Top 10 Exempted Income in Income Tax You Should Know to Save Tax Legally
Top 10 Exempted Income in Income Tax You Should Know to Save Tax Legally
Income tax in India is often seen as a daunting topic. People like to avoid this topic as far as possible. If you keep your calm, you can learn about the exempted income in income tax. You would find that you have reduced your income tax liability by a significant amount.
Certain types of income in India are either fully exempt. Others are partially taxable according to the Income Tax Act, 1961. These incomes are popularly known as ” Exempted Income in Income Tax “.
In this post, we’ll break down the meaning of exempted income. We will discuss key exemptions like HRA, home loan interest, and LIC premiums. Additionally, we will provide a list of exempted income under Section 10.
📌 What is Exempted Income in Income Tax?
Exempted income means an income on which no tax is to be paid. In simple terms, while calculating your gross income, such exempted income should not be considered. So, it is excluded from the Gross total income.
These are of two types:
✅ Fully Exempted Income
✅ Partially Exempted Income
Top 10 Exempted Income in Income Tax/List of exempted income under Section 10
Top 10 Exempted Income in Income Tax/List of exempted income under Section 10: These incomes are exempted from income tax. They may be fully or partially exempt.
1. Agricultural Income [Section 10(1)]
2. Receipts from Hindu Undivided Family (HUF) [Section 10(2)]
3. Share of profit from a partnership firm [Section 10(2A)]
4. Leave Travel Allowance (LTA) [Section 10(5)]
5. House Rent Allowance (HRA) [Section 10(13A)]
6. Gratuity [Section 10(10)]
7. Pension/Commuted Pension [Section 10(10A)]
8. Leave encashment [Section 10(10AA)]
9. Life Insurance Policy Maturity Amounts [Section 10(10D)]
10. Scholarship for education [Section 10(16)]
Exempted Income
Section
Description
1. Agricultural Income
10(1)
Income from agriculture activities is fully exempt from tax.
2. Receipts from Hindu Undivided Family (HUF)
10(2)
Amounts received by a member from HUF are tax-free.
3. Share of Profit from a Partnership Firm
10(2A)
Partners’ share in firm’s profit is exempt (already taxed at firm level).
4. Leave Travel Allowance (LTA)
10(5)
Exemption for travel expenses within India, subject to conditions.
5. House Rent Allowance (HRA)
10(13A)
Exempt up to specified limits based on salary, rent paid, and city.
6. Gratuity
10(10)
Exempt up to prescribed limits, depending on type of employee and service years.
7. Pension/Commuted Pension
10(10A)
Commuted pension is partly/fully exempt depending on employment type.
8. Leave Encashment
10(10AA)
Exempt up to a certain limit for non-government employees.
9. Life Insurance Policy Maturity Amounts
10(10D)
Maturity amounts (meeting conditions) are tax-free.
10. Scholarship for Education
10(16)
Any scholarship granted for education is fully exempt.
Top 10 Exempted Income
Top 10 Exempted Income under Section 10 of Income Tax Act
S.No
Exempted Income
Section
Description
1
Agricultural Income
10(1)
Income from agriculture activities is fully exempt from tax.
2
Receipts from Hindu Undivided Family (HUF)
10(2)
Amounts received by a member from HUF are tax-free.
3
Share of Profit from a Partnership Firm
10(2A)
Partners’ share in firm’s profit is exempt (already taxed at firm level).
4
Leave Travel Allowance (LTA)
10(5)
Exemption for travel expenses within India, subject to conditions.
5
House Rent Allowance (HRA)
10(13A)
Exempt up to specified limits based on salary, rent paid, and city.
6
Gratuity
10(10)
Exempt up to prescribed limits, depending on type of employee and service years.
7
Pension/Commuted Pension
10(10A)
Commuted pension is partly/fully exempt depending on employment type.
8
Leave Encashment
10(10AA)
Exempt up to a certain limit for non-government employees.
9
Life Insurance Policy Maturity Amounts
10(10D)
Maturity amounts (meeting conditions) are tax-free.
10
Scholarship for Education
10(16)
Any scholarship granted for education is fully exempt.
As per Section 10 of the Income Tax Act, Below is the Top Ten Exempted Income in Income Tax:
The following incomes are fully or partially exempted:
1. Agricultural Income U/S 10(1):
It means income earned from agricultural activities. These activities include cultivating land, harvesting crops, or renting out agricultural land.
This income is fully exempt from tax as per Section 10(1) of the Income Tax Act. It is exempt provided it meets certain conditions. Additionally, it must be derived from land situated in India.
However, for individuals with high non-agricultural income, agricultural income may still be considered for rate calculation. This is done under the partial integration method.
2. Receipts from Hindu Undivided Family (HUF) U/S 10(2):
This refers to the amount a member receives. The amount comes from the income or assets of the HUF.
As per Section 10(2) of the Income Tax Act, such receipts are fully exempt for members of the HUF. This applies when they are derived from the ancestral property or income of the HUF.
This exemption ensures that income taxed in the hands of the HUF is not taxed again. The individual does not pay tax on this income again. Members of the HUF are not taxed on this income again.
3. Share of profit from a partnership firm U/S 10(2A):
A partner’s share of profit from a partnership firm is fully exempt from tax. This is under Section 10(2A) of the Income Tax Act. This exemption applies in the hands of the partner.
The firm is already taxed on its total income, including profits distributed to partners. However, partners’ remuneration or interest from the firm is taxable as it’s not exempt.
4. Leave Travel Allowance (LTA) U/S 10(5):
Section 10(5) of the Income Tax Act provides tax exemption for travel expenses incurred by employees. This exemption is applicable for travel within India during their leave of absence.
This exemption is applicable solely to travel-related expenses, including fares, but not to food or lodging costs.
To claim the exemption, the individual must provide valid proof of travel, such as travel tickets. The exemption is only applicable to the employee and their immediate family members.
5. House Rent Allowance (HRA) U/S 10(13A):
Salaried employees residing in rented accommodations and receiving a house rent allowance (HRA) as part of their compensation are exempt from taxation under Section 10(13A) of the Income Tax Act.
This exemption is unavailable if the employee doesn’t pay rent or lives in their own house.
The exemption amount is calculated as the least of the following:
Actual HRA received,
50% of salary (metro cities), or 40% (non-metros)
Rent paid minus 10% of salary
6. Gratuity U/S 10(10):
Gratuity is defined in Section 10(10) of the Income Tax Act. It pertains to a lump-sum payment made by an employer. The payment is given to an employee as a token of recognition for extended service.
This payment is typically payable upon retirement, resignation, or the employee’s demise. The amount of gratuity received is tax-free up to a certain limit. This limit depends on whether the employee is in the government or in the private sector.
The Payment of Gratuity Act covers the private sector. If the employee is not in these categories, the limit differs. Any amount over the exempt limit is taxable as part of the employee’s income.
7. Pension/Commuted Pension U/S 10(10A):
A pension is a regular employer payment to a retired employee. A commuted pension, on the other hand, is a lump sum instead of periodic payments.
Government employees’ commuted pensions are fully tax-free, while non-government employees’ are partially exempt, depending on whether they receive gratuity.
In contrast, an uncommuted (monthly) pension is fully taxable as part of the individual’s income.
8. Leave Encashment U/S 10(10AA):
Section 10(10AA) states that Leave Encashment received as a terminal benefit at the time of retirement is partially exempt. The exemption is up to Rs. 25 Lakh for semi-government or non-government employees.
However, for Government employees, it is fully exempt from tax. Further, leave encashment received on a yearly basis as part of the salary is not exempt at all. This applies neither for Govt. nor for non-government employees.
9. Life Insurance Policy Maturity Amounts U/S 10(10D):
The proceeds received from a life insurance policy are exempt from income tax upon maturity. They are also exempt in cases of death or surrender, as per Section 10(10D).
This exemption is available to an individual if the following conditions are satisfied:
Policy issued up to 31.03.2012: The Premium amount should not exceed 20% of the sum assured. If it exceeds the threshold limit, no exemption is available U/S 10(10D).
Policy issued on or after 01.04.2012: The Premium amount should not exceed 10% of the sum assured. If it exceeds the threshold limit, no exemption is available U/S 10(10D).
Policy issued on or after 01.04.2023: If the premium amount is more than Rs. 5 Lakh in a year, there is no exemption U/S 10(10D). Thus, it is important to remember that to get the exemption benefit U/S 10(10D), the annual premium amount must remain within Rs. 5 lakh.
10. Scholarship for Education U/S 10(16):
Scholarships are awarded by governments, private institutions, or charities to support education. The exemption applies to all scholarship amounts and has no upper limit.
Under Section 10(16) of the Income Tax Act, any amount received as a scholarship for education is fully exempt. It is not subject to income tax.
Fully Exempted Income in Income Tax Examples
Some examples of fully exempted income in income tax include:
Agricultural income
Share in HUF income
Share of profit from a partnership firm
Leave Travel Allowance (LTA)
300 Days Leave Encashment (for Govt. employees only)
Life Insurance Policy Maturity Amount
Scholarship income
Partially Exempted Income in Income Tax Examples
Some incomes are partially exempted, meaning a certain portion is exempt, and the remaining is taxable:
HRA Exemption in Income Tax (subject to conditions)
Home loan interest exemption in Income Tax
Gratuity (based on tenure and employer type)
Commuted pension (only exempt for government employees or partly exempt otherwise)
What is HRA Exemption in Income Tax?
Companies pay House Rent Allowance (HRA) as part of their salary package. They offer it to employees for residing in rented houses. It helps employees meet their rent payments.
HRA is a common exemption for salaried individuals. However, it is important to note that HRA exemption is only available if you pay rent to the landlord. It falls under the partial exemption category.
HRA Exemption in Income Tax Calculation:
The least of the following is exempt under Section 10(13A):
Actual HRA received
50% of salary (metro cities) / 40% (non-metro)
Rent paid minus 10% of the basic salary
Note: Rent receipts and PAN of the landlord are required for claiming HRA.
HRA Exemption Calculator: Calculate Your HRA Exemption Limit
Interactive HRA Exemption Calculator
HRA Exemption Calculator
Fill the fields above to see your exemption calculation.
Note: HRA exemption is the lowest of the following:
(1) Actual HRA received
(2) 50% of salary (metro) or 40% (non-metro)
(3) Rent paid minus 10% of salary
What is Home Loan Interest Exemption in Income Tax?
The maximum amount of deduction permissible under Section 24(b) is Rs. 2 lakh in a financial year.If the property is rented out, there is no limit on the interest deduction.
Additionally, for first-time homebuyers, an extra deduction of up to Rs. 1.5 lakh may be claimed under Section 80EE or 80EEA, subject to specific conditions.
The provisions of Section 24(b) in detail is shown below:
Self Occupied Property: Up to Rs. 2,00,000 per annum for self-occupied property
Let out Property: No limit for let-out property. It can even be more than Rs. 2 Lakh
Section 80EE: Additional home loan interest deduction for first time home buyers of maximum Rs. 50,000, if first time loan availed for self-occupied property during FY 20216-17.(It is beyond Rs. 2 Lakh)
80EEA: Additional home loan interest deduction for first time home buyers of maximum Rs. 1,50,000, if first time loan availed for self-occupied property during FY 2019-22.(It is beyond Rs. 2 Lakh)
Calculate your Home Loan Interest Exemption in Income Tax
Home Loan Interest Deduction Calculator
Home Loan Interest Deduction
How much Income is Tax Free in 2025?
While discussing Finance Budget 2025, we must consider how much income is tax-free in FY 2025. We need to address the issues resolved by our Finance Minister in the Finance Budget 2025.
Here’s an expanded overview of how much income is tax free in India for FY 2025‑26 (Assessment Year 2026‑27):
For the FY 2025‑26, up to ₹12.75 lakh income is completely tax‑free under the new regime. Incomes above that are taxed on a progressive slab basis.
Under the new tax regime, the basic exemption limit has been raised to ₹4 lakh. It was ₹3 lakh last year. This change is as per Budget 2025.
Salaried individuals additionally get the enhanced benefit of standard deduction of ₹75,000, effectively extending the tax‑free threshold to ₹12.75 lakh.
Therefore, a typical salaried person with gross income up to ₹12.75 lakh will pay no income tax in FY 2025‑26.
Beyond ₹12.75 lakh, taxable income above ₹4 lakh is taxed slab-wise. The rates are 5% for ₹4–8 L, 10% for ₹8–12 L, 15% for ₹12–16 L, and 20% for ₹16–20 L. It continues up to 30% for incomes more than ₹24 lakh.
Under the old tax regime, the basic exemption remains ₹2.5 lakh for individuals below 60, rising to ₹3 lakh for seniors (60–79) and ₹5 lakh for super‑seniors (80+) .
The new regime is now the default, with taxpayers lacking business income free to choose annually; those with business income can switch only once
For salaried taxpayers, the combination of higher exemption, standard deduction, and rebate means zero tax up to ₹12.75 lakh, eliminating the need for most tax‑saving investments.
Now calculate your income tax liability under the New tax Regime
Income Tax Calculator (FY 2025–26: New Tax Regime)
Your tax will appear here.
Want to Calculate Your Tax in Excel: Check the post below