Exempt Income

Exempt Income Meaning

Exempt Income is an income earned by an individual that is not taxed under the revenue laws of the country or the state laws. In simple words, it means there are certain sources of income that are not taxed by the government/law and therefore it doesn’t form part of the total taxable income.

Explanation

The income of an individual or a business entity is classified under different heads in different countries under there state / central taxation laws, and there are certain incomes which the country determines as not to be taxed. Such income is considered classified as exempt income in the law.

There are various types of income which are considered as exempt; few can be enlisted below,

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Source: Exempt Income (wallstreetmojo.com)

Types of Exempt Income

Exempt income as per Indian laws are given under Chapter III, Section 10 of the income tax act 1961, the following is the extract of certain income given under the said section,

  1. Agriculture Income
  2. Sums received by an individual as a member of Hindu Undivided Family
  3. Income received under revised pension rule of the central government in the form of Gratuity
  4. Any compensation received by a workman under the Industrial Disputes Act, 1947
  5. The compensation received in case of any disaster
  6. Statutory Provident Fund
  7. Recognized Provident Fund
  8. Superannuation Fund
  9. House rent allowance (HRA)
  10. The income of the Mutual FundMutual FundA mutual fund is an investment fund that investors professionally manage by pooling money from multiple investors to initiate investment in securities individually held to provide greater diversification, long term gains and lower level of risks.read more
  11. Allowance for MP, MLA’s
  12. The income of investor protection fund
  13. The income of provident and superannuation fund
  14. The income of the Employee’s State Insurance Fund
  15. The income by way of dividendDividendDividend is that portion of profit which is distributed to the shareholders of the company as the reward for their investment in the company and its distribution amount is decided by the board of the company and thereafter approved by the shareholders of the company.read more from Indian Company (subject to max 10 lakhs)
  16. The income from units of Mutual fund
  17. The income from Securitization trust
  18. Scholarship
  19. The income of the local authority

Difference Between Exemptions and Deductions

To understand exemptions, we need to know the difference between exemptions and deductions –

The word exemptions and deductions are sometimes interchangeably used, but there is a significant difference between the two. Deduction means the reduction of a specific amount from the income, which is chargeable under the income tax act. In contrast, exemption means the entire income is excluded from being tax viz. the amount is not subject to levyLevyA levy is a lawful process where the debtor's property is seized when the debtor cannot pay the outstanding debts. It is different from liens, as a lien is only a claim against a property, whereas a levy is an actual property takeover to fulfill the obligation.read more of Income-tax.

Therefore, we can say that in the case of exempt income, the entire income will be tax-free irrespective of the amount. In deduction, a certain portion of the expense, specified in the law, is considered as a deduction to the taxable income.

Which Income Tax Act Governs Exempt Income?

Exempt incomes in India are governed by the Income Tax Act 1961, under chapter III, section 10. Below are most commonly found exempt items –

  1. Agriculture Income
  2. Sums received by an individual as a member of Hindu Undivided Family;
  3. Income received under the revised pension rule of the central government in the form of Gratuity.
  4. The income of the local authority
  5. The income of Scientific Research Association
  6. House rent allowance (HRA)

There are various amendments made every year under the Finance Act whereby there can be additions or deletion or modification of conditions for an exempt income. Therefore the latest Income Tax Act should be considered for understanding for a particular financial year, and the same should be read with the relevant Finance Act.

Investments with an Exempt Income

The income accrued from certain investments is considered as exempt for taxation. Individuals use such investments for income tax savings and planning. Generally, the tax savings investments are required to be made within the financial year to avail tax benefit of the principal portion, and the income portion of the investment is 100% exempt when received at the maturity of the investment

There are various investment avenues; a few are enlisted below,

  • Tax savings Fixed Deposits
  • Life insurance policies
  • Employee pension funds
  • Employee provident funds
  • Post office deposit
  • Tax-free bonds issued by government enterprises
  • Tax saving mutual funds
  • ELSS Investments

Such investment is long term in nature and has a lock-in period, which ranges from 5 years to 15 years depending upon the type of security.

Recommended Articles

This article has been a guide to Exempt Income and its Meaning. Here we discuss types, various investments with an exempt income along with the difference between exemptions and deductions. You can learn more about financing from the following articles –

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