Salaried employees often receive allowances beyond their regular salary to meet specific needs or expenses related to their job. While many of these allowances are taxable, the Income Tax Act provides exemptions under Section 10 for certain types of allowances. These exemptions help reduce the overall taxable income, offering financial relief to employees. Here’s a closer look at what Section 10 covers and how it benefits salaried employees.
What is Section 10 of the Income Tax Act?
Section 10 of the Income Tax Act specifies various incomes and allowances that are exempt from tax. This section is crucial for salaried employees as it identifies components of their income that do not contribute to their taxable income. Here’s an overview of its significance:
- Purpose: To provide relief by exempting certain incomes and allowances.
- Impact on Employees: Reduces taxable income, increasing take-home salary.
- Exemptions Covered: Includes allowances like HRA, LTA, Gratuity, and more, subject to specific conditions and limits.
Understanding Section 10 helps employees optimise their tax savings through effective planning.
What is Covered Under Section 10?
Section 10 provides exemptions for various allowances and benefits. Here’s a summary of the key exemptions available to salaried employees:
| Exemption Type | Description | Conditions/Limits |
| House Rent Allowance (HRA) | Exemption on rent paid for residential accommodation. | Based on salary, rent paid, and location (metro or non-metro cities). |
| Leave Travel Allowance (LTA) | Exemption for travel expenses during leave. | Applicable for two journeys in a block of four years. |
| Gratuity | Exemption on gratuity received at retirement or resignation. | Up to ₹20 lakhs for eligible employees. |
| Transport Allowance | Exemption for commuting expenses between home and work. | Up to ₹1,600 per month (₹3,200 for differently-abled employees). |
| Children Education Allowance | Exemption for children’s education expenses. | Up to ₹100 per month per child (maximum of 2 children). |
| Hostel Expenditure Allowance | Exemption for hostel accommodation expenses for children. | Up to ₹300 per month per child (maximum of 2 children). |
| Pension | Exemption on commuted pension. | Fully exempt for government employees; partially exempt for others. |
| Allowance for UN Employees | Exemption on allowances received by employees of the United Nations. | Fully exempt. |
| Death-cum-Retirement Gratuity | Exemption on gratuity for government employees. | Fully exempt for government employees, subject to limits for others. |
| Special Allowances | Includes allowances like uniform and research allowances. | Exempt to the extent of actual expenditure incurred. |
What are the Various Sub-parts of Section 10?
Section 10 encompasses several sub-sections, each specifying the type of income or allowance that qualifies for exemption. Here’s a breakdown:
| Sub-part of Section 10 | Income/Allowance Type | Description |
| Section 10(1) | Agricultural Income | Income derived from agriculture is tax-exempt. |
| Section 10(2) | Share from Income of HUF | Share of income received as a member of a Hindu Undivided Family (HUF). |
| Section 10(10) | Gratuity | Exemption on gratuity received at retirement or death. |
| Section 10(10A) | Commuted Pension | Exemption for commuted pension (fully for government employees, partially for others). |
| Section 10(10AA) | Leave Encashment | Exemption for leave encashment at retirement or resignation. |
| Section 10(10B) | Retrenchment Compensation | Exemption for compensation received during retrenchment. |
| Section 10(10C) | Voluntary Retirement Scheme (VRS) | Exemption for VRS amounts up to a specified limit. |
| Section 10(10D) | Life Insurance | Exemption on amounts received under life insurance policies, including bonuses. |
| Section 10(13A) | House Rent Allowance (HRA) | Exemption for HRA based on rent paid, salary, and city of residence. |
| Section 10(14) | Specific Allowances | Exemption for allowances like travel, uniform, and research allowances. |
| Section 10(15) | Interest Income | Exemption on interest earned from specified securities and bonds. |
Each sub-part provides unique tax benefits and caters to different types of income or allowances.
Conclusion
Section 10 of the Income Tax Act provides significant relief to salaried employees by exempting various allowances and benefits from tax. Understanding these exemptions is key to effective tax planning and can help employees maximise their take-home pay. Familiarising yourself with the specific sub-sections of Section 10 will enable you to make informed decisions and optimise your finances.
FAQs on Section 10
What is House Rent Allowance (HRA) exemption?
HRA exemption applies to employees receiving HRA as part of their salary. It is exempt up to the least of the following:
- Actual HRA received.
- 50% of salary for metro cities (40% for non-metro cities).
- Rent paid exceeding 10% of salary.
Who can claim a Transport Allowance exemption?
Salaried employees can claim this exemption to cover commuting expenses. The exemption limit is ₹1,600 per month (₹3,200 for differently-abled employees).
Is Children Education Allowance exempt from tax?
Yes, Children Education Allowance is tax-exempt up to ₹100 per month per child, for a maximum of two children.
What is the exemption limit for Hostel Expenditure Allowance?
Hostel Expenditure Allowance is exempt up to ₹300 per month per child for a maximum of two children.
How is Leave Travel Allowance (LTA) exempt from tax?
LTA exemption is based on actual travel expenses for two journeys within a block of four years. It covers travel within India and applies only to the employee and their immediate family.
Can an employee claim exemption for both HRA and home loan interest?
Yes, employees can claim HRA exemption and a deduction for home loan interest under Section 24(b) if they meet the conditions for both.
Are medical allowances exempt from tax?
Medical allowances are taxable. However, prior to FY 2018-19, reimbursements up to ₹15,000 per annum were exempt with supporting bills.
What is the tax treatment of Gratuity?
Gratuity is exempt up to ₹20 lakhs for government employees. For others, the exemption limit depends on the years of service and salary received.
Is the transport allowance for differently-abled individuals different?
Yes, differently-abled individuals can claim a higher exemption of ₹3,200 per month for transport allowance.
Can NRIs claim these exemptions?
NRIs earning income taxable in India can claim these exemptions if their salary structure includes the eligible allowances.
