INCOME WHICH DO NOT FORM A PART OF TOTAL INCOME
All receipts, which give rise to income, are taxable under the Income tax Act unless it is specifically provided that it does not form part of total income. Such incomes which do not form part of total income may also be called incomes exempt from tax. As per section 10 to 13A, certain incomes are either totally exempt from tax or exempt up to a certain amount. Therefore, these incomes, to the extent are exempt, are not included in the total income of an assessee for computation of his total income.
The following incomes do not form part of total income:
- Incomes not be included in total income of any person [section 10];
There are many incomes which are exempt as per section 10. Some of the important incomes which are exempt from tax under section 10 are discussed below:
1. Agriculture Income:
We can still consider India is the country mostly depending upon the agriculture and income generated from the activities of agriculture. Agriculture income shall be excluded from the assessee total income (section 10, (1)) however; it shall be taken for considering rate to tax non-agriculture income.
2. Share of Profit from A Firm:
A partners share in the total income of the firm is totally exempted from the total income of the hands of the partner because firm is separately assessed as such. However, any salary interest commission paid or payable to the partner who was deductible from the total income of the firm shall be included in the income of the partner’s total income as his business.
3. Leave Travel Concession:
If an employee goes on travel (on leave) with his family and traveling cost is reimbursed by the employer, then such reimbursement is fully exempted. But some provisions for it were as bellow;
1) Journey may be performed during service or after retirement.
2) Employer may be present or former.
3) Journey must be performed to any place within India.
4) In case, journey was performed to various places together, then exemption is limited to the extent of cost of journey from the place of origin to the farthest point reached, by the shortest route.
5) Employee may or may not be a citizen of India.
6) Stay cost is not exempt.
4. Remuneration to Person Who Is Not A Citizen Of India In Certain Cases [Sec. 10(6)]
Following remuneration to an individual who is not a citizen of India shall be exempt- Remuneration received by him as an official of an embassy, high commission, legation, commission, consulate, or the trade representation of a foreign state or as a staff of any of these officials provided corresponding Indian officials in that foreign country enjoy similar exemptions in their country – Sec. 10(6) (ii).
Remuneration received as an employee of a foreign enterprise for services rendered by him during his stay in India provided – a. the foreign enterprise is not engaged in any business or profession in India; b. his stay in India does not exceed 90 days in aggregate; and c. such remuneration is not liable to be deducted from the income of the employer under this Act – Sec.10 (6) (vi).
Remuneration for services rendered in connection with his employment on a foreign ship provided his total stay in India does not exceed 90 days in the previous year – Sec. 10(6) (viii).
Remuneration received as an employee of the Government of a foreign State during his stay in India in connection with his training in any undertaking owned by Government, Government company, subsidiary of a Government company, corporation established by any Central, State or Provincial Act and any society wholly financed by the Central or State Government – Sec. 10(6)(xi)
5. Tax Paid By Government on Royalty or Fees for Technical Service [Sec. 10(6a)]
6.Tax Paid By Government on Income of A Non-Resident or A Foreign Company [Sec. 10(6b)]
7.Tax Paid On Income From Leasing Of Aircraft [Sec. 10(6bb)]
Tax paid by an Indian company on income arising from leasing of aircraft, etc. to the Government of a foreign state or foreign enterprise under an approved agreement entered into with such Indian company engaged in the business of operation of aircraft, provided such agreement was entered into between 1-4-1997 and 31-3-1999 or after 31-3-2007.
8. Fees for Technical Services In Project Connected With Security Of India [Sec. 10(6C)]:
Any income arising to notified foreign company by way of royalty or fees for technical services received in pursuance of an agreement entered into with Central Government for providing services in or outside India in projects connected with security of India.
9. Income from Service Provided To National Technical Research Organization [Sec. 10(6D)]:
Any income arising to a non-resident or to a foreign company, by way of royalty from, or fees for technical services rendered in or outside India to, the National Technical Research Organization
10. Allowance Or Perquisite Paid Outside India [Sec. 10(7)]:
Any allowance or perquisite paid outside India by the Government to a citizen of India for Rendering Services outside India.
11. Remuneration Received For Co-Operative Technical Assistance Programmes With An Agreement Entered Into By The Central Government In Certain Cases [Sec. 10(8)].
12. Remuneration Received By Non-Resident Consultant Or Employee Or Family Member Of Such Consultant [Sec. 10(8a), (8b) & (9)].
13. Death-Cum-Retirement-Gratuity [Sec. 10(10)]:
Gratuity is a retirement benefit given by the employer to the employee in consideration of past services. Sec. 10(10) deals with the exemptions from gratuity income. Such exemption can be claimed by a salaried assessee. Gratuity received by an assessee other than employee shall not be eligible for exemption u/s 10(10). E.g. Gratuity received by an agent of LIC of India is not eligible for exemption u/s 10(10) as agents are not employees of LIC of India.
14. Compensation for Any Disaster [Sec. 10(10bc)]
Any amount received or receivable from the Central Government or a State Government or a local authority by an individual or his legal heir by way of compensation on account of any disaster, except the amount received or receivable to the extent such individual or his legal heir has been allowed a deduction under this Act on account of any loss or damage caused by such disaster.
15. Sum Received Under A Life Insurance Policy [Sec. 10(10d)]:
Any sum received under a life insurance policy including bonus on such policy is wholly exempt from tax. However, exemption is not available on – 1. any sum received u/s 80DD(3) or u/s 80DDA(3); or 2. any sum received under a Keyman insurance policy; or 3. any sum received under an insurance policy issued on or after 1-4-20121 in respect of which the premium payable for any of the years during the term of the policy exceeds 10%2 of the actual capital sum assured.
16. Payment from National Pension Trust [Sec. 10(12a) & 10(12b)]:
Any payment from the National Pension System Trust to an assessee on closure of his account or on his opting out of the pension scheme referred to in sec. 80CCD, to the extent it does not exceed 60% of the total amount payable to him at the time of such closure or his opting out of the scheme [Sec. 10(12A)] Any payment from the National Pension System Trust to an employee under the pension scheme referred to in sec. 80CCD, on partial withdrawal made out of his account in accordance with the terms and conditions, specified under the Pension Fund Regulatory and Development Authority Act, 2013, to the extent it does not exceed 25% of the amount of contributions made by him [Sec. 10(12B)]
17. Payment from Approved Superannuation Fund [Sec. 10(13)]:
Any payment from an approved superannuation fund made – • on the death of a beneficiary; or • to an employee in lieu of or in commutation of an annuity on his retirement at or after a specified age or on his becoming incapacitated prior to such retirement; or • by way of refund of contributions on the death of a beneficiary; or • by way of refund of contributions to an employee on his leaving the service (otherwise than by retirement at or after a specified age or on his becoming incapacitated prior to such retirement) to the extent to which such payment does not exceed the contributions made prior to 1-4-1962 and any interest thereon. • by way of transfer to the account of the employee under a pension scheme referred to in sec. 80CCD and notified by the Central Government.
18. Income From Leasing Of Aircraft [Sec. 10(15A)].
Any payment made, by an Indian company engaged in the business of operation of aircraft, to acquire an aircraft or an aircraft engine (other than a payment for providing spares, facilities or services in connection with the operation of leased aircraft) on lease from the foreign Government or a foreign enterprise under an approved agreement. The agreement must not be entered into- between 1-4-1997 to 31-3-1999; and on or after 1-4-2007.
19. Daily Allowance, Etc. To MP and MLA [Sec. 10(17)].
Any income by way of – a. Daily allowance received by any person by reason of his membership of Parliament or of any State Legislature or of any Committee thereof; b. Any allowance received by any person by reason of his membership of Parliament; c. Constituency Allowance received by any person by reason of his membership of State legislature.
20. Income of Professional Institutions [Sec. 10(23A)].
Any income (other than income chargeable under the head “Income from house property” or any income received for rendering any specific services or income by way of interest or dividends derived from its investments) of professional association shall be exempt provided – a. Such association or institution is established in India having as its object the control, supervision, regulation or encouragement of the profession of law, medicine, accountancy, engineering or architecture or other specified profession; b. Such association or institution applies its income, or accumulates it for application, solely to the objects for which it is established; and c. The association or institution is approved by the Central Government.
21. Income of Mutual Fund [Sec. 10(23D)].
Any income of – a. A Mutual Fund registered under the Securities and Exchange Board of India Act, 1992 or regulation made thereunder; b. A Mutual Fund set up by a public sector bank or a public financial institution or authorized by the Reserve Bank of India and subject to certain notified conditions.
22. Income of Business Trust [Sec 10(23FC)]:
Any income of a business trust by way of a) interest received or receivable from a special purpose vehicle; or b) dividend referred to in sec. 115-O (7) “Special purpose vehicle” means an Indian company in which the business trust holds controlling interest and any specific percentage of shareholding or interest, as may be required by the regulations under which such trust is granted registration.
23. Income of Specified Boards [Sec. 10(29A)]:
Any income accruing or arising to The Coffee Board; The Rubber Board; The Tea Board; The Tobacco Board; The Marine Products Export Development Authority; The Coir Board; The Agricultural and Processed Food Products Export Development Authority and The Spices Board.
24. Subsidy Received From Tea Board [Sec. 10(30)]:
Any subsidy received from or through the Tea Board under any scheme for replantation or replacement of tea bushes or for rejuvenation or consolidation of areas used for cultivation of tea as the Central Government may specify, is exempt.
25. Awards and Rewards [Sec. 10(17A)].
Any payment made, whether in cash or in kind – a. in pursuance of any award instituted in the public interest by the Central Government or any State Government or by any other approved body; or b. as a reward by the Central Government or any State Government for approved purposes.
26. Income of Scientific Research Association [Sec. 10(21)]:
Any income of a scientific research association [being approved for the purpose of Sec. 35(1)(ii)] or research association which has its object, undertaking research in social science or statistical research [being approved and notified for the purpose of Sec. 35(1)(iii)], is exempt provided such association— a. applies its income, or accumulates it for application, wholly and exclusively to the objects for which it is established; and b. invest or deposit its funds in specified investments.
27. Income of Professional Institutions [Sec. 10(23A)]:
Any income (other than income chargeable under the head “Income from house property” or any income received for rendering any specific services or income by way of interest or dividends derived from its investments) of professional association shall be exempt provided- a. Such association or institution is established in India having as its object the control, supervision, regulation or encouragement of the profession of law, medicine, accountancy, engineering or architecture or other specified profession; b. Such association or institution applies its income, or accumulates it for application, solely to the objects for which it is established; and c. The association or institution is approved by the Central Government.
28. Expenditure Related To Exempted Income [Sec. 14A]:
For the purposes of computing the total income, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income, which does not form part of the total income under this Act. Where the AO is not satisfied with the correctness of the claim of such expenditure by assessee, he can determine the disallowable expenditure in accordance with the method prescribed by the CBDT.
- Income of newly established units in Special Economic Zones [Section 10AA];
Section 10AA is a provision under the Income Tax Act which allows taxpayers to take deductions for businesses which are established in Special Economic Zones (SEZ). In April 2000, with a view to attracting foreign investment in India, the Government announced that tax concessions would be provided for entrepreneurs who set up the specified businesses in Special Economic Zones. Accordingly, initially, SEZs were instituted to function under the provisions of the Foreign Trade Policy. However, gradually, the SEZ Act and SEZ rules were formed and made effective from the year 2006. Income tax benefit or Section 10AA deduction is available to SEZ and the corresponding provisions are contained under section 10AA of the Income Tax Act. The present article highlights the various conditions for claiming the deduction under Section 10AA, the amount of income tax benefit/deduction available under the section, and other salient features of the section.
Eligibility for Section 10AA Deduction:-
In order to claim deduction under section 10AA of the Income Tax Act, SEZ units are required to satisfy the following conditions:
- The entrepreneur should be covered within the provisions of section 2 (j) of the Special Economic Zone Act, 2005;
- SEZ unit should have commenced its manufacturing activity or provision of service, as the case may be, during the previous year relevant to any assessment year commencing on or after 1st April 2006;
- SEZ unit is not formed by any splitting up, or the reconstruction of the business that is already in existence;
- SEZ unit is not formed by any transfer of plant or machinery, previously used for any purpose, to a new business; and
- Units who have already enjoyed the benefit of deduction under section 10A of the Income Tax Act for a continuous period of 10 years are not eligible to claim deduction under Section 10AA of the Act.
Amount of Deduction:-
The amount of deduction available under this section shall be as follows:
- 100% of export profit is eligible for the deduction for the first five years.
- 50% of export profit is eligible for the deduction for the next five years.
- Amount not exceeding 50% of export profit is eligible for the deduction for the next five years.
The condition for allowance of the deduction is that the same has to be debited from the Statement of Profit and Loss and credited to ‘Special Economic Zone Reinvestment Reserve Account’. Also, Section 10AA deduction is allowable from the assessment year relevant to the previous year in which the SEZ unit commences its manufacturing process or commences provision of service, as the case may be.
Special Economic Zone Reinvestment Reserve Account
There are certain conditions to be followed by the assessee, in order to claim a deduction of the last 5 years (i.e. amount not exceeding 50% of the export profit), as detailed above. The conditions for utilization of amount credited in ‘Special Economic Zone Reinvestment Reserve Account’ are summarized hereunder:
- The amount credited to ‘Special Economic Zone Reinvestment Reserve Account’ is required to be utilized only for the purpose of purchase of plant or machinery. Such newly acquired plant or machinery should be first put to use before the expiry of 3 years following the previous year in which the said reserve has been created.
- Further, the amount credited to ‘Special Economic Zone Reinvestment Reserve Account’, until the acquisition of the plant or machinery as mentioned in point 1 above, can be used for the purpose of the business of the undertaking. However, the same cannot be used for distribution by way of dividend or profits or for remittance of profits outside India or for creation of any assets outside India.
The following are the consequence in case the reserve fund is not used as per the directions of the Income Tax Act:
The amount credited to ‘Special Economic Zone Reinvestment Reserve Account’ would be deemed to be profitable in the year immediately following the period of three years in case the amount is not utilized for the purchase of plant or machinery as directed. Further, the amount credited to ‘Special Economic Zone Reinvestment Reserve Account’ would be deemed to be profitable in the year in which the amount has been utilized for a purpose other than directed.
Calculating Section 10AA Deduction
Section 10AA Deduction has to be calculated on the basis of the following formula:
(Profit of business of the unit x Export turnover of the unit) / Total turnover of the business.
Export turnover of the unit means consideration relating to export by the undertaking received in or brought into India. Such turnover/consideration does not include freight, telecommunication charges or insurance expense incurred for the delivery of a product or consumable item outside India or any other expense incurred in foreign exchange for the rendering of services outside India.
Amalgamation or Merger
Following would be the consequence in case the unit entitled for deduction under section 10AA has been transferred to another undertaking, before the expiry of deduction period, in a scheme of amalgamation or demerger –
- The deduction will not be available under section 10AA to the amalgamating or demerged unit, as the case may be, for the previous year in which the amalgamation or demerger has taken place; and
- Further, provisions of section 10AA should be applied to the amalgamated or demerged unit assuming no amalgamation or demerger has taken place.
- Income from property held for charitable or religious purposes [section 11-13];
Exempted Incomes of Charitable or Religious Trust (Section 11)
Subject to the provisions of sections 60 to 63, the following incomes of a religious or charitable trust or institution are not included in its total income,
(A). Income from Property held under Trust wholly for Charitable or Religious Purposes [Section 11(1)(a)]:
Income derived from property held under trust, wholly for charitable and religious purposes, shall be exempt—
- to the extent such income is applied in India for such purposes; and
- where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of 15% of the income from such property.
(B). Income from Property held under Trust which is applied in Part only for Charitable or Religious Purposes [Section 11(1)(b)]:
Income derived from property held under trust in part only for such purpose, shall be exempt:
- to the extent such income is applied in India for such purposes, provided, the trust in question is created before the commencement of Income-tax Act, 1961 i.e. before 1.4.1962; and
- where any such income is finally set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of 15% of the income from such property.
(C). Income from Property held under Trust which is applied for Charitable Purposes Outside India [Section 11(1)(c)]:
- Income derived from property held under trust, created on or after 1.4.1952 for charitable purpose which tends to promote international welfare in which India is interested, shall be exempt to the extent to which such income is applied to such purpose outside India. Religious trusts are not covered here.
- Income derived from property held under a trust for charitable or religious purposes, created before 1.4.1952, shall be exempt to the extent to which such income is applied to such purposes outside India. In the above two cases, it is necessary that the Board, by general or special order, has directed in either case that it shall not be included in the total income of the person in receipt of such income.
(D) Voluntary Contributions forming part of Corpus [Section 11(1)(d)]:
Income in the form of voluntary contributions made with a specific direction, that they shall form part of the corpus of the trust or institution shall be fully exempt. The condition that at least 85% of the income should be applied during the previous year in which it is earned is not applicable in this case.
It is not sufficient that the property is indirectly responsible for the income; it is necessary that the income must directly and substantially arise from the property held under trust. The property must be the effective source from which the income arises.
|[Section-12]: Income of Religious Trusts or Institutions From Voluntary Contributions|
|Any voluntary contribution received by a trust wholly for charitable or religious purposes or by an institution established wholly for such purposes (not being contributions made with a specific direction that they shall form part of the corpus of the trust or institution) shall be deemed to be the income derived from property held under trust wholly for charitable or religious purposes and will qualify for exemption to the extent such income is utilized for the purposes of the trust or set apart for future application as referred to in section 11 and also subject to the fulfillment of conditions laid down in section 12A. The value of any medical or educational services made available by any charitable or religious trust running a hospital, medical institution or an educational institution as referred to in section 13(3), shall be deemed to be income chargeable to income-tax if such services are rendered to the following persons: (i) the author of the trust or the founder of the institution; (ii) any person who has made a total contribution exceeding Rs. 50,000; (iii) where such author, founder or person is a HUE, a member of the HUF; (iv) any trustee of the trust or manager of the institution; (v) any relative of such author, founder, person, member, trustee or manager as aforesaid; (vi) any concerned in which any of the person to in clauses (i) to (vi) has a substantial interest. (vii) Where the aggregate of funds of the trust invested in a concern in which any person has a substantial interest does not exceed 5% of the capital of that concern.|
|[Section-13] : Income Of Charitable Or Religious Trust Does Not Qualify for Exemption u/s 11 or 12|
|The following income of charitable or religious trust does not qualify for exemption u/s 11 or 12— Any income of private religious trust which does not enure for the benefit of the public. Any income of a charitable trust or a charitable institution created or established after 31 -3-1962, for the benefit of any particular religious community or caste [Section 13(1)(b)]. Any income of religious trust or institution created or established after 31-3-1962, which ensures or the income of which trust is used or applied, directly or indirectly for the benefit of any author of the trust or founder of the institution or substantial contributor* to the trust or institution or any relation of such author, founder or substantial contributor etc. mentioned in section 13(3) of the Act. However, any such use or application prior to 1-6-1970, is exempt from tax. Further in the case of trust or institution created or established before 1-4-1962, the exemption under section 11 will not be denied if any part of its income is used or applied for the benefit of any author of the trust or founder of the institution or substantial contributor’ to the trust or institution or any relative of such author, founder or substantial contributor etc, in compliance with a mandatory term of the trust or a mandatory rule governing the institution [Section 13(1 )(c)(ii)].|
- Income of Political Parties [13A];
Political parties in India have to legally refrain from participating in commercial activities that are a source of income and, hence, generate profits. The acceptable sources of income are voluntary contributions under Representation of Peoples Act (RPA), 1951. Some other income sources are from membership fee, sale of coupons, etc.
Section 13A of the RPA provides political parties 100% exemption on income from house property, income from other sources, voluntary contributions and capital gains, subject to certain terms and conditions.
Below are the conditions that political parties of India need to comply to be able to avail the tax exemptions as per Section 13A need to fulfill the following conditions:
- Political parties have to be registered under Section 29A of the RPA.
- Keep a detailed record of accounts and other relevant documents as proofs for the Assessing Officer to calculate the total annual income and the sources. However, as specified by Section 44AA, political parties do not have to keep a record of all accounts, but only those that are necessary for the AO to deduce its annual income.
- Maintain records of all voluntary contributions that exceed Rs. 20,000, along with the corresponding names and addresses of individuals who have made these contributions. This is necessary only when the contribution has not been made through electoral bond.
- Hire professional Chartered Accountants to get books of account audited.
- Not receiving donation exceeding Rs. 2,000 by any way except through account payee cheque or demand draft or ECS or through bank account or electoral bond.
- Treasurer of the political party or any individual authorized by the party to prepare on its behalf a report of donations that exceed Rs. 20,000 to Election Commission of India for the financial year on or before the due date for filing the return of income for the same financial year, as per Section 29C of RPA.
- Section 29C of RPA refuses political parties the right to tax relief on its inability to present the abovementioned report.
It is mandatory for political parties to submit Form ITR 7 to declare their annual income tax returns every financial year. The following are the information details that have to be filled up in Form ITR 7:
- Balance sheet: Information about the source of funds – general fund, loan, etc. and their subsequent application or expenses in the form of investments, assets, advances, etc.
- Account of Income and Expenditure: Income from voluntary contributions, donations, fee, grants, sale of coupons, etc. and subsequent expenses.
- Contribution Report: Record of donations exceeding Rs. 20,000, along with the names of donors
- Registered or unregistered under Section 13A of RPA, 1951.
- Reported or not reported under Section 29C of RPA, 1951, along with the date of submission of report.
According to Section 80GGB, corporate donors can avail claim exemption on its donation to political parties registered under this section. The section also enables other individuals, with the exception of local authorities and every artificial juridical individual who is wholly or partially funded by the Government, to claim exemption under Section 80GGC. However, this provision holds true only for contributions made via any payment mode other than cash.
The phase ‘Political party for the purpose of Section 13A’ refers to a political party that is registered under Section 29A of the Representation of the People Act (RPA), 1951.
- Income of a Electoral Trust [Section 13B];
An Electoral Trust is a nonprofit organization established for orderly receipts of the voluntary contributions from any person for distributing the same to political parties, registered under section 29A of the Representation of People Act, 1951.
Operation – An Electoral Trust receives voluntary contributions and distributes the same to political parties.
Eligible Donors – The Electoral Trust may receive voluntary contributions from an individual who is citizen of India, a company registered in India and a firm, HUF, association of persons or body of Individuals resident in India. It shall not accept any contributions from an individual who is not citizen of India, from any foreign entity whether incorporated or not and from any other electoral trust.
Exemptions – Any voluntary contributions received by an Electoral Trust are exempt u/s 13B of the Income Tax Act, 1961 provided the Trust distributes 95% of the aggregate donations received and previous year surplus if any to political parties registered u/s 29A of the representation of Peoples Act, 1951 and it functions in accordance with rules made by Central Government.
Deductions – Deductions u/s 80GGC/80GGB would be available for amount contributed to Electoral Trust.