Exempted Income in Income tax Act 2025
Under the Income-tax Act, 2025, “exempted income” refers to specific types of income that do not form part of a person’s total income for the purpose of calculating tax. If an income qualifies for an exemption, no income-tax is charged on it, provided the taxpayer fulfills the specific conditions attached to that exemption.
The Act categorizes these tax-exempt incomes and entities into various Schedules:
1. General Exempt Incomes (Schedule II) These are common incomes excluded from total income:
- Agricultural income.
- Life insurance payouts, including bonuses, subject to certain conditions (e.g., the premium payable in any year must not exceed 10% to 20% of the actual capital sum assured, depending on the issue date).
- Payments received from a Provident Fund (such as the Public Provident Fund) or the accumulated balance due to an employee from a recognised provident fund, subject to contribution limits.
- Payments from the Sukanya Samriddhi Account Scheme.
- Specific payments from the National Pension System (NPS) Trust, such as on closure of the account or opting out of the scheme.
- Scholarships granted to meet the cost of education.
- Pension received by individuals awarded gallantry awards like the “ParamVir Chakra”, “Maha Vir Chakra”, or “Vir Chakra”, and family pensions received by their family members.
2. Exemptions for Eligible Persons (Schedule III) Specific receipts by certain eligible persons are entirely tax-free:
- HUF Member: Any sum received by an individual as a member of a Hindu Undivided Family (HUF) paid out of the family’s income.
- Business Partner: Any sum received by a partner towards their share in the total income of a firm, as per the partnership deed.
- Disaster Compensation: Amounts received from the Government or local authorities as compensation for a disaster.
- Travel Concessions: The value of travel concession or assistance (Leave Travel Allowance) received from an employer for proceeding on leave to any place in India, subject to prescribed limits and actual expenses incurred.
- Special Allowances: Certain allowances granted to meet personal expenses at the place of duty or to compensate for the increased cost of living.
3. Exempt Entities and Organisations (Schedule VII & VIII) Certain entities are completely exempt from paying income tax on their total income, provided they meet strict compliance and operational conditions:
- Political Parties and Electoral Trusts: Their income from voluntary contributions, house property, capital gains, or other sources is exempt, provided they maintain proper books of account to enable the Assessing Officer to properly deduce their income.
- Educational and Medical Institutions: Universities, educational institutions, hospitals, and other medical institutions that exist solely for educational or philanthropic purposes (and not for profit) and are wholly or substantially financed by the Government.
- Government Bodies: Local authorities, the Insurance Regulatory and Development Authority (IRDAI), and specific mutual funds.
4. Specialized Exemptions (Schedules IV, V, & VI) The Act also provides targeted exemptions for:
- Non-Residents and Foreign Companies (Schedule IV): Examples include interest on Non-Resident (External) Accounts and remuneration for foreign diplomats or trade commissioners.
- Investment Funds and Business Trusts (Schedule V): Specific incomes of investment funds, business trusts, and their unit holders.
- International Financial Services Centres (IFSC) (Schedule VI): Income accruing to eligible persons or specified funds located in or dealing with an IFSC.
Important Condition: If the specific conditions attached to any of these exemptions are not satisfied in a given tax year, the protection is lost, and the income will be charged to tax as part of the total income for that year.