Tax Exemption

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India has a well developed three-tier federal tax structure. According to Chapter III of the Income Tax Act, 1961 there is a provision of exemptions in income tax. Tax Exemption induces reduction of the tax burden on a specific section of the society to achieve some level of equilibrium among all. To encourage some economic activities through the process of reduction of the tax burden on some organizations or individuals involved in that activity is also another cause for Tax Exemptions. For instance, there are the exemptions from the property tax, and also many others like exemptions on income tax that includes exemptions for dependents or children financially dependent on the individual paying the tax.

Tax Exemptions have the authority to bring about social and economic changes within the society followed by unprecedented consequences. However, for such exemptions on tax some conditions are mandatory to follow. Some of them are like -
  • The age of the individual taxpayer
  • The public services performed by the individual taxpayers
  • The type of property owned by the individual
  • The geographic location of property
  • The net income of the individual paying the tax
  • The value of the taxable property
India tax exemptions are specified incomes on which a person can get exemptions. It means that at the time of calculating annual income, this type of income will not come under the purview of tax. Some of these exempted incomes are as follows:
  • Agriculture Income.
  • Share of partner in total income of a firm which is assessed separately.
  • Interest on securities and bonds including premium on redemption of bonds by Non Residents.
  • Interests on amounts in Non-resident (External) account in any bank in India being maintained as per FERA, 1973.
  • Interest on specified central Government's savings certificates which were subscribed to in convertible foreign exchange remitted from a country outside India as per FERA by an individual citizen.
  • Income of individuals engaged in research work in India under duly approved research schemes and remuneration received from foreign government for training in a government office or undertaking as employee.
  • Gratuity not exceeding Rs.3.5 lakh.
  • Receipt in respect of commutation of pension as per specified limits.
  • Leave encashment not exceeding 8 months salary and subject to specified conditions.
  • Receipt of amount on voluntary retirement up to ` 5,00,000.
  • Payment on a Life insurance policy, including bonus thereon but excluding therefrom amounts received u/s 80DDA(3).
  • Receipt of Payment from Public provident fund or Statutory Provident Fund.
  • Receipt of Payment from superannuation fund.
  • Special benefits and allowance to employee viz., house rent allowance.
  • Interest payable to any bank incorporated outside India and approved by RBI.
  • Scholarships granted to meet the cost of education
  • Receipt of any amount in connection with an award instituted by Government etc.
  • Income of a university or other educational institution.
  • Income of a hospital or other such institution working exclusively for philanthropic purposes.
  • Income of news agency having been set up in India for the sole purpose of collection & distribution of news.
  • Income of specified mutual funds registered and/or set up under /by SEBI Act, 1992.
  • Income of Exchange risk administration fund having been set up by public financial institutions either jointly or separately as per specified conditions.
  • Some other categories includes combat-pay to military officers, inheritances, payments for personal injuries, employee discounts, and income from local bonds. There are a number of protected classes like widows, people above 65, war-retired persons, and disabled persons
However, one should not get confused with the concepts of Tax Deduction and Tax Exemption, as when an expense received by a taxpayer is deduced from the gross income it results in the lowering of the net taxable income it is tax deduction and not Tax Exemption. There are many types of income and benefits being exempted from income taxes to a limited extent.

In countries like the United States, there are some non-profit organizations, such as churches, schools and charitable organizations that fall under the Income Tax Exemption. Some other institutions enjoying similar privileges are amateur sports leagues, farm associations, labor unions, and groups of veterans or present members of the U.S. Armed Forces.

Within the taxation laws of some states, there are also provisions for Tax Exemptions from property taxes, sales taxes and state income taxes. One of the major positive effects of Tax Exemption from property tax or any other local taxes is the way to attract commerce to regions under the brunt of economic depression. There are also Personal Tax Exemptions that can reduce the taxable income on the tax return. Generally, the Tax Exemptions are allowed for the individual as well as for spouses and dependents. However, in order to enjoy the Tax Exemption for the dependents there are certain tests like Member of Household or Relationship Test, Gross Income Test, Support Test, Joint Return Test, and Citizenship Test. At times when any family group jointly supports a relative or a parent, there are Multiple Support Agreements under which the taxpayer can claim Tax Exemption on the tax return.

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