Types of income of Salaried Employees that are exempted from Income Tax

Types of income of Salaried Employees that are exempted from Income Tax –Income not included under the head Salaries (Exemptions)

Any income falling within any of the following clauses shall not be included in computing the income from salaries for the purpose of section 192 of the Act :-

The value of any travel   concession     or   assistance   received by or due to an employee  from his employer or former employer for himself and his family, in connection with his proceeding (a) on leave to any place in India or (b) after retirement from service, or, after termination  of  service  to any place in India is exempt under Section 10(5) subject, however, to the  conditions prescribed in Rule 2B of the Rules.

For the purpose of this clause, “family” in relation to an individual means:

(i) the spouse and children of the individual;  and

(ii) the parents, brothers and sisters of the individual or any of them, wholly or mainly dependent on the individual.

It may also be noted that the amount exempt under this clause  shall  in  no case exceed the amount  of  expenses actually incurred for the purpose of such travel.

Death-cum-retirement    gratuity  or  any  other  gratuity  is  exempt  to  the  extent specified  from inclusion in computing the total income under Section 10(10). Any death- cum-retirement gratuity received under the revised Pension Rules of the Central Government or, as the case may be, the Central Civil Services (Pension) Rules, 1972, or under any similar scheme applicable to the members of the civil services of the Union or holders of posts connected with defence or of civil posts under the Union (such members or holders being persons not governed by the said Rules) or to the members of the all-India services or to the members of the civil services of a State or holders of civil posts under a State or to the employees  of  a  local  authority or  any payment  of  retiring  gratuity  received  under  the Pension Code or Regulations applicable to the members of the defence service is exempt. Gratuity received in cases other than those mentioned above, on retirement, termination etc is exempt up to the limit as prescribed by the Board. Presently the limit is Rs. 10 lakhs w.e.f. 24.05.2010 [Notification no. 43/2010 S.O. 1414(E) F.No. 200/33/2009-ITA-1 dated 11th June 2010].

Any payment in commutation of pension received under   the Civil Pensions (Commutation) Rules of the Central Government or under any similar scheme applicable  to the members of the civil services of the Union or holders of posts connected with defence or of civil posts under the Union (such members or holders being persons not governed by the said Rules) or to the members of the all- India services or to the members of the defence services or to the members of the civil services of a State or holders of civil posts under a State or to the employees of a local authority] or a corporation established by a Central, State or Provincial Act, is exempt under Section10(10A)(i). As regards payments in commutation of   pension received under any scheme   of   any other employer, exemption   will   be governed by the  provisions of section 10(10A)(ii). Also, any payment in commutation of pension from a fund referred to in Section 10(23AAB) is exempt under Section 10(10A)(iii).

Any payment received by an employee of the Central Government or a State Government, as cash-equivalent of the leave salary in respect of the period of earned leave at his credit at the time of his retirement, whether on superannuation or otherwise, is exempt under Section 10(10AA)(i).  In the case of other employees, this exemption will be determined with reference to the leave to their credit at the time of retirement on superannuation or otherwise, subject  to a maximum of ten months’ leave. This exemption will be  further limited  to  the  maximum amount  specified by the Government of India Notification  No.S.O.588(E)  dated  31.05.2002  at  Rs.  3,00,000/-  in  relation  to  such employees who retire, whether on superannuation or otherwise, after 1.4.1998.

Under Section 10(10B), the retrenchment compensation  received by a workman is exempt from income-tax  subject to certain limits. The maximum amount of retrenchment compensation exempt is the sum calculated on the basis provided  in section 25F(b) of the Industrial Disputes Act, 1947 or   any   amount not less than Rs.50,000/- as the Central Government  may  by    notification  specify  in   the Official  Gazette, whichever is less. These limits shall not apply in  the  case where the compensation is paid under  any scheme which  is  approved  in this behalf  by  the  Central   Government,  having regard to the need for extending  special protection  to  the workmen in the undertaking to  which  the scheme applies  and  other  relevant  circumstances.  The  maximum  limit  of  such  payment  is  Rs. 5,00,000/- where retrenchment is on or after 1.1.1997 as specified in Notification No. 10969 dated 25-06-1999.

Under Section 10(10C), any payment received or receivable (even if received in installments) by an employee of   the   following   bodies at   the   time   of   his voluntary retirement  or  termination of his  service, in accordance with any scheme or  schemes of voluntary retirement or in the case of public sector company, a scheme of voluntary separation, is exempt from income-tax to the  extent  that such amount does not exceed Rs.
5,00,000/-:

a)        A public sector company;

b)        Any other company;

c)        An Authority established under a Central, State or Provincial Act

d)        A Local Authority;

e)        A Cooperative Society;

f)         A  university  established  or  incorporated  or  under  a  Central,  State  or Provincial Act, or, an Institution declared to be a University under section 3 of the University Grants Commission Act, 1956;

g)        Any Indian Institute of Technology within the meaning of Section 3 (g) of the Institute of Technology Act, 1961;

h)        Such     Institute   of     Management   as   the Central   Government may by notification in the Official  Gazette,  specify in  this behalf.

The exemption  of  amount  received  under  VRS  has been extended  to  employees  of the   Central Government and   State   Government and employees of notified institutions having importance throughout India or any State or States. It may also be noted that where this exemption has been allowed to any employee for any assessment year, it shall not be allowed  to  him  for  any  other  assessment  year. Further, if relief has been allowed under section 89 for any assessment year in respect of amount received on voluntary retirement or superannuation, no exemption under section 10(10C) shall be available.

Any sum received under a Life Insurance Policy (Sec 10(10D), including  the  sum allocated by way of bonus on such policy other  than the following is exempt under section 10(10D):

i)         any sum  received under   section 80DD(3)  or section 80DDA(3);  or

ii)        any sum received under a Keyman insurance policy; or

iii)       any sum received under an insurance policy issued on or after 1.4.2003, but on or before 31-03-2012, in respect of which the premium payable for any of the years during the term of the policy exceeds 20 percent of the actual capital sum assured; or

iv)       any sum received under an insurance policy issued on or after 1.4.2012 in respect of which the premium payable for any of the years during the term of the policy exceeds 10 percent of the actual capital sum assured; or

v)        any sum received under an insurance policy issued on or after 1.4.2013 in cases of persons with disability or person with severe disability as per Sec 80U or suffering from disease or ailment as specified in Sec 80DDB, in respect of which the premium payable for any of the years during the term of the policy exceeds 15 percent of the actual capital sum assured

However, any sum received under such policy referred to in (iii), (iv) and (v) above, on the death of a person would be exempt.

Any  payment from a Provident Fund to  which  the Provident  Funds Act, 1925, applies or from any other  provident fund set up by the Central  Government and notified by it in the Official Gazette is exempt under section 10(11).

Under section 10(13A) of the Act, any special  allowance specifically granted to an assessee by his  employer to meet expenditure incurred on payment of rent (by  whatever name called) in respect of   residential   accommodation   occupied   by   the assessee   is exempt  from Income-tax  to  the  extent as may  be  prescribed,  having  regard  to the area or place in which such accommodation is situated and other relevant considerations. According  to  Rule 2A  of  the  Rules,  the  quantum  of exemption   allowable  on  account of  grant of special  allowance to meet expenditure on payment of rent shall be the least of the following:

(a)       the actual amount of such allowance received by the assessee in respect of the relevant  period  i.  e.  the  period  during  which  the  accommodation  was occupied by the assesse during the financial year;  or

(b)       the actual expenditure incurred in payment of rent in  excess  of  one-tenth  of the salary due  for the relevant period;  or

(i) where  such  accommodation is situated in  Bombay, Calcutta,  Delhi or Madras, 50% of the salary  due to the employee for the relevant period; or

(ii) where  such accommodation is situated in any other places,  40% of the salary due to the employee for the relevant period.

For this purpose, “Salary” includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites.

It   has to be noted that only the expenditure   actually incurred   on   payment   of rent in respect  of  residential  accommodation  occupied  by  the assessee  subject  to  the limits laid  down  in  Rule  2A,  qualifies  for  exemption    from  income-tax.  Thus,    house    rent allowance  granted  to  an employee  who  is residing in a house/flat owned by him  is not exempt   from   income-tax.   The   disbursing authorities should satisfy themselves in this regard by insisting on production of  evidence of actual payment of  rent  before excluding the House Rent Allowance or any portion  thereof from the total income of the employee.

Though   incurring actual expenditure on payment of rent is a   pre-requisite   for claiming deduction under section 10(13A), it has been decided as an administrative   measure that salaried employees drawing house rent allowance   upto Rs.3000/-   per   month will be exempted from   production   of rent   receipt. It   may,   however, be   noted   that   this concession   is   only   for the purpose of   tax-deduction   at source, and, in the regular assessment of the employee, the Assessing  Officer will be free to make such enquiry as  he deems  fit  for the purpose of satisfying himself that  the employee  has  incurred  actual expenditure on  payment  of  rent.

Further if annual rent paid by the employee exceeds Rs 1,00,000 per annum, it is mandatory for the employee to report PAN of the landlord to the employer. In case the landlord does not have a PAN, a declaration to this effect from the landlord along with   the name and address of the landlord should be filed by the employee.

Section 10(14) provides for exemption of the following allowances :-

(i)  Any special  allowance  or benefit granted  to  an employee  to  meet  the expenses wholly, necessarily and exclusively incurred  in  the performance of his duties as prescribed under Rule 2BB  subject to the extent to which such  expenses are actually incurred for that purpose.

(ii) Any allowance  granted to an employee  either  to meet  his  personal expenses at the place  of  his posting  or at the place he ordinarily resides  or to  compensate  him for  the  increased  cost  of living, which may be prescribed and to the extent as may be prescribed.

However, the allowance referred to in (ii) above should not be in the nature of a personal allowance granted to the assessee  to remunerate or compensate him  for performing duties of  a  special  nature relating to  his  office  or  employment unless such allowance is related to his place of posting or residence.

The  CBDT has prescribed guidelines for the purpose  of Section 10(14) (i) & 10 (14) (ii) vide notification No.SO 617(E) dated 7th July, 1995 (F.No.142/9/95-TPL)which has been amended vide   notification SO No.403(E)     dt 24.4.2000   (F.No.142/34/99-TPL). The transport allowance granted  to  an  employee to meet his expenditure  for  the purpose of commuting between the place of his residence and the place  of  duty is exempt to the extent of   Rs. 1600 p. m.   or Rs 3200 p.m. (for a person who is   blind or deaf and dumb or is orthopaedically handicapped with disabilities of lower extremes) vide  notification  S.O.No.395(E) dated  13.05.98 r/w S.O. No. 1002 (E) dated 13.04.2015 & S.O. No. 2604 (E) dated
23.09.2015.

Under Section 10(15)(iv)(i) of the Act, interest   payable by the Government on deposits made by   an employee of the Central Government or a State Government or a public   sector  company  out  of  his  retirement benefits,  in  accordance with such scheme framed  in  this  behalf  by  the  Central  Government and  notified  in  the  Official   Gazette is   exempt       from     income-tax.   By   notification No.F.2/14/89-NS-II dated 7.6.89, as amended by notification No.F.2/14/89-NS-II dated 12.10.89, the Central Government  has notified a scheme called Deposit Scheme for Retiring Government Employees, 1989 for the purpose of the  said clause.

Any scholarship granted to meet the cost of education is not to be included in total income as per provisions of section 10(16) of the Act.

Section 10(18) provides for exemption of 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 may be specifically notified by the Central Government. Family pension received by any member of the family of such individual is also exempt [Notifications No.S.O.1948(E) dated 24.11.2000 and 81(E) dated 29.1.2001, which are enclosed as per Annexure VIII & IX]. “Family” for this purpose shall have the meaning assigned to it in Section 10(5) of the Act.

DDO may not deduct any tax in the case of recipients of such awards after satisfying himself about the veracity of the claim.

Under  Section 17 of the Act, exemption from  tax will also be available in respect of:-

(a)  the  value  of  any medical treatment provided  to  an  employee  or any member of his family, in any hospital maintained by the employer;

(b) any  sum  paid  by  the employer  in  respect  of    any expenditure actually incurred by the employee on  his medical treatment or of any member of his family:

(i)  in any hospital maintained by the Government or any local  authority or any other hospital approved  by the   Government  for  the purposes  of   medical treatment of its employees;

ii) in respect of the prescribed diseases or ailments as  provided in Rule  3A(2) of the Rules  in any hospital  approved  by  the  Chief Commissioner having  regard  to  the prescribed guidelines as provided in Rule 3(A)(1)of the Rules,

(c)   premium   paid   by the employer in respect   of   medical insurance taken for his employees  (under  any     scheme  approved  by  the  Central  Government  or  Insurance Regulatory and Development Authority) or   reimbursement of insurance premium to the employees who take medical insurance  for themselves or for their family  members (under any scheme approved by the Central Government or Insurance Regulatory and Development Authority);

(d) reimbursement, by the employer, of the amount spent by an employee in obtaining medical treatment for himself or   any   member   of his family from   any   doctor, not exceeding in the aggregate Rs.15,000/- in an year;

(e) As  regards  medical  treatment abroad,  the  actual expenditure  on  stay  and  treatment abroad   of   the   employee   or   any   member of his family, or,   on   stay abroad   of one attendant  who  accompanies  the    patient,  in    connection    with  such  treatment,  will  be excluded from  perquisites  to  the  extent  permitted  by  the Reserve Bank of India. It may be noted that  the  expenditure  incurred on travel abroad by the patient/attendant, shall  be excluded  from    perquisites  only  if  the  employee’s  gross  total  income, as  computed before including the said expenditure, does not exceed  Rs.2 lakhs.

For     the     purpose    of       availing     exemption     on expenditure incurred on medical treatment, “hospital” includes a dispensary or clinic or nursing home, and   “family” in relation to an individual  means  the  spouse  and  children  of  the individual.   Family  also includes  parents,  brothers  and  sisters  of  the  individual  if they are  wholly  or  mainly dependent on the individual.

It is pertinent to mention that benefits specifically exempt u/s 10(13A), 10(5), 10(14), 17 etc. of the Act would continue to be exempt. These include benefits  like house rent allowance, leave travel concession, travel expense allowance on tour and transfer, daily allowance to meet tour expenses as prescribed, medical facilities  subject to conditions.

In this connection it is to be noted that as per sec. 10 (14) read wit rule 2BBany allowance granted to meet the cost of travel on tour or on transfer includes any sum paid in connection with transfer, packing and transportation of personal effects o such transfer shall be exempt. Also any allowance, whether, granted for the period of journey in connection with transfer, to meet the ordinary daily charges incurred by an employee on account of absence form his normal place of duty shall be exempt.

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Download Income Tax Department Circular No.20/2015 (F.No. 275/192/2015-IT(B) dated 02.12.2015