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

2
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

3
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
Assessee’s 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

4
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

5
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
6
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 exemption—The 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

7
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

8
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 31-3-
1997 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

9
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

10
of Total Income
 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
11
of Total Income
 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

12
of Total Income
 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

13
of Total Income
 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

14
of Total Income
 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

15
of Total Income
 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

16
of Total Income
 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

17
of Total Income
 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

18
of Total Income
 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

19
of Total Income
 Contd…
• Quantum of Deduction will be Least of following –

Mumbai / Kolkata / Delhi / Other Cities

Chennai

Allowance Actually Received Allowance Actually Received

Rent Paid in excess of 10 % of Rent Paid in excess of 10 % of

Salary Salary

50 % of Salary 40 % of Salary

Chapter 3 : Income which do not form part

20
of Total Income
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

21
of Total Income
 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

22
of Total Income
 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

23
of Total Income
 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 Rs.800 per month

uncongenial, unnatural climate in underground coal mines
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

24
of Total Income
 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

25
of Total Income
 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

26
of Total Income
 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

27
of Total Income
 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

28
of Total Income
 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
29
of Total Income
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
30
of Total Income
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

31
of Total Income
 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

32
of Total Income
 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

33
of Total Income
 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

34
of Total Income
Income of Minor clubbed in the hands
of Parent (Section 10 (32))
• In the case of an assessee referred to in sub-
section (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

35
of Total Income
 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

36
of Total Income
 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
37
of Total Income
 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
years-
Location Year

Free Trade Zone During the previous year relevant to the

assessment year 1981-82 or any subsequent year
Electronic Hardware Technology Park or During the previous year relevant to the
Software Technology Park 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

38
of Total Income
 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
39
of Total Income
 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
40
of Total Income
 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

41
of Total Income
 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

42
of Total Income
 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

43
of Total Income
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
44
of Total Income
 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
45
of Total Income
 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

46
of Total Income
 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

47
of Total Income