Quick Summary
Tax Exemption means income that is completely free from taxation and need not be included in the total income. Common exemptions include agricultural income, HRA, LTA, and certain allowances.
Tax Exemption refers to income that is completely excluded from taxation under specific provisions of the Income Tax Act. Unlike deductions which reduce taxable income, exempt income is not included in total income at all.
Types of Tax Exemptions
1. Fully Exempt Income
- Agricultural Income (Section 10(1)): Income from agricultural land in India
- Leave Travel Concession (Section 10(5)): Travel expenses for self and family
- Gratuity (Section 10(10)): Up to specified limits based on employer type
- Pension (Section 10(10A)): Commuted pension up to specified limits
- Leave Encashment (Section 10(10AA)): On retirement, up to ₹25 lakh
- VRS Compensation (Section 10(10C)): Up to ₹5 lakh
2. Allowance Exemptions
| Allowance | Section | Exemption Limit |
|---|---|---|
| House Rent Allowance (HRA) | 10(13A) | Least of: Actual HRA, 50%/40% of salary, Rent - 10% salary |
| Special Allowance | 10(14) | Varies by type (Conveyance, Medical, etc.) |
| Children Education Allowance | 10(14) | ₹100 per month per child (max 2) |
3. Income of Specific Entities
- Income of recognized Provident Funds (Section 10(12))
- Amount from SUUTI (Section 10(23B))
- Income of SEZs (subject to conditions)
- Income of certain charitable institutions (Section 11)
Exemption vs Deduction vs Rebate
| Aspect | Exemption | Deduction | Rebate |
|---|---|---|---|
| Effect | Income not taxed at all | Reduces taxable income | Reduces tax amount |
| Example | HRA, LTA | 80C, 80D | 87A |
Key Points
- Income completely excluded from taxation
- Not included in total income
- HRA, LTA, Agricultural income are common exemptions
- Different from deduction which reduces taxable income
- Gratuity and leave encashment exempt up to limits
- Allowances have specific exemption limits