+91Salaried individuals receive a fixed salary, which often includes various allowances. Section 10 of the Income Tax Act, 1961, grants exemptions on specific allowances, allowing them to reduce their taxable income. These exemptions are intended to cover certain employment-related expenses. This article delves into the eligibility criteria for these exemptions and outlines the key sub-sections of Section 10 that benefit salaried employees.
Individuals Eligible for Allowance Exemptions
Salaried individuals who receive special allowances from their employers can also avail tax exemptions under Section 10, provided these allowances are used for their designated purposes. The exemptions apply to:
- Government Employees: Defense personnel, civil servants and other government employees receiving allowances such as House Rent Allowance (HRA) and transport allowances.
- Private Sector Employees: Corporate employees receiving allowances like HRA, conveyance allowances and travel allowances.
- Employees in Specific Categories: Individual employees working in challenging environments like hilly areas, border regions, etc., who receive special hardship allowances.
Suggested Reads: Income Tax for FY 2025-26
Sub-sections of Section 10
Given below are the sub-parts of Section 10 and the related details regarding exemptions:
Section 10(13A) – Exemptions on House Rent Allowance (HRA)
Employees who receive HRA can claim tax exemption in case they reside in rented accommodation. The exemption amount is the least of the following:
- Actual HRA received
- 50% of salary (for those living in metro cities) or 40% of salary (for non-metro cities)
- Rent paid minus 10% of the basic salary + DA
Note: HRA exemption is only available under the old tax regime. Under the new tax regime, this exemption is not available.
Section 10(5) – Leave Travel Allowance (LTA)
Employers may offer LTA to cover employees’ travel expenses during vacations. Key points include:
- Exemptions only apply to domestic travel expenses such as airfare, railway or bus fare and do not cover expenses like hotel accommodation or sightseeing, etc.
- Moreover, the exemption is limited to the LTA provided by the employer in your CTC.
Note: LTA exemption is not available under the new tax regime.
Section 10(10) – Gratuity
Gratuity received by an employee upon retirement or termination is exempt subject to certain conditions:
- Government Employees: Fully exempt from tax
- Non-Government Employees: Exemption is least of the following:
– Half month’s salary for each completed year of service
– Rs. 20 lakh
– Actual gratuity received
Note: Any gratuity amount received beyond the exemption limit is taxable as per the applicable slab rates.
Section 10(10AA) – Leave Encashment
Leave encashment refers to the compensation received by employees at the time of resignation or retirement for their unused accumulated leaves. This leave encashment is eligible for tax deduction under section 10(10AA) subject to the following conditions:
- Government Employees: Completely exempt from tax.
- Non-Government Employees: Exemption is limited to the least of the following:
– Actual leave encashment received
– Cash equivalent of unutilized earned leave
– Rs. 3 lakh
– Average salary of last 10 months
Note: Leave encashment while you are still in service is fully taxable.
Section 10(10D) – Life Insurance
Any sum that the employee receives under a life insurance plan either as death benefit, maturity benefit or any bonus, is tax-free under Section 10.
Section 10 (1) – Agricultural Income
In case the income that you receive from agricultural activities is your only income source for the entire financial year, then your income would be completely excluded from tax. Here is the list of exemptions on agricultural income under Section 10 (1):
- Sale of agricultural produce
- Agricultural operations including sowing, cultivation and tilling
- Earning from farm building needed for agricultural purposes
- Agricultural land in India yielding rent or revenue
- For preservation and growth or product certain agricultural operations are exempted, such as pruning, weeding, cutting, etc.
Section 10 (10C) – VRS Compensation
Under the voluntary retirement scheme, the compensation that a person receives at the time of retirement is exempted up to a maximum of Rs. 5 lakh.
Section 10(11) – Exemption on Payment Made to Provident Fund
The payments that an individual receives from his/her Provident Fund, are excluded under Section 10. However, if the service period has been less than 5 years, then the PF is taxable.
Section 10(13) – Superannuation Fund
The regular payment that an employee makes into a fund towards his future pension is called the Superannuation fund. This amount is also tax exempted.
Section 10(14) – Special Allowances
Under the special allowance act of Section 10 (14), certain allowances are exempt from tax to the extent they are utilized for their specific purposes. The exemption depends on the following points:
- Allowance amount
- Actual amount utilised for the purpose for which the allowance is granted
Special Individuals Receiving Allowances Exemption
Under section 10(14)(i) and section 10(14)(ii), special allowances are exempted for specific individuals, including:
- UNO employees
- Government employees working outside India but are Indian citizens
- High court judges
- High court and Supreme court judges entitled to receive the Sumptuary Allowance
1. Section 10(14)(i):
Allowances granted to meet expenses wholly, necessarily and exclusively incurred in the performance of duties of an office or employment are exempted from taxes. Allowances covered under this category include:
- Travel Allowance: Travel allowance covers costs related to official tours or travel. It also includes travel costs incurred while getting transferred to another location, including packaging or transport of personal objects.
- Daily Allowance: This allowance is given to meet the ordinary daily charges incurred by an employee when on tour or for the duration of a job transfer.
- Conveyance Allowance: For meeting conveyance expenses incurred in the course of official duties. However, the employer does not pay to travel from home to work as it is not considered as a duty of the office. This type of allowance comes under a different section called ‘Transport allowance’ and is not exempt from tax.
Read more on conveyance allowance
- Research/ Academic Allowance: This type of allowance is granted with the aim of encouraging training that is related to academics or research.
- Helper Allowance: Sometimes your employer permits you to appoint a helper for performing official duties. In such cases, helper allowance may be granted.
- Uniform Allowance: Allowance that is given for the purchase or maintenance of uniform that needs to be worn while on duty is referred to as uniform allowance. You can avail this allowance only when an office duty prescribes a specific uniform.
2. Section 10(14)(ii):
Allowances granted to meet personal expenses at the place where employees are required to work under certain set of conditions or to compensate for increased cost of living. The amount exempted is either the amount of allowance received or the limit specified, whichever is lesser. Some of these allowances include:
- Children Education Allowance: Up to Rs. 100 per month for each child and a maximum of two children.
- Hostel Expenditure Allowance: Up to Rs. 300 per month per child for a maximum of two children
- Compensatory Allowance: Also known as climate allowance, this is offered to employees working in high-cost areas to offset the increased cost of living such as high altitude or hilly regions such as:
– Hilly areas of HP, J&K, UP and North East – Rs.800
– Siachen are of J&K – Rs.7,000 per month
– Common places above 1000 meter or above – Rs.300
- Scheduled/ Tribal/Agency Areas Allowance: Karnataka, MP, West Bengal, Assam, Orissa, Bihar, UP, Tamil Nadu and Tripura. – Rs. 200
- Allowance for Duty in Border Area/Remote Area/Any Difficult or Disturbed Areas: Allowances can range from Rs.200 to Rs.1300 per month and are exempt under the Rule 2BB.
- Allowance for Working in a Transport System for Personal Expenses, While on Duty: 70% of allowance up to Rs.10,000 per month.
- Field Area Allowance: Areas of Nagaland, HP, J&K, UP, AP, Sikkim and Manipur – Rs. 2600 per month
- Allowance Granted to Armed Forces for Cases of Counter Insurgency: Rs.3900 per month.
- Transport Allowance to Physically Disabled Employee on Duty to Travel to Work: Rs.1600 per month.
- Transport Allowance for Commute Between Work and Residence: Rs.1600 pm.
- Compensatory allowance for duty in modified field area: Specific areas of West Bengal, Rajasthan, North East, J&K, UP and HP – Rs.1000 per month.
- Island Duty Allowance Granted to Armed Forces in Andaman & Nicobar and Lakshadweep: Rs.3250 per month.
- Allowance for Working in Underground Mines: Rs.800 per month.
- Special Compensatory Highly Active Field Area Allowance: Rs.4200 per month.
- Allowance for Armed Forces in a High Altitude Region:
- 9000 – 15,000ft – Rs.1060 per month
- Above 15,000 ft – Rs.1600 per month
Under the new tax regime, exemptions under Section 10(14) are not available, except for specific allowances such as transport allowance granted to a divyang employee to meet expenditure to commute between place of residence and place of duty, conveyance allowance, any allowance granted to meet the cost of travel on tour or on transfer and daily allowance to meet ordinary daily charges incurred by an employee on account of absence from his normal place of duty.
Section 10 of the Income Tax Act FAQs
Q. My father is a farmer, can he save taxes under Section 10?
Ans. Yes, in case the income that he receives from agricultural activities is the only income source for the entire financial year, then your father’s income would be completely excluded from tax.
Q. I use my own bike to go to my office every day, can I avail tax benefits?
Ans. Yes, transport allowance up to Rs. 800 per month, that is, Rs. 9,600 per year is exempted if it features in your salary slip.
Q. How much transport allowance is granted to an employee?
Ans. To commute between home and workplace, an individual can receive a maximum of Rs. 1,600 per month as transport allowance. However, for an employee who is blind or handicapped, the maximum transport allowance applicable is Rs. 3200 per month.
Q. Is Dearness allowance (DA) and special allowance the same?
Ans. No, DA is only paid to central government employees, whereas, a special allowance is applicable for employees working in both private and public sector.
Q. Can my special allowance be higher than my basic pay?
Ans. Yes, in certain rare cases your special allowance may be higher than your basic pay. The general norm however, is that the basic pay is higher than the special allowance.
Q. What is the difference between allowance and perquisites?
Ans. An allowance is money given to an employee for a specific reason, whereas perquisites are a variety of services provided by employers to employees.