By CA. Ridhima Bhatia

Exemption V/s Deduction

Exemption Deduction

Derived from the word exempt i.e. Not

Liable

Means a reduction/concession

Not Charged to Tax i.e. It is not part of

Gross Total Income (GTI)

Included in income of taxpayer then

deduction is allowed

Allowed to be claim on specific course of

income, not from total income

Allowed to be claim from total income

Coverage u/s 10 and u/s 54 Coverage u/s 80C to 80U

Section 10(1) - Agricultural Income

• As defined in section 2(1A), Agriculture Income may arise in any of the three ways:

Rent or Revenue derived from agricultural land

• Agriculture

• Processing of Agriculture produce into saleable commodity

• Sale of such agricultural produce in market

Income Derived form such land by:

From farm building required for agricultural operations

Rent or Revenue Derived from Land

Rent or revenue

•Rent received either by owner or sub tenant

• In cash or in kind

Land situated in India

• In case of foreign agriculture land-entire income taxable

Land Used for Agriculture purpose

•Exclusively used for agricultural purpose

Income derived from such Land

• Basic Operations i.e. absolutely necessary for raising the produce

• Subsequent Operations i.e. in conjunction and in continuation of basic operations.

Through Agriculture

• To make the produce a saleable commodity

• Produce must retains its original character in spite of the processing unless there is no market for selling in that condition

Process employed to render the produce fit to the market

• Income from sale of produce to cultivator/receiver of rent in kind

• If produce gone through other than ordinarily process, then income shall be partly agricultural and partly business

Sale of such agriculture produce

Income from Farm Building

• Conditions:

a) Building should be on or in the immediate vicinity of land

b) Used as store or a dwelling house

• Additionally:

a) Land should be assessed to land revenue in India

b) If not assessed so, then it should not be situated in any area

- Comprised within jurisdiction of a municipality/ cantonment board having

population less than 10,000

- With such shortest distance measured aerially and in relation to range of population:

Shortest aerial distance from municipality/cant.

Board

Population

2 kms More than 10,000 but less than equal to 1,00,000

6 kms More than 1,00,000 but less than equal to 10,00,000

8 kms More than 10,00,000

Apportionment of Income between Agriculture Income and

Business Income

Rule Apportionment of income in certain cases Agriculture

Income

Business

Income

7A Income from growing and manufacturing

of rubber

65% 35%

7B Income from growing and manufacturing

of rubber

- In case of sale of coffee grown and cured 75% 25%

- In case pf sale of coffee grown, cured,

roasted and grounded

60% 40%

8 Income from growing and manufacturing

of tea

60% 40%

Examples:

Agricultural Income Non- Agricultural Income

•Income from flowers

•Income derived from saplings/seedlings

grown in a nursery (Explanation3)

•Rent received from land

•Income for poultry farming

•Income from dairy farming/ butter

making

•Income from Sale of spontaneous grown

trees

•Dividend paid by company engaged in

agricultural operations

Taxation of Agricultural Income

• As a general rule, agriculture income is exempt from tax

• Partial Integration of Agricultural Income with Non Agricultural Income:

- Agricultural income is aggregated with Non Agricultural income

- An Indirect way to tax Agricultural income

- Eventually, Non – Agriculture Income is taxed at a higher rate

• Conditions:

- Applicable to Individual/HUF/ AOP/ BOI and artificial person

- Only if agricultural income exceeds Rs. 5,000

- Non- Agricultural income exceeds the maximum amount not chargeable to tax

Taxation of Agricultural Income (Contd....)

• Steps for tax calculation :

Compute tax on agricultural and non-agricultural

income (A)

Compute tax on [Agricultural

Income + Maximum Exemption

Limit ] (B)

A- B

Sum so calculated shall be increased by

cess and surcharge as applicable.

Also, rebate, if any shall be available.

Other Exempt Incomes

Section Nature of Income Eligible

Assessee

Conditions for exemption

10(2) Amount received by a member from the

income of HUF

Member of

HUF

Applies only in respect of payment made by

HUF-

-Out of the income of the family or

- out of the income of the impartible estate

belong to the family

10(2A) Share income of partner Partner’s share received in accordance with

profit sharing ratio is exempt

10(4)(i) Interest on notified securities o non-resident

issued by Central Government

- Exemption not available in respect of any

further issue of bond/securities on or after

01.06.2002

10(4)(ii) Interest earned on deposit in NRE account Individual -Person should be resident outside India as per

FEMA,1999

- has been permitted by RBI to maintain such

account

10(4B) Interest on savings certificates to non-resident Individual

who is citizen

of India or a

person of

Indian origin

who is non-

resident

-such saving certificates issued before

01.06.2002

- Certificates should have subscribed in

convertible foreign exchange

Other Exempt Incomes (Contd..)

Section Nature of Income Eligible

Assessee

Conditions for exemption

10(6)(ii) Remuneration received by official of

Embassies, high commission etc. of Foreign

State.

Individual not

citizen of

India

-remuneration received by our corresponding

government officers resident in such foreign

countries should be exempt

- Officers should not be engaged in any other

business or profession or employment in India

10(6)(vi) Remuneration for services rendered in India by

employer by foreign enterprise

Foreign

Nation

-foreign enterprise is not engaged in a

business activity in India

-Employees stay in India does not exceed 90

days in PY

-Remuneration is not labile to be deducted

from the employer’s income

10(6)(viii) Salary received for services rendered in

connection with employment in foreign ship

Non-citizen of

India who is

NR

-total stay in India does not exceed 90 days in

PY

10(6)(ix) Remuneration received by Foreign

Government employees during their stay in

India for specified training

Individual -Training in any establishment or office of

government or PSU

Other Exempt Incomes (Contd..)

Section Nature of Income Eligible

Assessee

Conditions for exemption

10(10BB) Payments to Bhopal Gas Victims He should not be allowed deduction on

account of loss/damage against the payment

10(10BC) Compensation received on account of disaster Individual or

is legal heir

-granted by Central Government or a state

government or local authority

- not be allowed deduction on account of

loss/damage against the compensation

10(11A) Payment from Sukanya Samriddhi Account

10(16) Educational Scholarship (irrespective of the

amount or source of scholarship)

10(17) Payment to MPs and MLAs -Daily Allowances, Constituency Allowances

will be exempt

10(17A) Awards for literary, scientific and artistic

works and other awards by the government

-Instituted in public interest by Central/State

Government or any body approved by them

10(18) Pension received by recipient of gallantry

awards

Awardee or in

case of death

of awardee,

his family

- Individual who has been awarded ‘Param Vir

Chakra” or “Maha Vir Cjhakra” or “Vir

Chakra” or any other award as notified by

Central Government

Other Exempt Incomes (Contd..)Section Nature of Income Eligible

Assessee

Conditions for exemption

10(26) Income of a member of a schedule tribe

arising or accruing :

-From any source in the areas or Sates

aforesaid

- by way of dividend or interest on

securities

Residing in

-Any area(specified in the Constitution)

-In the states of Manipur, Tripura, Arunachal

Pradesh, Mizoram and Nagaland

-Ladhak region if the state of J&K

10(26AA) Income of a Sikkimese individual arising

or accruing :

-From any source in the State of Sikkim

- by way of dividend or interest on

securities

Not available to a Sikkimese woman who on

or after 01.04.2008 marries a non- Sikkimese

individual

10(30) Tea Board Subsidy Engaged in

growing and

manufacturing of

tea

-Should have been received under any scheme

for replantation/replacement of bushes or

rejuvenation or consoldiation of areas used for

cultivation

-Furnish certificate from Tea Board along

with return of income

10(31) Other Subsidies Engaged in

business of

growing and

manufacturing

rubber , coffee,

cardamom or other

specified

commodity

-Same as above

Tax Holiday for Newly Established Unit in SEZ – Section 10AA

• Conditions to be satisfied:

Books of Account

Should be audited Audit report in Firm n. 56F to be submitted along with the

return of income

Plant and Machinery

plant and machinery previously used should not exceed 20% of the total value of P&M

Plant and machinery which was used outside India will not be regarded as previously used

Other condition

It is not formed by Splitting up, or reconstruction of a business in existence

It is not form by transfer of business

Commencement of Unit

Should begin during previous year relevant to A.Y. 2006-01 or any subsequent year; but not later than A.Y.2020-21

Assessee

Engaged in export of articles or things or providing any serviceEntrepreneur as referred in Section 2(j) of Special Economic

Zone Act, 2005

Tax Holiday for Newly Established Unit in SEZ (Contd..)

• Amount of Deduction: Deduction depends upon quantum of profit derive from

Export of Articles or things or services (including computer software).

It is calculated as under :

Profit if Business of Undertaking X Export Turnover/ Total Turnover of Business

Deduction for first 5 Assessment Years

• 100% of profits derived

Deduction for 6th Assessment Year to 10th

Assessment year

• 50% of such profits and gains

Deduction for 11th Assessment Year to 15th

Assessment year

• Not exceeding 50% of the profit as is debited to P& L A/c of the previous year in respect of which deduction is allowed

• And Credited to Special Economic Zone Re-investment Reserve Account

• Created and Utilised in manner as per section 10AA(2)

Tax Holiday for Newly Established Unit in SEZ (Contd..)

• Other Points ::

- Such deduction is only applicable to units set up in SEZ, not in any FTZ (Foreign

Trade Zone) or EPZ (Export Processing Zone)

- Loss us/ 72(1) or section 74(1)/(3) shall be allowed to be carried forward

- No deduction allowed under section 80-IA and 80-IB in relations to profits and

gains of undertaking

- In case of amalgamation/merger

:: No deduction shall be admissible to amalgamating or demerged unit in previous

year of amalgamation/demerger

:: provision shall apply to amalgamated or resulting unit as they would have applied

in case the amalgamation or demerger had not taken place

Section 14A – Restriction on allowability of Expenditure

• Disallowance of expenditure incurred in relation to earning of exempt income

• Where the Tax Officer is not satisfied with the taxpayer’s claim with respect to

determination of amount liable for disallowance under section 14A, Rule 8D of the

Income-tax Rules, 1962 (Rules) provides for the mechanism to determine the

quantum of such disallowance.

• It is also clarified disallowance in relation to exempt income is mandatory

irrespective of whether income has been earned during the year or not

Amount of Expenditure

directly relating to Income

1% of annual average of the

monthly averages of value of investment

yielding exempt income

Disallowance under section 14

(however it should not exceed the

total expenditure claimed by the

assessee)

Chargeability u/s 15

Deduction u/s 16

Meaning u/s 17

Before we Proceed

• Some important concepts in context of salary :

Existence of Employer and

Employee relationship

Salary surrendered to Central

Government u/s 2 of the

Voluntary Surrender of Salary

Act ,191 is exempt

Foregoing salary once

accrued does not make

absolve the liability of tax

Full time or part time

employment does not impact

taxability

If tax on salary is borne by

employer , then the income

from salaries in hand of

employees will consist of

salary and tax paid thereon

Salary taxable if services are

rendered in India,

irrespective of the fact if paid

outside India

Basis of Charge (Section 15)

• Tax on DUE basis or RECEIPT basis which is EARLIER

• Salary paid in advance if assessed before can not be subsequently assessed when it is due

• Possibility of relief u/s 89(1) can be considered in case of advance salary and arrears of

salary (discussed later)

• Advance Salary and Advance Against Salary

- Advance salary mean salary received in advance, however

- Advance against salary is advance(like a loan) taken form employer and is adjusted against

salary over a period. IT CAN NOT BE TREATED AS SALARY

Meaning of Salary(an overview) Section 17(1)

• - includes both monetary payments and non-monetary facilities

• An inclusive definition of salary is provided u/s 17(1). It includes the following:

Wages

Any annuity or pension

Any gratuity

Any fees, commission or profits in lieu of or in addition to any salary or wages

Any advance of salary

Any payment received in respect of any period of leave not availed by him i.e. Leave encashment

Employer’s contribution to Provident fund

Contribution made by Central Government or employer under a pension scheme

Wages and other monetary payments

• Wages or interchangeably called ‘basic salary’ or ‘salary’ – is the fixed regular

payment earned for work/services are FULLY TAXABLE

• Allowances – fixed amount given in addition to salary to meet some specific

expenses/ requirements. THEY ARE GENERALLY FULLY TAXABLE unless an

exemption is provided.

- Dearness Allowances – Cost of living adjustment allowance paid to the employees

to cope with inflation. FULLY TAXABLE

- Allowances fully Exempt :

- Allowances to High Court Judges

Allowances received from United Nations Organisation

Compensatory Allowance received by Judge

Sumptuary allowance

Allowances payable outside India by the Government to

Citizen of India (section (10(7))

Wages and other monetary payments (Contd..)

• FULLY TAXABLE ALLOWANCE

Dearness Allowance

Overtime allowance

Medical Allowance

City Compensatory Allowance (to meet increased cost of living

in cities)

Entertainment allowance (deduction available only in case of

Government employees)

Interim Allowance

Servant Allowance

Tiffin/Lunch/Dinner Allowance

Non- Practicing allowance

House Rent Allowance (HRA)

• Allowance to meet expenditure actually incurred in payment of rent for residential

accommodation occupied by employee.

• Quantum of Exemption (Section 10(13A)) shall be least of the following:

HRA actually received

Rent paid – 10% of salary for the relevant period

40% of the salary for the relevant period. (in case accommodation is in metro cities

i.e. Mumbai, Chennai, Delhi, Kolkata then 40% shall be replaced by 50%)

Relevant Period – period for which accommodation is occupied

Salary for the purpose of calculating exemption on HRA = Basic Salary + Dearness

allowance, if provided in terms of employment +Commission as a fixed percentage

of turnover

Note ::

1) Exemption shall not be allowed in case assessee lives in his own house or no rent

expenditure is incurred.

2) Students should note that the exemption on HRA is based on city of

accommodation, rent paid, salary received and actual HRA received. If any of these

changes during the period, separate exemption shall be calculated for each period.

Special Allowances to meet expenses relating to duties or personal

expenses (Section 10(14), read with rule 2BB.

Allowances paid u/s 10 (14)(i) Allowances paid u/s 10 (14)(ii)

To meet expenses incurred wholly in

performance of duties

To meet personal expenses at place where

duties are performed or to compensate

increased cost of living

No limit on the amount which employee can

receive from employer

Limit on the amount which employee can

receive.

Will be fully exempt if fully utilised for the

purpose for which it is given

-Any amount received in excess of the limits

shall be fully taxable

-Exemption shall be granted as per the limit

provided, irrespective of the fact actually spent

by employee

Allowances u/s 10(14)(i)

Travelling/ Transfer allowance

Conveyance allowance

Helper allowance

Uniform Allowance

Allowance for encouraging academic research and training pursuits in education and research institutions

Daily allowance to meet charges incurred by employee on account of absence from normal place of duty

Allowances prescribed for purpose u/s 10(4)(ii) Exemption will be received or limit whichever is less

Name of Allowance Exemption limit

Children education allowance Rs. 100 p.m. per child, for maximum of 2 children

Hostel expenditure allowance Rs. 300 p.m. per child, for maximum of 2 children

Allowance for transport employees 70% of the allowance or Rs. 10,000 p.m., whichever

is lower

Tribal Area allowance Rs. 200 p.m.

Transport allowance Rs. 1600 p.m.

Transport Allowance to employee who is

blind/deaf/dumb/disabled

Rs. 3200 p.m.

Underground allownace Rs. 800 p.m.

Compensatory Field Allowance Rs. 2600 p.m. In specified areas

Compensatory Modified Feild Area

Allownace

Rs. 1000 p.m. In speified areas

Counter Insurgency Allowance Rs. 3900 p.m.

Gratuity

• Payment made by an employer in appreciation of services rendered by employee

• Gratuity received during the period of service is FULLY TAXABLE

Exemption in respect of gratuity (Section 10(10)

FULLY EXEMPT

Retirement gratuity received by members of Defence services

Death cum retirement gratuity received by CG/SG employees

PARTIALLY EXEMPT (Non – Government Employees) (discussed in the next slide)

Exemption of Gratuity for Non- Government employees

Covered by payment of Gratuity Act,1972 :

Exemption shall be least of the following—

1) Rs. 10,00,000

2) Gratuity Actually Received

3) 15 days of salary based on last drawn

salary for each completed year of service

or part thereof in excess of six months

Salary for this purpose means ::

Basic Salary + Dearness Allowance

No. Of days in a month for this purpose

shall be taken as 26

NOT Covered by payment of Gratuity Act,1972

:

Exemption shall be least of the following—

1) Rs. 10,00,000

2) Gratuity Actually Received

3) Half month’s salary for each completed year

of service (calculated on the basis of

average salary for ten months immediately

preceding the month of retirement/death)

Salary for this purpose means ::

Basic Salary + Dearness Allowance(in terms of

employment for retirement benefit+ fixed

commission on turnover)

Please note :

•Limit of Rs. 10,00,000 is a lifetime deduction limit.

Hence, when gratuity received in any earlier from former employer, the limit of Rs.10,00,000

will be reduced by the amount of gratuity exempt earlier.

• The exemption u/s 10(10) will available even if gratuity is received by family of deceased.

Annuity and Pension

• Annuity – yearly grant received on investment of some money - Equal annum

Sums• Received by Present employer :: taxable as salary

• Received from a past employer :: taxable as profit in lieu of salary

• Received from person other than an employer :: taxable as ‘income from other sources’

• Pension – periodic payment in consideration of past services payable after

retirement

Pension

Uncommuted Pension

Fully taxable in hands of both government and non government

employee

Commuted Pension (future right to receive pension into lump sum amount receive immediately)

Fully Exempt for employees of the CG/SG/ local authority (section

10(10A)

Non- Government employees –Exemption as provided in Section

10(10A)

Exemption in respect of Commuted Pension for Non- Government

Employees (Section 10(10A)

• If the employee is in receipt of gratuity

• Exemption::

= 1/3rd of the total pension which he is entitled

to receive

i.e. 1/3 x commuted pension

received/commutation % x 100%

• If the employee does not receive gratuity

• Exemption::

= ½ of the total pension which he is entitled to receive

i.e. 1/2 x commuted pension received/commutation % x 100%

Notes::1) Supreme Court and High Court Judges entitled to exemption of the commuted

pension not exceeding ½ of the pension2) Any commuted pension received by an individual out of annuity plan of LIC – Is

EXEMPT

Leave Encashment of Unutilised Earned Leave

• Leave Encashment received during the period of service is fully taxable

• Leave Encashment received on retirement/ superannuation (Section(10(10AA)) –

– By a Government employee – FULLY EXEMPT

– By any other employee – Exemption shall be least of the following:

a) Rs. 3,00,000

b) Leave salary actually received

c) 10 months salary (on the basis of average salary of last 10 months)

d) Cash equivalent of unavailed leave at 30 days for every year of service

1. Leave salary or 30 days per year which ever is less

2. Leave actually taken

3. (1-2)/30* Average salary of last 10 months

Salary for this purpose = Basis Salary + Dearness Allowance (forming part of

employment for retirement benefits) + Commission based on fixed turnover

• Like gratuity, INR 3,00,000 is lifetime limit for exemption for leave encashment

• Leave salary paid to legal heir in case of death of employee is not taxable