
There’s a saying among tax professionals — not all income is taxable income. Some amounts that come into your bank account may look like income, but the Income Tax Act knows better. They don’t always form part of your total income.
That’s where Section 10(3) of the Income Tax Act, 1961 quietly steps in.
This section deals with incomes not included in total income, essentially carving out a list of what the government doesn’t intend to tax. It ensures that you’re not taxed for every small windfall, reimbursement, or casual earning that comes your way.
Let’s decode what this section says, what types of income it covers, & why understanding it can help you legally save tax.
What is Section 10(3) of the Income Tax Act?
Section 10(3) is one of those short but powerful provisions in the Act. It says that certain incomes — casual, irregular, or minor in nature — are not to be included in the total income of a taxpayer.
In simple words, it tells us:
👉 “Some incomes may not be taxable at all.”
It outlines specific incomes that are exempt from tax, such as winnings from small lotteries, casual receipts, or compensation that doesn’t form part of a business or salary structure. However, this exemption comes with limits and exceptions.
It’s not a free pass for everything you earn, but rather a thoughtful way to avoid taxing small, uncertain, or one-time incomes that don’t really count as your earning capacity.
Breaking It Down — What Kind of Income is Excluded
Under Section 10(3), certain casual incomes up to a specified limit are not taxed.
The government defines “casual income” as any income that doesn’t arise regularly or from a known source.
These may include:
- Awards or small gifts received without obligation,
- Minor lotteries or prizes not forming part of regular business,
- Reimbursements or allowances from employers that directly relate to business work,"
- Compensation received in certain circumstances like compulsory land acquisition, and more.
Essentially, if it’s not your regular earning and not linked to your profession or business, it might fall under this exemption.
Also Read: Capital Gain Exemption on Compulsory Acquisition of Urban Agricultural Land
Why This Section Exists
Let’s be real — if every small benefit or reimbursement were taxed, compliance would become impossible.
Think about it: small rewards, reimbursements, or goodwill payments are part of normal life, not a sign of hidden income.
That’s why the government inserted this clause — to make taxation logical and humane. Section 10(3) acts as a filter, removing non-substantial, non-recurring incomes from your tax calculation.
It’s designed to keep the system fair for salaried employees, freelancers, & small business owners alike.
Example 1 — Casual Receipts
Suppose you receive ₹20,000 as a one-time reward for contributing an idea at your company’s innovation day.
That’s not part of your salary structure. It’s not regular income.
If it’s within the permissible exemption limit, it qualifies under “incomes not included in total income.”
But if the same company adds it as a bonus or incentive in your salary slip, then it’s taxable. The difference lies in how & why you received it.
Example 2 — Compensation on Land Acquisition
Let’s say you owned a small plot of urban agricultural land, and the government acquires it for a public project.
In that case, tax exemption on capital gains from the compulsory acquisition of urban agricultural land is available under related sub-sections of Section 10.
Section 10(3) complements this broader framework by classifying the compensation as income that may not be taxable if it falls under exempted categories.
That means the government acknowledges — this isn’t profit; it’s compensation.
Example 3 — Reimbursements by Employer
Section 10(3) also provides exemptions for expenses incurred due to your employer’s business.
For instance, if your company reimburses your travel expenses while you’re on a work trip, that amount isn’t taxable.
You didn’t “earn” it — you just got back what you spent for official purposes."
The law differentiates between genuine business reimbursements & personal perks.
How Section 10(3) Differs from Other Subsections
Sections under 10 often overlap, but each has its own flavor.
While Section 10(2A) deals with partnership share income, and Section 10(37A) covers certain compensation exemptions, Section 10(3) works as a general umbrella — it captures miscellaneous incomes that aren’t significant enough to classify elsewhere.
It’s like a “miscellaneous exemptions” drawer in the Act — small but essential.
Also Read: Tax Exemption on Long-Term Capital Gains
How It Benefits Salaried Employees
For salaried individuals, this section ties beautifully with employer reimbursements.
Let’s say your company covers your internet bill or work-related fuel cost. If it’s incurred solely for official work, that amount is exempt because it qualifies as expenses incurred due to your employer’s business.
At the same time, tax rebate is given to salaried professionals under various provisions — Section 87A, standard deduction under Section 16(ia), & specific exemptions like this one under Section 10(3).
Together, these make your take-home income healthier & reduce unnecessary tax on reimbursements.
The Spirit of Fairness
The Income Tax Act doesn’t aim to tax every rupee that lands in your account.
It aims to tax income in the real sense — steady, measurable, and recurring earnings.
Section 10(3) reflects this fairness.
It ensures that the tax net focuses on meaningful income, not casual receipts.
It’s also in line with the government’s broader goal: simplify taxation, reward compliance, & avoid penalizing genuine situations.
Connection with Capital Gains Exemption
You might wonder, “What does this have to do with capital gains?”
While Section 10(3) deals with casual income, the broader Section 10 family — like 10(37) and 10(37A) — offers tax exemption on capital gains from the compulsory acquisition of urban agricultural land.
Together, these sections create a strong network of protection for taxpayers — making sure you’re not taxed on money that isn’t truly a profit.
What the Courts Say
Courts have consistently interpreted Section 10(3) as a relief measure.
In several judgments, they’ve clarified that this clause exists to prevent over-taxation of “receipts of casual or non-recurring nature.”
That means small honorariums, gifts, or reimbursements aren’t taxable just because they happened once."
Intent & context matter more than the amount itself.
Important Caveats
While this section provides relief, not every casual income is exempt. For example:
- Lottery or betting winnings are taxable under separate provisions.
- Large one-time receipts linked to business or salary are taxable.
- Income that’s part of a contractual arrangement doesn’t qualify.
So, it’s always wise to check with your Chartered Accountant before classifying any income as “casual” or “exempt.”
Also Read: A Relief for Compensated Landowners and Employees
Documentation Tip
If you receive any exempt income — say, reimbursement or casual payment — keep supporting proof.
Maintain receipts, emails, or statements showing it wasn’t part of your regular earning.
During scrutiny, the assessing officer will appreciate clarity, and you’ll be safe from unnecessary adjustments.
The Bigger Picture — Why Section 10(3) Still Matters
In today’s gig economy & flexible workplaces, people often receive small side incomes — cashbacks, referral bonuses, or reimbursements.
Without a clause like Section 10(3), all of these could technically be taxed.
But the law wisely avoids that.
It draws a fine line between income earned & income received.
That single difference saves countless salaried and self-employed taxpayers from double taxation.
A Quick Summary
Here’s how you can understand Section 10(3) at a glance:
Scenario |
Tax Treatment |
Why |
Work-related reimbursements |
Exempt |
Linked to employer’s business |
Small gifts or casual receipts |
Exempt (within limit) |
Non-recurring, not income-generating |
Compensation for compulsory acquisition |
Exempt |
Capital gain relief via Section 10(37A) |
Salary bonuses |
Taxable |
Regular earning |
Lottery, betting, gambling |
Taxable |
Excluded from casual exemption |
It’s all about the nature of income — not the number in your bank account.
Why It’s More Than Just Law
When you really think about it, Section 10(3) shows that tax law isn’t heartless.
It recognizes that not every rupee received is a reward — some are recoveries, reimbursements, or compensations for inconvenience.
For a salaried employee or small entrepreneur, this difference matters. It makes the law feel just, not punitive.
And that’s a big deal in a system where most people already struggle to understand their taxes.
Final Thoughts
The Income Tax Act is full of complex clauses, but Section 10(3) is refreshingly humane. It deals with incomes not included in total income, ensures tax exemption on capital gains from compulsory acquisition, and even provides exemptions for expenses incurred due to your employer’s business. In short, it acknowledges that not all money earned should be taxed. For salaried professionals, this means fair treatment. For taxpayers at large, it means trust in the system. So, the next time you receive a reimbursement, gift, or compensation, take a moment to check if it falls under this section — it might just be your ticket to legal tax savings.
Confused whether your reimbursement, award, or compensation is taxable?
Don’t guess — get expert help. Our CAs at Callmyca.com can review your income structure, identify exemptions under Section 10(3), & help you save taxes the right way.
Your next refund could be just one smart filing away.