Agricultural income and its tax treatment in India fall under Section 10(1) of the Income Tax Act, 1961. Section 10(1) deals with the exemption of agricultural income from income tax. Here's what you need to know about agricultural income and its tax treatment under Section 10(1):
Agricultural income is defined under Section 2(1A) of the Act as:
Agricultural income is exempt from income tax under Section 10(1) of the Income Tax Act. However, it is considered for the purpose of determining the rate of tax applicable to non-agricultural income. This is known as the partial integration of agricultural income.
This means that if you earn income from agricultural activities, you do not have to pay tax on it. However, there are certain conditions and exceptions to this rule.
Here are some examples of agricultural income that is exempt from income tax under Section 10(1):
For income to be considered as agricultural income and qualify for exemption, it must fulfill the following conditions:
If these conditions are met, the income will be treated as agricultural income and will be exempt from tax.
While agricultural income is generally exempt from tax, there are certain exceptions to this rule:
It is important to note that income from plantations, such as tea, coffee, and rubber, is not considered as agricultural income and is taxable.
For individuals and Hindu Undivided Families (HUFs), agricultural income is combined with other income (if any) to determine the tax liability. However, agricultural income remains exempt from income tax.
In the case of entities other than individuals and HUFs, such as companies, firms, or associations of persons (AOPs), agricultural income is not combined with other income. It is taxed separately at a flat rate of 30%. The agricultural income is not eligible for any deductions or exemptions.
Another important aspect to consider is the clubbing of income. If an individual has agricultural income and any other income, such as income from a business or profession, both incomes will be treated separately for tax purposes. The agricultural income will continue to be exempt under Section 10(1), while the other income will be taxed as per the applicable tax rates.
Agricultural income earned by an individual taxpayer can also be clubbed with the income of their spouse, minor child, or any other person in certain cases. This is done to prevent tax evasion by transferring agricultural income to other family members.
Taxpayers are required to maintain proper records and documentation to establish the source and nature of their agricultural income. This documentation may include land records, crop details, income from agricultural activities, and any other relevant documents.
Understanding the tax treatment of agricultural income is essential for individuals involved in agricultural activities. While agricultural income is generally exempt from tax, it is important to be aware of the conditions and exceptions to this rule. By following the provisions of Section 10(1) of the Income Tax Act, individuals can ensure that they comply with the tax regulations and make informed decisions regarding their agricultural income.
Under Section 10(2) of the Income Tax Act, 1961, the sum received by a member from a Hindu Undivided Family (HUF) out of the family income or out of the income of the impartible estate is exempt from income tax. This exemption is available irrespective of whether the sum is received by way of gift, advancement, withdrawal, or otherwise.
The exemption under Section 10(2) is based on the principle that a member of an HUF has a pre-existing right in the assets of the HUF. Therefore, any sum received by a member from the HUF cannot be said to be a gift or income.
However, it is important to note that the exemption under Section 10(2) is available only if the sum is received out of the family income or out of the income of the impartible estate. If the sum is received from any other source, such as from the sale of HUF assets, then it will be taxable in the hands of the member.
Here are some examples of situations where the exemption under Section 10(2) will be available:
There are certain conditions that need to be fulfilled in order for the sum to be exempt from tax.
It is important to note that the exemption under Section 10(2) is available only to the extent of the member's share in the income of the HUF. This means that if the sum received by the member exceeds his share in the income of the HUF, the excess amount will be taxable.
For example, if the total income of the HUF is Rs. 10 lakhs and you are entitled to a 50% share in the income, then you can receive up to Rs. 5 lakhs from the HUF without attracting any tax. However, if you receive more than Rs. 5 lakhs, the excess amount will be taxable.
It is also worth mentioning that the exemption under Section 10(2) is available only to individuals who are members of the HUF. If you are not a member of the HUF, any sum received from the HUF will be taxable in your hands.
It is important to note that the exemption under Section 10(2) is only available for sums received by a member of an HUF out of the income of the HUF. Any sums received by a member of an HUF from his or her own individual income or from any other source will be taxable in the hands of the member.
According to Section 10(2A), any share of profit received by a partner from a firm is exempt from tax. However, this exemption is subject to certain conditions and limitations.
Firstly, the exemption is only applicable if the firm is engaged in a business or profession. If the firm is not involved in any business activity, the partner's share of profit will not be eligible for the exemption.
Secondly, the exemption is limited to the amount of share of profit that is included in the partner's total income. If the partner's share of profit exceeds the total income, the excess amount will not be eligible for the exemption.
Additionally, the exemption is not available if the partner's share of profit is received in the form of interest, salary, bonus, commission, or any other remuneration. The exemption only applies to the share of profit received as a partner.
It is important to note that the exemption under Section 10(2A) is not automatic. The partner needs to fulfill certain conditions to avail of the exemption. These conditions include:
Once the partner fulfills these conditions, they can claim the exemption while filing their income tax return. The share of profit exempted under Section 10(2A) should be mentioned separately in the return.
Here are some examples of situations where the exemption under Section 10(2A) will be available:
It is important to note that the exemption under Section 10(2A) is not available to the following:
Interest on Non-resident (External) Account (NRE) is exempt from income tax in India under Section 10(4)(ii) of the Income Tax Act, 1961. This exemption is available to both individuals and Hindu Undivided Families (HUFs) who are non-residents of India.
An NRE account is a type of bank account that can be opened by non-residents of India to deposit foreign currency. The interest earned on NRE accounts is exempt from income tax in India, regardless of whether the account holder is a resident of India for the purposes of the Foreign Exchange Management Act, 1999 (FEMA).
To be eligible for the exemption under Section 10(4)(ii), the following conditions must be met:
If all of the above conditions are met, then the interest earned on the NRE account will be exempt from income tax in India.
The exemption under Section 10(4)(ii) is a significant benefit for non-residents of India who have NRE accounts. It helps to reduce their tax burden and encourages them to invest in India.
Here are some examples of cases where the exemption under Section 10(4)(ii) will be available:
It is important to note that the exemption under Section 10(4)(ii) is only available for interest earned on NRE accounts. Interest earned on other types of bank accounts, such as Non-Resident Ordinary (NRO) accounts and Resident Ordinary (RO) accounts, is taxable in India.
In order to avail the tax exemption on NRE account interest, NRIs need to ensure they are compliant with the necessary documentation and reporting requirements. They must provide the required documents, such as a valid passport, visa, and proof of NRI status, to open an NRE account.
Additionally, NRIs need to report their NRE account details and interest income in their income tax returns. Even though the interest income is exempt from tax, it is still necessary to disclose the income in the tax return filing.
While the tax treatment of interest on NRE accounts is favorable for NRIs, there are a few other considerations to keep in mind. NRIs should be aware of the currency conversion rates and any associated charges when transferring funds to and from their NRE accounts.
Furthermore, NRIs should also consider the tax implications in their country of residence. While the interest income may be tax-free in India, it may still be subject to tax in the country where the NRI is a tax resident. NRIs should consult with a tax advisor or professional to understand the tax implications in their specific situation.
The tax treatment of interest on Non-resident (External) Accounts under Section 10(4) of the Income Tax Act provides a significant benefit for NRIs. The tax exemption on NRE account interest allows NRIs to earn tax-free income on their foreign investments in India. However, NRIs need to ensure compliance with documentation and reporting requirements to avail the tax exemption. It is also important to consider other factors such as currency conversion rates and tax implications in the country of residence. Overall, NRE accounts offer an attractive investment option for NRIs looking to earn tax-free returns on their foreign income.
Under Section 10(4D) of the Income Tax Act, a specified fund is eligible for certain exemptions on its income. This provision aims to encourage investments in specific funds that contribute to the welfare of society.
A specified fund refers to a fund established by the government or any other entity for the promotion of charitable, religious, or educational purposes. The income generated by such funds is exempt from tax, provided it meets the conditions specified under Section 10(4D).
To qualify for the exemption, the specified fund must apply its income solely for the purposes for which it was established. It should not distribute any part of its income to its members, trustees, or contributors. Additionally, the fund should maintain separate books of account to record its income, expenses, and investments.
The exemption under Section 10(4D) covers various types of income, including dividends, interest, capital gains, and rental income. However, any income derived from business activities or commercial ventures is not eligible for the exemption.
The following income received by a specified fund is eligible for exemption under Section 10(4D):
The exemption is subject to the following conditions:
The exemption of certain income received by a specified fund provides several benefits:
Section 10(4D) of the Income Tax Act provides an exemption for certain income received by a specified fund. This exemption encourages contributions to funds that support social welfare causes and promote scientific research, healthcare, education, and other charitable purposes. By providing tax benefits to donors and ensuring the financial sustainability of specified funds, this provision plays a crucial role in promoting social welfare and advancing various charitable initiatives.
Section 10(4E) of the Income Tax Act, 1961 provides an exemption from tax on income arising from the transfer of non-deliverable forward (NDF) contracts entered into by a person with an Offshore Banking Unit (OBU) located in an International Financial Services Centre (IFSC).
NDF contracts are financial contracts that are settled in cash, rather than in the underlying asset. They are often used to hedge against currency fluctuations or interest rate movements.
OBUs are banking units that are located in IFSCs and that are regulated by the Reserve Bank of India. IFSCs are financial centers that are designed to attract foreign investment and to promote the development of the Indian financial sector.
The exemption under Section 10(4E) is available to any person who enters into NDF contracts with an OBU located in an IFSC. The income arising from such contracts is deemed to accrue or arise outside India, and is therefore exempt from tax in India.
The following conditions must be met for the exemption to be available:
If all of the above conditions are met, then the income arising from the NDF contract will be exempt from tax in India.
The exemption under Section 10(4E) is a significant benefit for businesses and individuals who enter into NDF contracts. It helps to reduce their tax burden and encourages them to use Indian IFSCs for their financial transactions.
Here are some examples of situations where the exemption under Section 10(4E) will be available:
Section 10(4F) specifically applies to income earned by a non-resident from a unit of an International Financial Services Centre (IFSC) in India. An IFSC is a designated area that provides various financial services to residents and non-residents. The exemption under Section 10(4F) is aimed at encouraging the leasing of aircraft in IFSCs and attracting global aviation companies to set up operations in India.
Under this provision, any income received by a non-resident from royalty or interest on the lease of an aircraft, which is paid by a unit of an IFSC, is exempt from income tax in India. This exemption applies to both individuals and companies who are non-residents for tax purposes.
It is important to note that the exemption is applicable only to income derived from the lease of an aircraft. Income from other sources, such as the lease of other assets or services provided by non-residents, would not qualify for this exemption.
The rationale behind this exemption is to promote the growth of the aviation sector in India. By providing tax incentives to non-residents who lease aircraft through IFSCs, the government aims to attract global aviation companies and increase the availability of aircraft for domestic and international operations.
Additionally, this exemption helps in creating a level playing field for IFSCs in India compared to other global financial centers. It ensures that non-residents who choose to lease aircraft through IFSCs are not subject to any additional tax burden, thereby making India a more attractive destination for aviation-related activities.
Furthermore, the exemption under Section 10(4F) also contributes to the overall development of the IFSC ecosystem in India. It encourages the establishment of IFSC units that specialize in aircraft leasing and related financial services, leading to the creation of job opportunities and the growth of ancillary industries.
Section 10(4F) of the Income Tax Act, 1961 provides an exemption from income tax for royalty income received by a non-resident on account of leasing of aircraft or ship in a previous year, paid by a unit of an International Financial Services Centre (IFSC) as referred to in sub-section (1A) of section 80LA, if the unit has commenced its operations on or before the 31st day of March, 2024.
This exemption is available to non-residents who lease their aircraft or ships to IFSC units that are eligible for deduction under section 80LA and have commenced their operations on or before 31st March, 2024.
The following conditions must be met for the exemption to be available:
If all of the above conditions are met, then the royalty income received by the non-resident will be exempt from income tax in India.
The exemption under Section 10(4F) is a significant benefit for non-residents who lease their aircraft or ships to IFSC units. It helps to reduce their tax burden and encourages them to use Indian IFSCs for their financial transactions.
This exemption is also in line with the Government of India's objective to promote the development of IFSCs as global financial hubs.
Here are some examples of situations where the exemption under Section 10(4F) will be available:
[Exemption will not be available if the employee opts to be taxed under section 115BAC]
The employee is entitled to exemption under section 10(5) in respect of the value of travel concession or assistance received by or due to him from his employer or former employer for himself and his family, in connection with his proceeding—
(a) on leave to any place in India.
(b) to any place in India after retirement from service or after the termination of his service.
The exemption shall be allowed subject to the following:
(i) where journey is performed by air — Maximum exemption shall be an amount not exceeding the air economy fare of the National Carrier by the shortest route to the place of destination;
(ii) where places of origin of journey and destination are connected by rail and the journey is performed by any mode of transport other than by air — Maximum exemption shall be an amount not exceeding the air-conditioned first class rail fare by the shortest route to the place of destination; and
(iii) where the places of origin of journey and destination or part thereof are not connected by rail and the journey is performed between such places — The amount eligible for exemption shall be:
(A) where a recognised public transport system exists, an amount not exceeding the 1 St class or deluxe class fare, as the case may be, on such transport by the shortest route to the place of destination; and
(B) where no recognised public transport system exists, an amount equivalent to the air- conditioned first class rail fare, for the distance of the journey by the shortest route, as if the journey had been performed by rail.
Exemption will, however, in no case exceed, actual expenditure incurred on the performance of journey.
HOW MANY TIMES CAN EXEMPTION BE CLAIMED?
Exemption available only in respect of two children
The exemption relating to LTC shall not be available to more than two surviving children of an individual after 1.10.1998.
Exception: The above rule will not apply in respect of children born before 1.10.1998 and also in case of multiple birth after one child.
IMPORTANT NOTES :
1. In case the LTC is encashed without performing the journey, the entire amount received by the employee would be taxable.
2. Family for this purpose includes:
(a) the spouse and children of the employee;
(b) parents, brothers & sisters of the employee, who are wholly or mainly dependent upon him.
3. The exemption can be availed for the journey undertaken while on leave during the tenure of service or even after retirement/termination from service.
4. The exemption is allowed only in respect of fare. Expenses incurred on porterage, conveyance from residence to the railway station/airport/bus stand and back, boarding and lodging or expenses during the journey will not qualify for exemption.
5. Exemption is available in respect of shortest route. Where the journey is performed from the place of origin to different places in a circular form or in any other manner, the exemption for that journey will be limited to what is admissible for the journey from the place or origin to the farthest point reached, by the shortest route.
Section 10(6) of the Income Tax Act, 1961 provides an exemption from income tax for certain income received by an individual who is not a citizen of India.
The following are the different types of income that are exempt under Section 10(6):
The exemption under Section 10(6) is available only to individuals who are not citizens of India. It is also important to note that the exemption is not available for all types of income received by non-residents. Only the specific types of income listed above are exempt from income tax under Section 10(6).
Here are some examples of cases where the exemption under Section 10(6) will be available:
The exemption under Section 10(6) is a valuable benefit for non-residents who are working or teaching in India. It helps to reduce their tax burden and encourages them to come to India and work or teach.
Section 10(7) of the Income Tax Act, 1961 provides an exemption from income tax for allowances or perquisites paid by the Government to its employees for performing services outside India.
The following conditions must be met for the exemption to be available:
If all of the above conditions are met, then the allowance or perquisite paid to the employee will be exempt from income tax.
The exemption under Section 10(7) is a significant benefit for government employees who are posted outside India. It helps to reduce their tax burden and encourages them to serve in foreign countries.
Here are some examples of cases where the exemption under Section 10(7) will be available:
Gratuity is a payment made by the employer to an employee in appreciation of the past services rendered by the employee. Gratuity can either be received by:
(a) the employee himself at the time of his retirement; or
(b) the legal heir on the event of the death of the employee.
Gratuity received by an employee on his retirement is taxable under the head “Salary” whereas gratuity received by the legal heir of the deceased employee shall be taxable under the head “Income from other sources”.
However, in both the above cases, according to section 10(10), gratuity is exempt upto a certain limit. Therefore, in case gratuity is received by employee, salary would include only that part of the gratuity which is not exempt under section 10(10).
Exemption of Gratuity under Section 10(10)
Government Employees & employees of local
authority
Employees covered under Gratuity Act
Any other employee
Minimum of the following 3 limits:
(1) Actual gratuity received, or
(2) 15 days’ salary for every completed year, or part thereof exceeding six months 7 days’ salary for each season in case of employee in seasonal establishment; or
Meaning of Salary:
(i) Basic Salary plus dearness allowance.
(ii) Last drawn salary. Average salary for preceding 3 months in case of piece rates employees
(iii) No. of days in a month to be taken as 26
Minimum of the following 3 limits:
(1) Actual gratuity received
(2) Half months’ average salary of each completed year of service.
Meaning of Salary:
(i) Basic salary plus D.A. to the extent the terms of employment so provide Commission, if fixed percentage of turnover.
(ii) Average salary of last 10 months preceding the month in which event occurs.
(iii) Only completed year of service is to be taken.
(i) Where an assessee receives gratuity and part of it is taxable because it is not fully exempt under section 10(10), the employee can claim relief under section 89 on account of such gratuity.
(ii) Where an employee had received gratuity in any earlier year(s) and had claimed exemptions under section 10(10) in respect of the gratuity received earlier also, he will still be entitled to this exemption but the limit which at present is Rs. 20,00,000 shall be reduced by the amount of exemption(s) availed in the earlier year(s). There will be no change in the other two limits.
(iii) If gratuity is received from more than one employer in the same previous year, by an employee, the limit of Rs. 20,00,000 would apply to the aggregate of gratuity received from one or more employers.
(iv) Gratuity is exempt. if the relationship of employer and employee exists between the payer and the payee. If such relationship does not exist, the exemption shall not be available, e.g., gratuity payable by the LIC of India to its Insurance Agents does not qualify for exemption as agents are not employees of the Corporation.
(v) The words “completed service” occurring in section 10(10) should be interpreted to mean an employee’s total service under different employers including the employer other than the one from whose service he retired, for the purpose of calculation of period of years of his completed service, provided he was not paid gratuity by the former employer. [CIT v PM Mehra (1993) 201 ITR 930 (Born)].
(vi) Any gratuity paid to an employee, while he continues to remain in service with the same employer is taxable under the head “Salaries” because gratuity is exempt only on retirement or on his becoming incapacitated or on termination of his employment or death of the employee. In this case, however the assessee can claim relief under section 89.
(vii) The CBDT vide its instruction in F. No. 194/0/73-IT, dated 19.6.1973 has clarified that the expression “termination of employment” would cover an employee who has resigned from the service.
Section 10(10A) of the Income Tax Act in India relates to the tax treatment of payments made in commutation of pension received by employees. Commutation of pension refers to the lump-sum payment that an employee receives in lieu of a portion of their regular pension. Here's an overview of Section 10(10A):
Payment in commutation of pension received by the employees is exempt from income tax up to a certain limit under Section 10(10A) of the Income Tax Act, 1961.
The exemption limit is as follows:
If the commuted pension exceeds the exemption limit, the excess amount is taxable as income.
To avail the exemption under Section 10(10A), the employee must submit a declaration to the employer at the time of commutation of pension. The declaration must state that the employee has not received any gratuity from the employer.
Here are some examples of cases where the exemption under Section 10(10A) will be available:
The exemption under Section 10(10A) is a significant benefit for employees who opt to commute their pension. It helps to reduce their tax burden and provides them with a lump sum amount of money that they can use for their retirement needs.
Exemption of leave encashment at the time of retirement u/s 10(10AA)
Govt. employee i.e. Central and State Govt. employees
Any other Employee
Minimum of the following four limits:
(i) Leave encashment actually received; or
(ii) 10 month’s average salary; or
(iii) Cash equivalent of unavailed leave calculated on the basis of maximum 30 days leave for every year of actual service rendered;
or
Meaning of salary
(i) Basic salary plus D.A. to the extent the terms of employment so provide plus Commission, if fixed percentage of turnover.
(ii) Average salary of last 10 months immediately preceding the date of retirement.
Amount specified by the Government from time to time is given in the table below:
Date of Retirement
Between 1-1-1988 and 3 1-3-1995
Between 1-4-1995 and 30-6-1995
Between 1-7-1995 and 1-7-1997
After 1-7-1997 and upto 1-4-1998
1. If the employee had received leave encashment in any one or more earlier previous year(s) also and had availed of the exemption in respect of such amount, then the limit given in clause (d), specified above, shall be reduced by the amount of exemption(s) availed earlier.
2. Where the leave encashment is received by the employee from more than one employer in the same previous year, the specified limit given in clause (d) above would apply to the aggregate of leave encashment received from one or more employers.
3. Leave salary received by the family of a government servant, who died in harness, is not taxable in the hands of the recipient. [Circular Wo. 309, dated 3.7.1981].
4. Leave salary paid to legal heirs of a deceased employee in respect of privilege leave standing to the credit of such employee at the time of his/her death is an ex-gratia payment on compassionate grounds in the nature of gifts. Thus the payment is not in the nature of salary. [Letter No. 35/1/65, dated 5.11.1965].
5. The assessee can claim relief from tax under section 89 in respect of leave encashment.
Example :
E, an employee of XYZ Pvt. Ltd. retired from the company on 30.11.2021. At the time of his retirement, he received 2,88,000 as leave salary from his employer. The following information is provided by the employee: