Chapter 3 : Income which do not form

part of Total Income (Section 10)

Advance Direct Tax and Service Tax

[Sub code : 441]

Learning Objectives
Various Income Categories Exempt from Total
Income.
Incomes not Included in Total Income (Section
10)
Exemption on Interest on Small Scale Savings
Schemes.
Exemption on Certain Payments to Employees.
Exemption on Incomes of Research or
Charitable Institutes.
Chapter 3 : Income which do not form part
of Total Income

Incomes not included in Total Income (Section 10)

Various categories of income are exempt from
income tax under section 10 (which we refer in
coming slides).
However, the onus of showing that a particular
class of income is exempt from taxation lies on
the assessee.
To earn the exemption, the assessee has to
establish that his case clearly and squarely falls
within the ambit of the said provisions of the Act.
Chapter 3 : Income which do not form part
of Total Income

Agriculture Income
We can still consider India as the country
mostly depending on Agriculture and income
generated from the activities of Agriculture.
Agricultural income shall be excluded from the
Assessees total income (Section 10(1))
However, It shall be taken for considering rate
to tax non-agricultural income

Chapter 3 : Income which do not form part

of Total Income

Receipt by a Partner of a Firm (Section 10(2A))

A partner's share in the total income of the
firm is exempted in hands of partner because
the firm is separately assessed as such.
However, any salary, interest or commission
paid or payable to a partner which is
deductible from the total income of the firm
shall be included in the income of the partner
as his business income.
Chapter 3 : Income which do not form part
of Total Income

Travel Concessions (Section 10(5))

This exemption is applicable only to Individuals
The exemption is limited to expenses actually incurred
or amount of concession actually received whichever is
lower
The exemption is available for the journeys performed
in India only.
The exemption can be availed only in respect of two
journeys performed in a block of four calendar years.
For this purpose, the first four-year block commenced
with the calendar year 1986. Thus, the four-year blocks
will be 1986-89, 1990-93, 1994-97, 1998-2001 and so
on.
Chapter 3 : Income which do not form part
of Total Income

Contd
If an assessee has not availed travel concession or
assistance during any of the specified four-year block
periods on one of the two permitted occasions, or on
both occasions, exemption can be claimed provided he
avails the concession or assistance in the calendar year
immediately following that block. This is popularly
known as the 'carry-over' concession.
Quantum of exemptionThe basic rule is that the
quantum of exemption will be limited to the actual
expenses incurred on the journey

Chapter 3 : Income which do not form part

of Total Income

Salary to Foreign Enterprise/Consulate Employees

(Section 10(6)(vi))
The remuneration received by him as an employee of a
foreign enterprise for services rendered by him during his
stay in India, provided the following conditions are
fulfilled the foreign enterprise is not engaged in any trade or
business in India;
his stay in India does not exceed in the aggregate a
period of ninety days in such previous year; and
such remuneration is not liable to be deducted from the
income of the employer chargeable under this Act
Chapter 3 : Income which do not form part
of Total Income

Tax payable on income from Leasing of Aircraft

Section 10(6BB)
In case of Government of foreign State or a foreign enterprise gives
an aircraft or an aircraft engine to an Indian company which is
engaged in the business of operation of aircrafts and the tax on
such income is paid by the Indian company, then the tax so paid
shall be exempt and will not be treated as the income of foreign
State or enterprise, provided the following conditions are satisfied
The agreement for lease must have been entered into after 31-31997 but before 1-4-1999, or entered into after 31-3-2007;
The agreement must be approved by the Central Government in
this behalf;
The payment by the Indian Company should be for lease of the
aircraft and not for providing spares, facilities or services in
connection with the operation of the leased aircraft
Chapter 3 : Income which do not form part
of Total Income

Fees/Remuneration received by Consultant who is Non-Resident

Section 10 (8A)

In the case of a consultant

any remuneration or fee received by him or it, directly or
indirectly, out of the funds made available to an
international organization under a technical assistance
grant agreement between the agency and the
Government of a foreign State; and
any other income which accrues or arises to him or it
outside India, and is not deemed to accrue or arise in
India, in respect of which such consultant is required to
pay any income or social security tax to the Government
of the country of his or its origin.
Chapter 3 : Income which do not form part
of Total Income

10

Gratuity (Section 10(10))

Sec. 10(10)(i): Death-cum-retirement gratuity by
Government Employees Exempted from Tax if received
under

the revised Pension Rules of the Central Government

the Central Civil Services (Pension) Rules, 1972, or
any similar scheme applicable to the members of the
civil services of the Union
to the members of the all-India services or to the
members of the civil services of a State
any payment of retiring gratuity received under the
Pension Code or Regulations applicable to the
members of the defence services
Chapter 3 : Income which do not form part
of Total Income

11

Contd
Sec.10(10)(ii): Gratuity received under the Payment of
Gratuity Act, 1972:
The limits of gratuity so exempt shall be to the extent it
does not exceed
one-half month's salary for each year of completed
service,
calculated on the basis of the average salary for 'the ten
months immediately preceding the month in which any
such event occurs,
Subject to such limit [Rs.3,50,000/-] as the Central
Government may, by notification in the Official Gazette
Chapter 3 : Income which do not form part
of Total Income

12

Commuted Pension (Section 10(10A))

Where received by Government Employees Fully
exempted
For any other Employee, to the extent it does not
exceed
in a case where the employee receives any gratuity, the
commuted value of one-third of the pension which he is
normally entitled to receive, and
in any other case, the commuted value of one-half of
such pension,

Chapter 3 : Income which do not form part

of Total Income

13

Leave Salary (Section 10(10AA))

Where received by Government Employees Fully
exempted
For any other Employee, to the extent it does not exceed
To the extent of the period of earned leave at his credit at
the time of his retirement
as does not exceed 10 months average salary drawn by the
employee during the period of ten months immediately
preceding his retirement,
subject to limit of Rs. 3,00,000/- (limit currently specified
by Central Government)

Chapter 3 : Income which do not form part

of Total Income

14

Retrenchment compensation and

Bhopal Gas Leak Disaster - Compensation
Any compensation received by a workman under the Industrial
Disputes Act, 1947 at the time of his retrenchment.
The amount exempt under this clause shall not exceed the least of an amount calculated in accordance with the provisions of clause
(b) of section 25F of the Industrial Disputes Act, 1947
such amount, not being less than Rs.50,000/- (fifty thousand
rupees), but not exceeding Rs.5,00,000/ Any payments made under the Bhopal Gas Leak Disaster
(Processing of Claims) Act, 1985, and any scheme framed there
under except payment made to any assessee in connection with the
Bhopal Gas Leak Disaster to the extent such assessee has been
allowed a deduction under this Act on account of any loss or
damage caused to him by such disaster.
Chapter 3 : Income which do not form part
of Total Income

15

Payment Received on Voluntary Retirement

Section 10(10C)
Any amount received or receivable by an employee at the
time of his voluntary retirement or termination of his
service, in accordance with any scheme of voluntary
retirement or in the case of a public sector company, a
scheme of voluntary separation, to the extent such amount
does not exceed Rs.5,00,000/ Where exemption has been allowed to an employee under
this clause for any assessment year, no exemption there
under shall be allowed to him in relation to any other
assessment year.

Chapter 3 : Income which do not form part

of Total Income

16

Contd
However, in case of other companies, the scheme needs to satisfy the
prescribed conditions. Here the Scheme has to meet the following criteria:
It applies to an employee who has completed ten years of service or
completed 40 years of age.
It applies to all employees, including workers and executives excepting
directors of the company/co-operative society
The scheme of voluntary retirement/separation has been drawn to result
in overall reduction in the existing strength of the employees
The vacancy caused by voluntary retirement/separation is not to be filled
up
The amount receivable on account of voluntary retirement/separation of
the employees, does not exceed the amount equivalent to three months'
salary for each completed year of service or salary at the time of
retirement multiplied by the balance months of service left before the
date of his retirement on superannuation
Chapter 3 : Income which do not form part
of Total Income

17

Superannuation Fund Section 10 (13A)

Payment made from approved Superannuation fund is
tax exempted if received in following cases
On death of a beneficiary;
To an employee on his retirement or after a specified age
in commutation or in lieu of an annuity;
By way of refund of contributions on the death of a
beneficiary;
By way of refund of contributions on his leaving of
service otherwise than by retirement or after a specific
age or on his becoming incapacitated prior to such
retirement
Chapter 3 : Income which do not form part
of Total Income

18

House Rant Allowances Section 10 (13A)

Any special allowance specifically granted to an assessee by
his employer to meet expenditure actually incurred on
payment of rent in respect of residential accommodation
occupied by the assessee, to such extent as may be prescribed
having regard to the area or place in which such
accommodation is situate and other relevant considerations.
It is very much clear that HRA is not available where
the residential accommodation occupied by the assessee is
owned by him; or
the assessee has not actually incurred expenditure on
payment of rent (by whatever name called) in respect of the
residential accommodation occupied by him
Chapter 3 : Income which do not form part
of Total Income

19

Contd
Quantum of Deduction will be Least of following
Mumbai / Kolkata / Delhi /
Chennai

Other Cities

Allowance Actually Received

Allowance Actually Received

Rent Paid in excess of 10 % of

Salary

Rent Paid in excess of 10 % of

Salary

50 % of Salary

40 % of Salary

Chapter 3 : Income which do not form part

of Total Income

20

Section 10 (14): Special Allowance

Any prescribed special allowance or benefit, other than those
in the nature of a perquisite, specifically granted to meet
expenses wholly, necessarily and exclusively incurred in the
performance of the duties of an office or employment of profit,
is exempt to the extent to which such expenses are actually
incurred for that purpose. These allowances are as follows
Any allowance granted to meet the cost of travel on tour or on
transfer
Any allowance, whether granted on tour or for the period of
journey in connection with transfer, to meet the ordinary daily
charges incurred by an employee on account of absence from
his normal place of duty
Chapter 3 : Income which do not form part
of Total Income

21

Contd
Any allowance granted to meet the expenditure incurred- on
a helper, where such helper is engaged for the performance of
duties of an office
Any allowance granted for encouraging the academic,
research and training pursuits in educational and research
institutions.
Any allowance granted to meet the expenditure incurred on
the purchase or maintenance of uniform for wear during the
performance of the duties of an office
Any allowance granted to meet the expenditure incurred on
conveyance in performance of duties

Chapter 3 : Income which do not form part

of Total Income

22

Contd
Some prescribed allowance granted to the assessee
either to meet his personal expenses at the place
where the duties of his office or employment are
ordinarily performed by him or at the place where he
ordinarily resides, or to compensate him for the
increased cost of living, is exempt up to the prescribed
extent. Rule 2BB(2) enumerates these allowances and
the limits up to which they are exempt.
Example of Some of such kind of allowances are as per
below given table

Chapter 3 : Income which do not form part

of Total Income

23

Contd
Name of allowance/places where exempt

Extent of exemption

Hilly Area Allowance for Siachen area of Jammu and Kashmir

Rs. 7,000 per month

Difficult Area Allowance for Jog Falls in Karnataka

Rs. 300 per month

Any allowance granted to an employee working in any transport 70 per cent of such allowance up to
system to meet his personal expenditure during his duty performance a maximum of
Rs.10,000 per
from one place to another
month
Children Educational Allowance (whole of India)

Rs.100 per month per child up to

maximum of two children

Any allowance granted to an employee to meet the hostel Rs.300 per month per child up to
expenditure on his child (whole of India)
maximum of two children

Any special allowance in the nature of counter-insurgency allowance Rs.3,900 per month
granted to the members of the armed forces operating in areas away
from their permanent locations
Transport allowance granted to an employee

Rs.800 per month

Underground allowance granted to an employee who is working in

uncongenial, unnatural climate in underground coal mines

Rs.800 per month

Any special allowance granted to the member of the armed forces in Rs.3,250 per month
the nature of Island allowance for Andaman & Nicobar and
Lakshadweep Group of Islands
Chapter 3 : Income which do not form part
of Total Income

24

Scholarships (Section 10 (17))

Scholarships granted to meet the cost of education is
Exempted. Some facts
Recipient can be Indian or foreigner; the whole amount
need not be spent on education
Scholarship, even though income, is exempt only if it is
granted to meet cost of education
Scholarship granted to meet education cost of children of
employee is exempt
Scholarship received abroad for study and research is
exempt, even if it taxable under foreign law

Chapter 3 : Income which do not form part

of Total Income

25

Daily allowances to Members of Parliament

(Section 10 (17))
Any income by way of
daily allowance received by any person by reason of his
membership of Parliament or of any State Legislature or of
any Committee thereof;
any allowance received by any person by reason of his
membership of Parliament under the Members of
Parliament (Constituency Allowance) Rules, 1986;
Any constituency allowance received by any person by
reason of his membership of any State Legislature under
any Act or rules made by that State Legislation
is exempted from Tax.
Chapter 3 : Income which do not form part
of Total Income

26

Pension to gallantry Award winners (Section 10(18))

Any income by way of
pension received by an individual who has been in the
service of the Central Government or State Government
and has been awarded "Param Vir Chakra" or "Maha Vir
Chakra" or "Vir Chakra" or such other gallantry award as
the Central Government may, by notification in the
Official Gazette, specify in this behalf;
family pension received by any member of the family of
such gallantry award winners
is exempted from Tax.
Chapter 3 : Income which do not form part
of Total Income

27

Family Pension and Former Ruler - exemption

Family pension received by the widow or children or
nominated heirs, as the case may be, of a member of the
armed forces (including para-military forces) of the
Union, where the death of such member has occurred in
the course of operational duties, in such circumstances
and subject to such conditions, as may be prescribed.

From Assessment Year commencing on the 1st day April,

1972, the annual value of every palace in the occupation
of any Former Ruler during the relevant previous year
shall be exempt from income tax.
Chapter 3 : Income which do not form part
of Total Income

28

Income of Professional Institution (Section 10 (23A))

Any Income (other than income from house property) of an
association or institution established in India having as its
object the control, supervision, regulation or encouragement
of the profession of
Law
Medicine
Accountancy
Engineering
Architecture or
such other profession as the Central Government may
Specify
is exempted from Tax.
Chapter 3 : Income which do not form part
of Total Income

29

Income of certain National Funds, Hospitals, Universities,

Institutions

Any income received by any person on behalf of

the Prime Minister's National Relief Fund; or
the Prime Minister's Aid to Students Fund; or
the National Foundation for Communal Harmony; or
any university or other educational institution existing solely for
educational purposes
any hospital or other institution for treatment of persons suffering
from illness or mental defectiveness or of persons requiring
medical attention or rehabilitation
any other fund or institution established for charitable purposes
any trust (including any other legal obligation) or institution
wholly for public religious purposes
is exempted from Tax.
Chapter 3 : Income which do not form part
of Total Income

30

Dividend income, or long-term capital gains of a venture capital fund or a

venture capital company from investments made by way of equity shares in
a venture capital undertaking (Section 10(23FA))

Any income by way of dividend [other than dividends referred

to in section 115-O], or long-term capital gains of a venture
capital fund or a venture capital company from investments
made by way of equity shares in a venture capital undertaking
is exempt from tax.
Any approval by the Central Government shall, at any one
time, have effect for such assessment year or years, not
exceeding three assessment years, as may be specified in the
order of approval.
This clause shall apply in respect of any investment in respect
of investment made after the 31st day of March, 2000.
Chapter 3 : Income which do not form part
of Total Income

31

Income of a registered Trade Union

(Section 10(24))
Any income chargeable under the heads "Income from
house property" and "Income from other sources" of
a registered union within the meaning of the Trade
Unions Act, 1926 (16 of 1926), formed primarily for the
purpose of regulating the relations between workmen
and employers or between workmen and workmen;
an association of registered unions
is exempted from Tax.

Chapter 3 : Income which do not form part

of Total Income

32

Income of Sikkimese (Section 10(26AAA))

In case of individual, being a Sikkimese, any income
which accrues or arise to him
From any source in the State of Sikkim; or
By way of dividend or interest on securities
is exempt from Tax.

It is further explained that, this should not applied to a

Sikkimese woman who, on or after the 1st day of
April,2008, marries an individual who is not a
Sikkimese.
Chapter 3 : Income which do not form part
of Total Income

33

Income of Agriculture Produce Boards

(Section 10(29A))
Any income arising or accruing to the following Boards will
be exempted
Coffee Board
Rubber Board
Tea Board
Tobacco Board
Marine Products Export Development authority
Agricultural & Processed Food products Export Development
Authority

Spices Board
Coir Board
Chapter 3 : Income which do not form part
of Total Income

34

Income of Minor clubbed in the hands

of Parent (Section 10 (32))
In the case of an assessee referred to in subsection (1A) of section 64, any income
includible in the total income of the any
parent of the minor under that sub-section to
the extent such income does not exceed one
thousand five hundred rupees in respect of
each minor child whose income is so
includible is exempt from tax.
Chapter 3 : Income which do not form part
of Total Income

35

Income from transfer of Long Term Asset

(Section 10 (36))
Any income arising from the transfer of a long-term
capital asset, being an eligible equity share in a company
purchased on or after the 1st day of March, 2003 and
before the 1st day of March, 2004 and held for a period of
twelve months or more is not chargeable to tax.
Eligible equity share means any equity share in a
company being a constituent of BSE-500 Index of the
Stock Exchange, Mumbai as on the 1st day of March,
2003

Chapter 3 : Income which do not form part

of Total Income

36

Income from transfer of Agricultural Land

(Section 10(37))
In the case of an assessee, being an individual or a Hindu
undivided family, any income chargeable under the head
"Capital gains" arising from the transfer of Agricultural Land,
where
such land is situate in any area referred to in item (a) or item (b)
of sub-clause (iii) of clause (14) of section 2;
such land, during the period of two years immediately preceding
the date of transfer, was being used for agricultural purposes;
such transfer is by way of compulsory acquisition under any law;
such income has arisen from the compensation or consideration
for such transfer received by such assessee on or after the 1st
day of April, 2004
is exempted from Tax.
Chapter 3 : Income which do not form part
of Total Income

37

Section - 10A - Special provisions, in respect of newly

established undertakings in Free Trade Zone
To claim exemption under section 10A, following conditions
must be satisfied
The unit has begun or begins to manufacture/produce
articles or things or computer software during the following
yearsLocation

Year

Free Trade Zone

During the previous year relevant to the

assessment year 1981-82 or any subsequent year

Electronic Hardware Technology Park or

Software Technology Park

During the previous year relevant to the

assessment year 1994-95 or any subsequent year

Special Economic Zone

During the previous year relevant to the

assessment year 2001-02 or any subsequent year

Chapter 3 : Income which do not form part

of Total Income

38

Contd

It should not be formed by splitting/reconstruction of business

It should not be formed by transfer of old machinery
There must be repatriation of sale proceeds into India
Audit report should be submitted in Form No.56F along with
return of income.

Quantum of Deduction:
Profits of business of undertaking * Export turnover / Total
turnover of business carried on by undertaking
Period of Deduction:
A period of 10 consecutive assessment years beginning with
the assessment year relevant to the previous year in which
the undertaking begins to manufacture or produce such
articles or things or computer software.
Chapter 3 : Income which do not form part
of Total Income

39

Section- 10AA : Special provisions in respect of newly

established units in Special Economic Zone
To claim exemption under section 10AA, following conditions
must be satisfied
Assessee is a person who has been granted a letter of
approval by Development Commissioner to set up a unit in
Special Economic Zone
It begins to manufacture or produce articles or things or
provide services during the financial year 2005-06 or any
subsequent year.
It should not be formed by splitting/reconstruction of
business > It should not be formed by transfer of old
machinery
The assessee has income form export of articles or things or
from services from such units.
Chapter 3 : Income which do not form part
of Total Income

40

Contd
Audit report should be submitted in Form No.56F
along with return of income.
Quantum of Deduction:
Profits of business of undertaking * Export turnover /
Total turnover of business carried on by undertaking
Period of Deduction:
100% of Profit for first 5 years, and
50% of Profit for next 5 years

Chapter 3 : Income which do not form part

of Total Income

41

Section - 10B : Special provisions in respect of newly

established hundred percent Export-Oriented Undertakings

To claim exemption under section 10B, following

conditions must be satisfied
It must be an approved hundred percent export
oriented undertaking
It must produce or manufacture articles of things or
computer software
It should not be formed by splitting/reconstruction
of business
It should not be formed by transfer of old machinery
Chapter 3 : Income which do not form part
of Total Income

42

Contd
There must be repatriation of sale proceeds into India
Audit report should be submitted in Form No.56G along with
return of income.

Quantum of Deduction:
Profits of business of undertaking * Export turnover /
Total turnover of business carried on by undertaking
Period of Deduction:
A period of 10 consecutive assessment years beginning
with the assessment year relevant to the previous year in
which the undertaking begins to manufacture or produce
such articles or things or computer software.
Chapter 3 : Income which do not form part
of Total Income

43

Section - 11 : Income from Property held for Charitable or

Religious purposes

To claim exemption under section 11, following

conditions must be satisfied
The property from which income is derived should be
held under a trust or other legal obligation.
The property should be held for charitable or religious
purpose.
The exemption is confined to only such portion of
income which is applied to charitable or religious
purposes
The exemption is restricted to such portion of income as
is applied to charitable or religious purposes in India.
Chapter 3 : Income which do not form part
of Total Income

44

Contd
The trust shall apply for registration with the Commissioner
The accounts of the trust should be audited for such
accounting year in which its income exceeds Rs.50,000.
The funds of the trust should be invested or deposited in
any one or more of modes or form mentioned in section
11(5)
Application of income:
In order to claim full tax exemption, a charitable trust or
institution has to apply at least 85% of the income to
charitable or religious purposes. Exemption under section
11 is 15% of income derived from property held under
charitable purpose.
Chapter 3 : Income which do not form part
of Total Income

45

Section - 13A : Special provision relating to

Incomes of Political Parties
The following categories of income derived by a
political party are not included in computing its
total income:
Any income which is chargeable under the heads
"Income from house property", "Capital gains"
and "Income from other sources"; and
Any income by way of voluntary contributions.

Chapter 3 : Income which do not form part

of Total Income

46

Contd
For claiming exemption under section 13A following conditions
must be satisfied
The political party keeps and maintains such books of account and
other documents as would enable the Assessing Officer to property
deduce its income there from;
The political party keeps and maintains a record of each voluntary
contribution in excess of Rs.20,000 and of the names and addresses
of persons who have made such contributions;
The accounts of political party are audited by a chartered
accountant or other qualified accountants; and
The treasure of political party shall in each financial year prepare a
report in respect of contribution received by the political party in
excess of Rs.20,000 from any person/company in that year and
submit it to the Election Commission.
Chapter 3 : Income which do not form part
of Total Income

47