax Return (ITR), you may come across a section for exempt income. This category is important because it refers to types of income that are not taxable under the Income-tax Act. Even though such income is not subject to taxation under the law, it often needs to be disclosed in the ITR for transparency & compliance purposes.

Understanding exempt income helps you plan your taxes better and avoid confusion when the time comes to file returns. Let’s break it down.

What is Exempt Income?

In simple terms, exempt income refers to income on which no tax has been levied under the Income-tax Act. This means that even if you earn it, you are not required to pay tax on it, provided it meets certain conditions.

However, not all exempt incomes are completely free from reporting obligations—some must still be disclosed in your ITR even if no tax is payable.

Legal Basis for Exempt Income

The Income-tax Act, 1961, specifies several categories of income that are not subject to taxation under the law. These exemptions can be:

• Fully exempt – No tax payable at all
• Partially exempt – Only a portion of the income is tax-free, while the rest is taxable

Exempt income is usually covered under Section 10, Section 54, & other special provisions of the Act.

Types of Income That Are Not Taxable in India

Let’s look at the most common types of income that are not taxable:

1. Agricultural Income

• Fully exempt under Section 10(1)
• Includes income from farming, rent from agricultural land, or produce sales
• However, for certain cases, agricultural income is used to determine the applicable tax rate on other income (partial integration rule)

2. Share of Profit from Partnership Firm

• Exempt under Section 10(2A) for partners in a firm assessed separately
• The firm pays tax, not the individual partners

3. Dividend from Domestic Companies

• Post April 1, 2020, dividends are taxable in the hands of the shareholder
• But certain dividends, such as those from specified cooperative societies or exempt mutual funds, remain exempt

4. Income from Provident Fund

• Interest credited to recognized PF up to the notified limit is exempt
• PPF interest is fully exempt under Section 10(11)

5. Gifts within the Prescribed Limit

• Gifts from relatives are fully exempt
• Gifts from non-relatives are exempt if the aggregate value is below ₹50,000 in a financial year

6. Gratuity, Leave Encashment, and Retirement Benefits

• Gratuity received by government employees is fully exempt
• For non-government employees, exemptions are subject to monetary limits under Section 10(10) & 10(10AA)

7. Certain Allowances and Perquisites

• HRA (House Rent Allowance) exemption under Section 10(13A)
• LTA (Leave Travel Allowance) exemption as per rules

8. Income from Tax-Free Bonds

• Interest from specific bonds issued by government entities like NHAI, PFC, REC is fully exempt under Section 10(15)

Also Read: Leave Encashment and Tax Relief Explained

Why Disclose Exempt Income in ITR?

Even though no tax is payable, disclosing exempt income serves important purposes:

1. Transparency – Avoids future tax notices
2. Proof of Financial Position – Useful for loans & visas
3. Compliance with Law – The ITR form requires disclosure under the “Exempt Income” schedule

For example, if you earn agricultural income, you still have to mention it in the ITR even though it’s tax-free."

Partial Exemptions – A Special Case

Some incomes are partially exempt:

• Pension received by gallantry award winners – Exempt to a certain extent
• Scholarships – Fully exempt but must be reported if conditions apply
• Income from certain charitable trusts – Exempt if 85% is applied for charitable purposes

In these cases, only the exempt portion is reported as such, while the remaining part is taxable.

Exempt Income vs. Tax-Free Income

While they sound similar, there’s a subtle difference:

• Exempt income – Specifically mentioned in the Income-tax Act as non-taxable under certain sections.
• Tax-free income – May be from sources like PPF or certain allowances, already excluded from tax computation.

 Common Misconceptions About Exempt Income

1. "If it’s exempt, I don’t need to mention it in ITR" – Wrong. Some exempt incomes must be disclosed.
2. "All dividends are exempt" – Not anymore; only certain specified dividends are exempt.
3. "Agricultural income is always ignored" – Not true; it can impact slab rates when combined with non-agricultural income."

How to Report Exempt Income in ITR

• Use the “Exempt Income” schedule in the ITR form
• Mention section codes where applicable (e.g., Section 10(1) for agricultural income)
• Maintain proof for all exempt incomes in case of assessment

Also Read: Share of Profit Exempt for Partners

Tax Planning Using Exempt Income

Knowing which incomes are exempt helps in strategic tax planning. For example:

• Investing in PPF ensures fully tax-free returns
• Buying tax-free bonds generates safe, exempt interest
• Maximizing HRA exemptions reduces taxable salary

Final Thoughts

Exempt income is a vital concept in tax planning and compliance. It includes income on which no tax has been levied under the Income-tax Act, ranging from agricultural earnings to certain retirement benefits. While these incomes are not subject to taxation under the law, reporting them in your ITR is both a legal requirement & a smart financial habit.

By understanding types of income that are not taxable, you can optimize investments, avoid tax disputes, and maintain a clean compliance record.