Complete Guide to Tax-Exempt Incomes Under Section 10 of the Income Tax Act, 1961
Overview and Legal Framework
Under the Income Tax Act, 1961, all income earned by an assessee is subject to taxation unless a specific provision of law grants an exemption. Section 10 of the Income Tax Act, 1961 consolidates a comprehensive catalogue of income categories that are statutorily excluded from the computation of total income. These exclusions span a wide spectrum — from agricultural earnings and family receipts to institutional incomes, international financial transactions, and government-backed welfare schemes.
Understanding which incomes fall outside the tax net is critical for accurate return filing, advance tax planning, and compliance management. This guide provides a structured walkthrough of all major exemptions available under Section 10, their conditions, and applicable limits.
Agricultural Income and Family Receipts
Section 10(1) — Agricultural Income
Agricultural income enjoys a blanket exemption from income tax. However, a partial integration mechanism applies when agricultural income exceeds Rs. 5,000 and the assessee's non-agricultural income also surpasses the basic exemption threshold. In such cases, the agricultural income is factored into the computation only for the purpose of determining the applicable slab rate — it does not itself become taxable.
Section 10(2) — Receipts by HUF Members
Any sum received by an individual in their capacity as a member of a Hindu Undivided Family (HUF) from the family's income or from income of an impartible estate is fully exempt. An exception applies where personal property has been converted into HUF property without any consideration.
Section 10(2A) — Partner's Share in Firm Profits
Since a partnership firm is separately assessed under the Income Tax Act, 1961, a partner's proportionate share of the firm's total income is not taxed again in the partner's hands. The share is computed in the ratio of profit entitlement as stipulated in the partnership deed.
Exemptions for Non-Residents and Foreign Entities
Section 10(4)(i) — Interest on National Defence Loans
Interest and premium on redemption of 4.25% National Defence Loans, 1968 and 1972 are exempt in the hands of non-resident holders. The Central Government is restricted from notifying new securities for this purpose on or after 1st June 2002.
Section 10(4)(ii) — NRE Account Interest
Interest credited to a Non-Resident (External) Account maintained with any bank in India is fully exempt for Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs). Joint account holders can also avail of this exemption subject to fulfillment of prescribed conditions. (Refer: Circular No. 592, dated 04-02-1991)
Section 10(4C) — Rupee Denominated Bonds
Interest paid to a non-resident (not being a company) or to a foreign company on Rupee Denominated Bonds issued by Indian companies between 17th September 2018 and 31st March 2019 for the purpose of external borrowings is fully exempt from tax.
Section 10(4D) — IFSC-Based Specified Funds
Certain capital gains and income arising to specified funds — including Category-III AIFs, retail schemes, Exchange Traded Funds located in an International Financial Services Centre (IFSC), and investment divisions of offshore banking units — are exempt to the extent attributable to non-resident unit holders or the investment division itself, as computed in the prescribed manner.
Section 10(4E) — Offshore Derivative Instruments
Any income accruing to a non-resident from:
- Transfer of non-deliverable forward contracts, offshore derivative instruments, or over-the-counter derivatives; or
- Distribution of income on such instruments by an IFSC banking unit
is fully exempt, provided the prescribed conditions are satisfied.
Finance Act, 2025 Amendment: With effect from 1st April 2026, the term "Foreign Portfolio Investor" in this clause will refer to a person registered under the SEBI (Foreign Portfolio Investors) Regulations, 2019.
Section 10(4F) — Royalty/Interest from Aircraft or Ship Leasing in IFSC
A non-resident deriving royalty or interest income from leasing of an aircraft or ship to an IFSC unit that has commenced operations on or before 31st March 2030 is exempt from tax on such income.
Section 10(4G) — Portfolio Income of Non-Residents in IFSC
Income received by a non-resident from a portfolio of securities or financial products managed by a portfolio manager — maintained in an account with an Offshore Banking Unit in an IFSC — is exempt to the extent such income accrues outside India and does not deemed to accrue or arise in India.
Section 10(4H) — Capital Gains on IFSC Aircraft/Ship Leasing Companies
Capital gains arising from the transfer of equity shares of a domestic company that qualifies as an IFSC unit primarily engaged in leasing of aircraft or ships are exempt for a non-resident or another IFSC unit, subject to:
- The domestic company having commenced operations on or before 31st March 2030
- The exemption window covering 10 assessment years from commencement, or 10 years from AY 2024-25, whichever is applicable
Employee-Related Exemptions
Section 10(5) — Leave Travel Allowance (LTA)
The Leave Travel Allowance received by an employee is exempt to the extent of actual travel expenditure incurred within India for the employee and family members. The exemption covers travel on leave or on post-retirement relocation, subject to conditions regarding frequency of journeys and entitlement limits applicable to Central Government employees.
Section 10(6) — Remuneration of Foreign Nationals
| Sub-clause | Category | Key Condition |
|---|---|---|
Section 10(6)(ii) |
Embassy/consulate officials | Reciprocity with India required |
Section 10(6)(vi) |
Employees of foreign enterprises | Stay ≤ 90 days; no Indian operations of employer |
Section 10(6)(viii) |
Crew of foreign ships | Non-resident, non-Indian citizen; stay ≤ 90 days |
Section 10(6)(xi) |
Employees of foreign governments | Receiving training in Indian government-linked entities |
Section 10(7) — Government Employees Serving Abroad
Any allowance or perquisite paid by the Indian Government to a citizen of India for rendering services outside India is fully exempt.
Section 10(10) — Gratuity
- Government employees: Full exemption on retirement, resignation, or death
- Non-government employees covered under Payment of Gratuity Act: Exempt up to Rs. 20 lakhs
- Non-government employees not covered: Exempt up to Rs. 10 lakhs
Section 10(10A) — Commuted Pension
Monthly pension is taxable. However, commuted (lump sum) pension is treated as follows:
- Government employees: Fully exempt
- Non-government employees entitled to gratuity: 1/3rd of total commuted value is exempt
- Non-government employees not entitled to gratuity: 50% of commuted value is exempt
Section 10(10AA) — Leave Encashment
- On death or retirement of government employees: Fully exempt
- Non-government employees on retirement/resignation: Exempt up to Rs. 25 lakhs
- Encashment during active service: Fully taxable for all categories
Section 10(10B) — Retrenchment Compensation
Exempt if paid under a Central Government-approved scheme. Otherwise, the exempt amount is the lower of Rs. 5 lakhs or the formula-based limit linked to years of service. No exemption applies where the employee continues with a new employer following a business transfer.
Section 10(10BB) — Bhopal Gas Disaster Payments
Payments under the Bhopal Gas Leak Disaster (Processing of Claims) Act, 1985 are fully exempt, except where deductions for the same loss have already been availed.
Section 10(10BC) — Disaster Compensation
Compensation received from the Central Government, State Government, or local authority on account of any disaster is exempt, subject to the condition that no prior deduction has been claimed for the same loss.
Section 10(10C) — Voluntary Retirement Compensation (VRS)
Compensation received under a VRS scheme is exempt up to the lower of actual compensation received or Rs. 5,00,000. This is a one-time benefit and is available only when paid by specified employers.
Section 10(10CC) — Tax on Perquisites Paid by Employer
Where an employer pays income tax on non-monetary perquisites on behalf of the employee, the amount so paid is not treated as income in the employee's hands.