Section 10(4): The Hidden Tax-Free Benefit on NRE & FCNR Accounts

The Indian Income Tax Act has always tried to strike a balance between encouraging investments, supporting employees, and providing relief to taxpayers. One of the key provisions that allows this relief is Section 10 of the Income Tax Act, which contains multiple exemptions. Within this section, Section 10(4) of the Income Tax Act provides a list of incomes exempt from taxation, making it extremely important for both salaried individuals and Non-Resident Indians (NRIs).

This exemption provision allows taxpayers to save on tax liability by excluding specific categories of income from their taxable income. From allowances given by employers to special income streams for NRIs, this section ensures that taxpayers receive due benefits as per law.

Understanding Section 10(4) of Income Tax Act

At its core, Section 10(4) of the Income Tax Act provides a list of incomes exempt from taxation. These are special cases where the government intentionally excludes income from tax to encourage certain behavior, like investing in financial instruments, promoting digital access, or attracting NRI investments.

For instance, Internet allowance provided by your employer is exempted from taxation to promote digital usage and support work-related internet expenses. Similarly, certain NRIs enjoy complete exemption on specific categories of income from India, fostering global capital inflow."

Exemptions Available Under Section 10(4)

Let’s break down the major exemptions that come under this section:

1. Internet Allowance from Employers

With the rise of work-from-home and digital connectivity, many organizations provide internet reimbursements. As per the law, Internet allowance provided by your employer is exempted from taxation, subject to reasonable proof of expenses. This ensures employees don’t face additional tax burdens on essential work tools.

2. Exempt Income from Specific Financial Instruments

Section 10(4) also covers exempt income arising from the transfer of specific financial instruments. For example, some notified bonds or securities purchased by NRIs may generate interest or returns that are fully exempt from tax. These instruments are specifically designed to attract foreign investments into India.

Also Read: The Retirement Payout Exemption You Can’t Afford to Ignore

3. Tax Exemption for Non-Resident Indians (NRIs)

One of the biggest highlights is that a Non-Resident Indian (NRI) can claim full tax exemption on certain incomes. These include interest earned on foreign currency accounts in India or on notified securities.

This special benefit ensures that NRIs who wish to invest in India can do so without worrying about double taxation or loss of returns.

4. Exemption of Income Received by an NRI from India

Another important aspect is the exemption of income received by an NRI from India. Certain categories of income like interest on NRE (Non-Resident External) accounts or FCNR deposits are completely exempted from taxation. This provision supports NRIs who maintain banking and investment relations with India while living abroad.

Why Section 10(4) Matters

The exemptions under Section 10(4) go beyond just reducing taxes. They serve multiple purposes:

• Promotes Digital Growth – By exempting internet allowances, it helps build a tech-driven workforce.
• Encourages NRI Investments – By exempting income from specific financial instruments, NRIs are motivated to invest more in Indian markets.
• Supports Global Mobility – NRIs get relief from Indian taxation while managing finances back home.
• Ensures Fairness – Exemptions ensure that genuine work-related allowances or savings aren’t taxed unnecessarily."

Case Example – NRI Tax Exemption

Consider Mr. Raj, an NRI working in the USA who maintains an NRE account in India. The interest he earns on this account is fully exempt under Section 10(4). This means he does not have to pay any income tax in India on this income, even though it arises in India. This makes such accounts highly attractive for NRIs.

Also Read: Leave Travel Allowance (LTA) Exemption

Practical Example – Employee Internet Allowance

Let’s take the case of Ms. Priya, an employee in a private company. Her employer reimburses her internet bill of ₹1,500 per month. Since Internet allowance provided by your employer is exempted from taxation, Priya does not need to include this amount in her taxable salary. This exemption directly reduces her tax burden.

Section 10(4) vs Other Exemptions

While Section 10(4) is specific to NRIs and certain allowances, other subsections of Section 10 cover a broader range:

• Section 10(10) – Gratuity exemptions.
• Section 10(10C) – Voluntary retirement compensation.
• Section 10(14) – Allowances like travel, uniform, and research.

This shows how Section 10 overall is a crucial tax planning tool for all categories of taxpayers.

Common Mistakes Taxpayers Make

1. Not Claiming Exemption – Many employees don’t report internet allowances separately and end up paying tax unnecessarily.
2. Lack of Documentation – NRIs sometimes fail to maintain proper documents for investments, leading to disputes.
3. Confusion Between Resident & NRI Status – Misreporting residency status can cause denial of exemptions.
4. Double Claiming – Some taxpayers wrongly claim the same exemption in both India and abroad, which can trigger scrutiny.

Also Read: List of Tax-Free Incomes You Must Know

How to Claim Benefits Under Section 10(4)

1. Maintain Proper Proofs – For internet allowance, keep bills and employer letters.
2. Check NRI Status – Ensure your residential status is accurately determined each year.
3. Declare Correctly in ITR – Report exempt income under the correct head in your Income Tax Return.
4. Consult Professionals – For NRIs, exemptions can get complex due to foreign taxation, so professional advice is helpful.

Conclusion

Section 10(4) of the Income Tax Act provides a list of incomes exempt from taxation, making it vital for both resident employees and Non-Resident Indians. Whether it is the internet allowance provided by your employer, exempt income arising from the transfer of specific financial instruments, or cases where a Non-Resident Indian (NRI) can claim full tax exemption, this section offers significant relief.

It further ensures the exemption of income received by an NRI from India in specific cases, encouraging global financial participation. By understanding and claiming these exemptions correctly, taxpayers can optimize their tax liability legally and effectively.

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