Understanding Exemption Under Section 10 of Income Tax Act and How It Helps You Save Tax

Your salary slip is a long list of varied components, such as basic pay, HRA, conveyance, and the list goes on. But, did you know that some of them can help you save tax? That’s where exemptions under Section 10 of the Income Tax Act come in.

This section helps you understand which components of your income are partially or fully tax-free, lowering your total taxable income and saving you money. Let’s get into it.

What is Section 10 of the Income Tax Act?

If you’re a salaried individual, knowing what exactly Section 10 is beneficial. Section 10 of the Income Tax Act, 1961, lists types of income that are not taxable, either fully or up to a specified limit.

These help you reduce tax burden and help you save more, invest better, and enjoy employment benefits.

Common Exemptions Under Section 10 of Income Tax Act

Different subsections cover different types of income. For salaried employees, the exemptions under Section 10 of the Income Tax Act often come directly through the salary structure.

1. House Rent Allowance (HRA) – Section 10(13A): For individuals living in a rented home and receiving HRA from your employer, this section allows you to claim an exemption based on rent, salary, and city.
2. Leave Travel Allowance (LTA) – Section 10(5): This covers domestic travel costs for you and your family during vacations. You can claim it twice in a span of four years.
3. Gratuity – Section 10(10): Your gratuity amount, which you receive at the end of your employment service, is exempt up to a certain limit. This depends on whether or not your employer is covered under the Gratuity Act.
4. Leave Encashment – Section 10(10AA): Your unused leaves can be encashed at the time of retirement, and part of it may be tax-free (fully exempt for government employees).
5. Commutation of Pension – Section 10(10A): Your pension can be availed in two ways; either you choose a full monthly pension for life or a commuted pension, where you take a lump sum amount upfront and receive a reduced monthly pension later. For government employees, commuted pension (the lump sum amount) is fully exempt. For others, it’s partially exempt.
6. Retirement or Voluntary Retirement Benefits – Section 10(10C): If you voluntarily retire, the amount you receive is exempted up to Rs. 5 lakh, subject to certain conditions.
7. Allowances and Perquisites: Some specific allowances like conveyance or travel may be partially exempt under various clauses of Section 10.

Who Can Claim These Exemptions

If you’re a:

• Salaried employee
• Self-employed individual
• In a specific-income category (agricultural income, foreign allowances)

To claim these, you’ll need to provide documents, such as:

• Rent receipts
• Travel bills
• Employer-issued forms

Takeaway

Knowing the exemptions under Section 10 of the Income Tax Act helps you reduce your taxable income, plan your salary structure, and take home more of your salary without increasing your gross pay.