EXEMPTIONS AND DEDUCTIONS

EXEMPTIONS UNDER THE

INCOME TAX ACT, 1961 – SEC.10

• Recap the discussion on what is an exemption, as distinct from a deduction

• Sec. 10: In computing the total income of a previous year of any person, any
income falling within any of the following clauses shall not be included…..
• Who bears the burden of proof of showing that some income is exempt?
• Basic exemption that is available to all taxpayers
 ARE TAX INCENTIVES GOOD
POLICY INSTRUMENTS?
Tax incentives have been provided for in the law to promoted a multitude of
objectives such as regional development, stimulating investment, etc.
What motivates an individual to invest in India?
 Tax factors
 Economic considerations
 Non-economic considerations
 Social policy considerations
In which instances can tax incentives have positive externalities?
 COST-EFFECTIVENESS OF TAX
INCENTIVES
How important is the cost effectiveness of a tax incentive?
What are the costs of granting an incentive?
 Distortions between investments enjoying incentives as opposed to others
 Foregone revenue
 Administrative costs
 Social costs
• Tax exemptions to some movies
• Should CSR spends be eligible for a tax incentive?
 AGRICULTURAL INCOME
Recap the entries in the Seventh Schedule relating to agriculture income
Exempt from List I so that States can tax under List II
What is agricultural income? – Sec 2(1A)
 (a) any rent or revenue derived from land which is situated in India and is used for
agricultural purposes;
 (b) Income derived from such land by agricultural operations including processing of
the agricultural produce, raised or received as rent-in-kind so as to render it fit for the
market, or sale of such produce; and
 (c) Income attributable to a farm house, subject to some conditions.
 Income from saplings or seedlings grown in a nursery shall be deemed to be
agricultural income.
 Agricultural income from a foreign country is treated as non-agricultural income in
India.
 RENT OR REVENUE
DERIVED FROM LAND
Recipient of the rent or revenue income need not be the owner of the land
Are the following incomes derived from land?
 Dividend received by a shareholder from a company carrying on agricultural operations
 Surplus arising on transfer of agricultural land
 Commission earned by a broker for selling agricultural produce of an agriculturist
 Contract farming such as was in Namdhari Seeds [2012]341ITR342(KAR)
 AGRICULTURE OR AGRICULTURAL
PURPOSE?
No definition, we need to look at judicial interpretation
CIT v Raja Benoy Kumar Sahas Roy [1957] 32 ITR 466
 Basic operations: human skill and labour being expended on the land itself – examples
are tilling, sowing of seeds, planting, etc.
 Subsequent operations: activities undertaken after the growth of the farm produce –
examples are weeding, digging, removal of undergrowth, tending, pruning, harvesting,
rendering fit for market.
 Basic + subsequent operations form an integrated activity = agricultural purpose
Agricultural products – range from food, grains to cash crops and to forest produce
Mere connection with land is insufficient
INCOME FROM A FARM BUILDING –
SEC.2(1A)(C)
 Building must be occupied by cultivator or receiver of rent in kind
 It is on or in the immediate vicinity of the land situated in India and used for agricultural
purposes
 The cultivator or receiver of rent in kind, by reason of his connection with the
agricultural land, requires the building as a dwelling house or as a store house of other
out-building
 Land is assessed to land revenue or local rate or alternatively the land is situated in a rural
area.
Income would be exempt only if land or building is used for agricultural purposes.
 DO THE FOLLOWING
CONSTITUTE
AGRICULTURAL INCOME?

Income from sale of forest trees, fruits and flowers growing naturally
without the intervention of human agency
Income from contract farming – consider Namdhari Seeds
 RECEIPTS BY A MEMBER OF A HUF
- SEC.10(2)
As per section 10(2), any sum received by an individual as a member of a HUF either
out of income of the family or out of income of estate belonging to the family is exempt
from tax. Such receipts are not chargeable to tax in the hands of an individual member even
if tax is not paid or payable by the family on its total income.
Illustration - X, an individual, has personal income of Rs. 56,000 for the PY 2005-06. He is
also a member of a HUF, which has an income of Rs. 1,08,000 for the PY. Out of the income,
X gets Rs. 12,000, being his share of income. Rs. 12,000 will be exempt in the hands of X by
virtue of section 10(2). The position will remain the same whether (or not) the family is
chargeable to tax. X shall pay tax only on his income of Rs. 56,000.
SHARE OF PROFIT OF PARTNERS IN A
PARTNERSHIP FIRM
As per Sec.10(2A), share of profit received by partners from a firm is not taxable in
the hand of partners.

Leave Travel Concession

The amount exempt under Sec.10(5) is the value of any travel concession or
assistance received or due to the assessee from his employer for himself and his
family in connection with his proceeding on leave to any place in India.
The amount exempt can in no case exceed the expenditure actually incurred for the
purposes of such travel. Only two journeys in a block of four years is exempt.
Exemption is available in respect of travel fare only and also with respect to the
shortest route.
 FOREIGN ALLOWANCE OR
PERQUISITE
As per section 10(7), any allowance or perquisite paid or allowed
outside India by the Government to an Indian citizen for rendering
service outside India is wholly exempt from tax.
Context: Section 9(1)(iii) states that income chargeable under the head
salaries is deemed to accrue in India if it is payable by the government
to an Indian citizen for rendering service outside India
 LIFE INSURANCE POLICIES – SUMS RECEIVED
As per section 10(10D), any sum received on life insurance policy (including bonus) is not chargeable to
tax. Exemption is not available in respect of the amount received on the following policies -
a. any sum received under section 80DD (3) or 80DDA (3);
b. any sum received under a Keyman insurance policy (look at explanation 1)
c. any sum received under an insurance policy issued
• Between April 1, 2003 to April 1, 2012 – where premium payable exceeds 20 % of actual sum assured;
• Between 2012 – 2013 – where premium payable exceeds 10% of actual sum assured;
• After April 1, 2013 – where premium payable exceeds 10% or 15% of sum assured (latter rate applies
80 U or 80 DDB applies)
In respect of (c) (supra) the following points should be noted - Any sum received under such policy on
the death of a person shall continue to be exempt.
Keyman Insurance Policy - a policy taken by a person on the life of another person who is or was the
employee of the first-mentioned person or is or was connected in any manner whatsoever with the
business of the first-mentioned person
 EDUCATIONAL
SCHOLARSHIPS
As per section 10(16), scholarship granted to meet the cost of education is exempt from tax. In
order to avail the exemption it is not necessary that the Government should finance scholarship.

INCOME OF A MINOR
As per section 10(32), in case the income of an individual includes the income of his minor child
in terms of section 64(1A), such individual shall be entitled to exemption of Rs. 1,500 in respect
of each minor child if the income so includible exceeds Rs.1500. Where, however, the income of
any minor so includible is less than Rs. 1,500, the aforesaid exemption shall be restricted to the
income so included in the total income of the individual.
 Family Pension received by members of Armed Forces
 As per section 10(19), family pension received by the widow (or children or nominated heirs) of a
member of the armed forces (including para-military forces) of the Union is not chargeable to tax from
AY 2005-06, if death is occurred in such circumstances—
 acts of violence or kidnapping or attacks by terrorists or anti-social elements;
 action against extremists or anti-social elements;
 enemy action in the international war;
 action during deployment with a peace keeping mission abroad;
 border skirmishes;
 Laying or clearance of mines including enemy mines as also mine sweeping operations;
 explosions of mines while laying operationally oriented mine-fields or lifting or negotiation mine-fields
laid by the enemy or own forces in operational areas near international borders or the line of control;
 in the aid of civil power in dealing with natural calamities and rescue operations; and
 in the aid of civil power in quelling agitation or riots or revolts by demonstrators.
 DIVIDEND INCOME AND INCOME
FROM MUTUAL FUNDS
As per section 10(34)/ (35), the following income is not chargeable to tax—
a. any income by way of dividend referred to in section 115-O [i.e., dividend, not being covered by section
2(22) (e), from a domestic company];
b. any income in respect of units of mutual fund;
c. income from units received by a unit holder of UTI [i.e., from the administrator of the specified
undertaking as defined in Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002];
d. income in respect of units from the specified company.
DEDUCTIONS
 INTRODUCTION TO DEDUCTIONS
 PURPOSE of Deductions:
 Encourage savings - saving based deductions are 80-C (certain investments towards LIC, PF),
80CCC (pension fund), 80CCD (Pension scheme of central Government).
 Personal expenditure - 80D (Medical insurance), 80DD (Medical treatment of disabled
dependent), 80E (Repayment of loan taken for higher education) and 80GG (rent paid)
 Socially desirable activities - 80 G (donations to certain funds), charitable institutions
 Disabled persons - Section 80U
Where are they contained? - these 166 provisions are contained in Chapter VIA – Sec. 80C to
80U
Effect of deductions: reduce the chargeable income and thus, the tax liability – serve as
inducements to act in the desired manner
 HOW DO DEDUCTIONS PLAY OUT?
The aggregate of income under the five heads is known as “gross total income”. Certain deductions which
are not deductible under any particular head of income are allowed out of gross total income to arrive at
the total income liable to tax.
Total income is accordingly computed as under:
1. Income from Salaries ___
2. Income from House property ___
3. Profits and Gains of Business and Profession ___
4. Income from Capital Gains ___
5. Income from other sources ___
Gross Total Income = ______________
Less deductions under Chapter VI-A(80C TO 80U)(-) _______
Net Income ______________
BASIC RULES OF COMPUTATION
 The aggregate amount of deductions under sections 80C to 80U cannot exceed gross total
income (gross total income after excluding long term capital gains, short term capital gain on
equity shares [Sec 111A], winnings from lottery, crossword puzzles and income earned under
Sec.115A, 115AB, 115AC, 115ACA, 115AD, 115BBA and 115D)
 These deductions are to be allowed only if the assessee claims these and gives proof of such
investments/ expenditure/ income.
 Deduction is allowed when the saving is invested but normally any withdrawal is treated as
income in the year of withdrawal.
 There are some monetary thresholds on the allowable deductions under the different sections.
 Deductions are of two types, on account of certain : (a) payments and investments covered
under Section 80C to 80 GGC and (b) incomes which are already included under gross total
income covered under Section 80-IA to 80U.
 SECTION 80C
 A new section 80C has been inserted from the AY 2006-07 onwards. Section 80C provides
deduction in respect of certain expenditure/ investments (which are specified in this section) paid
or deposited by the assessee in the previous year.
 Who can avail of this deduction?: Individual and HUF
 Monetary threshold: Whole of the amount paid or deposited in the previous year (gross
qualifying amount), as does not exceed Rs.1,50,000. Basically – gross qualifying amount or
Rs.1,50,000, whichever is lesser.
 Aggregate cap: The aggregate cap on investments under Section 80C, 80CCC and 80CCD is
Rs.1,50,000.
 SECTION 80C
What all amounts are eligible for deduction under Section 80C?
1. Life Insurance premium paid on a policy taken on his own life, life of the spouse
or any child (dependent/ independent). In the case of a HUF, policy may be taken on
the life of any member of the family. The premium cannot exceed the ceilings as below:
Policy on life of person Policy on life of any
with disability or severe other person
disability or suffering
from disease or ailment
under Section 80DDB
If policy is issued before 20% of sum assured 20% of sum assured
March 31, 2012
If policy is issued during 10% of sum assured 10% of sum assured
2012-2013

If policy is issued on or 15% of sum assured 10% of sum assured

after April 1, 2013
 Section 80C
3. Contribution towards Statutory Provident Fund, Recognized Provident Fund and approved
Superannuation Fund
4. Contribution towards Public Provident Fund (maximum of Rs 1,50,000 under the PPF scheme)
5. Subscription to National Savings Certificates, VIII Issue or IX Issue (no ceiling on investment)
6. Contribution for participating in the Unit-Linked Insurance Plan (ULIP) of Unit Trust of India or LIC
Mutual Fund (i.e. Dhanraksha plan).
7. Payment for notified annuity plan of LIC or any other insurer.
8. Subscription towards notified units of Mutual Fund or UTI
13. Any sum paid as tuition fees to any university/college/educational institution in India for full time
education (does not include donation / development fees)
 CONTRIBUTIONS TO CERTAIN
PENSION FUNDS – 80CCC
 Who can claim the deduction? - individual taxpayer
 Conditions for claiming deduction
during the PY, the individual has paid/deposited a sum under an annuity plan of the LIC
or any other insurer for receiving pension.
• deduction should not have been claimed under Section 80C
 Amount of deduction - If the aforesaid conditions are satisfied, then the amount
deposited or Rs. 1,50,000, whichever is lower, is deductible.
 Tax treatment of pension received - pension amount received by the assessee or his
nominee as pension will be taxable in the year of the receipt.
 PENSION SCHEME OF CENTRAL
GOVERNMENT – SECTION 80CCD
 Who can avail of the deduction? – persons employed with the Central Government on or after 1st Jan,
2004 or any other person who has invested in a pension scheme notified by the Central Government
 What are the conditions to be satisfied?
• The taxpayer is an individual and has in the previous year deposited any amount in his account under a
pension scheme notified by the Central Government
 What is the amount of permissible deduction?
The amount deductible is :
a) The total of employee’s and employer’s contribution to the notified pension scheme during the year, or
b) 10% of salary (to include DA, if so provided) of the employee, whichever is less.
This section is subject to a ceiling of Rs.50,000.
 MEDICAL INSURANCE PREMIUMS –
SECTION 80D
 Conditions to be satisfied:
• taxpayer is an individual or a HUF
• Insurance premium is paid by the taxpayer in accordance with the scheme framed in this behalf
by the General Insurance Corporation of India and approved by the Central Government or any
other insurer who is approved by the Insurance Regulatory and Development Authority
• Mediclaim policy is taken on the health of the taxpayer, on the health of spouse, parents or
dependent children of the taxpayer. In case of HUF on the health of any member of the family.
• Aforesaid premium should have been paid by cheque (for preventive health check-up, cash could
have been paid).
 MEDICAL INSURANCE PREMIUMS
– SECTION 80D
Amount of Deduction:
If all the aforesaid conditions are satisfied, then the
a) premium on insurance policy on health of assessee, his spouse and dependent children - up to
Rs. 25,000/- and
b) premium on insurance policy on health of assessee’s parents - up to Rs. 25,000/
c) Medical expenditure incurred towards health of family as does not exceed Rs. 30,000/-
d) Medical expenditure incurred towards health of parents as does not exceed Rs. 30,000/-
e) From AY 2013-14, within the existing limit a deduction of up to Rs. 5,000 for preventive health
check-up is available.
Internal cap: (a) and (c) or (b) and (d) should not exceed Rs.30,000/-
Where the life insurance is in respect of a parent who is a senior citizen (at least of 60 years of
age) or very senior citizen (above 80 years) – Rs.25,000 is substituted by Rs.30,000/-
 MAINTENANCE INCLUDING
MEDICAL TREATMENT OF A
DISABLED DEPENDENT – 80DD
 Who can avail of the deduction? only individuals and HUF resident in India
 Disabilities – inter alia autism, cerebral palsy, mental retardation as specified in Persons With Disabilities
Act, 1995 (PWD Act).
 Conditions for availing the deduction are as follows:
• This deduction is given to the assessee if a person with disability is dependent upon him.
• The assessee has incurred expenditure by way of medical treatment (including nursing), training and
rehabilitation of a disabled dependent: or/and he has paid or deposited any amount under any scheme
framed by the LIC of India or any other insurer for the payment of an annuity or a lump sum amount
for the benefit of such dependent in the event of the death of the assessee.
• For claiming the deduction the assessee shall have to furnish a certificate by the prescribed medical
authority with the return of income.
 SECTION 80DD
 Explanation: Dependent means
i) In case of an individual, the spouse, children, parents, brothers, sisters of the individual or any
of them
ii) In case of HUF, a member of the HUF
wholly or mainly dependent on such individual or HUF for support and maintenance.
 Amount of Deduction
If the above mentioned conditions are satisfied the amount of deduction is fixed at Rs. 75,000
irrespective of actual expenditure. In case of a person with severe disability (over 80 %) a higher
deduction of Rs. 1,25,000 shall be allowed irrespective of actual expenditure.
A person with ‘severe disability’ means a person with 80% or more disabilities as outlined in
section 56(4) of the ‘Persons with disabilities (Equal opportunities, protection of rights and full
participation)’ Act, 1995 or a person with severe disability referred to in section 2(o) of the
National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and
Multiple Disabilities Act, 1999.
 MEDICAL TREATMENT
EXPENSES – 80DDB
 Who can avail of the deduction? - individual or HUF resident in India
 Deduction is available if the following are satisfied :
The assessee has actually paid for the medical treatment of specified disease or ailment, for himself or
any dependent* or in case of HUF any member of the family.
The assessee furnishes a certificate, in the prescribed form from a specialized doctor.
 What is the amount that can be availed of as a deduction?
• Amount paid or Rs. 40,000, whichever is less
• Amount paid or Rs. 60,000, whichever is less – senior citizen
• Amoutn paid or Rs. 80,000, whichever is less – very senior citizen
The deduction shall be reduced by the amount received, if any, under an insurance from an insurer for
the medical treatment of person mentioned in this section or reimbursed by the employer.
* The definition of ‘dependent’ is the same as in the above section.
 REPAYMENT OF LOAN FOR
HIGHER EDUCATION – SECTION
80E
 When is the deduction available?
• Assessee is an individual who has taken a loan from any financial institution or an approved charitable
institution for himself or his relative (spouse and children)
• The loan must have been taken in relation to pursuit of higher education
• During the PY he has repaid some amount as interest on such loan
• Such amount is paid out of his income chargeable to tax.
 “Higher education” means any course of study pursued after passing the Senior Secondary Examination
or its equivalent from any school, board or university recognized by the Central Government or State
Government or local authority or by any other authority authorized by the Central Government or State
Government or local authority to do so
 Period of Deduction - deduction shall be allowed for the PY in which the assessee starts repaying the
loan or interest thereon and seven previous years immediately succeeding it or until the loan together
with interest thereon is paid by the assessee in full ,whichever is earlier.
 RENT PAID – SECTION 80GG
 Who can avail of this deduction? - an individual in respect of rent paid by him for an accommodation used for his
residential purposes provided the following conditions are fulfilled:
• Assessee is either a self-employed person or a salaried employee, not in receipt of HRA
• Actual rent paid is in excess of 10% of his total income
• He / his spouse / minor children / HUF, of which he is a member, does not own any residential accommodation at
the place where the assessee resides, performs the duties of his employment / carries on his business or profession.
• Where, however, the assessee owns any residential accommodation at any other place and claims the concessions
of self-occupied house property for the same, he will not be entitled to any deduction u/s 80GG even if he does
not own any residential accommodation at the place where he ordinarily resides/ performs the duties of his
employment /carries on his business or profession.
• The assessee files a declaration in Form No. 10BA regarding the payment of rent.
 What is the deduction available under this Section? - The allowable deduction is the least of these amounts:
• excess of actual rent paid over 10% of total income (GTI – LTCGs – STCGs under Sec 111A – deductions under
Secs.80 C- 80U – income under 115A);
• 25% of his total income; and
• Rs. 2,000 p.m.
 SECTION 80 TTA: DEDUCTION -
INCOME BY WAY OF INTEREST
ON SAVINGS ACCOUNT
 This deduction was inserted into the law w.e.f. 1st April 2012 (AY 2013-2014)
 Who can avail this deduction? - individual or HUF
 Deduction from gross total income up to a maximum of Rs.10,000, in respect
of interest on deposits in savings account (not time deposits) with a bank, co-
operative society or post office
 DEDUCTION TO A PERSON
WITH DISABILITY – SECTION
80U
 What are the conditions to avail of this deduction?
• The assessee is a resident individual
• He is a person with disability.
• He is certified by the medical authority to be a person with disability, at any time during the
previous year.
• He furnishes a certificate issued by the medical authority in the prescribed form along the return
of income
 What is the amount of deduction? It is a fixed deduction, per the following details:
Rs. 75,000 in case of a person with disability
Rs. 1,25,000 in case of a person with severe disability (having a disability over 80%)
 DEDUCTIONS FOR SOCIALLY
DESIRABLE ACTIVITIES –
SECTION 80G
 There are various funds created by Governments to take care of natural calamities like
earthquake, floods, etc. Similarly certain funds have been created to promote social and
economic welfare and education.
 To incentivize contribution into these funds, deduction has been provided in Section 80G for
donations given by assessee to these funds.
 Who can avail of the deduction? All assessees
 What are the conditions for availing a deduction?
Donation should be monetary – not in kind
Donation should be made to the stipulated funds / institutions
 What should be the mode of payment? Donation can be given in cash, or cheque or draft.
No deduction shall be allowed under Section 80G in respect of donation made in cash of an
amount exceeding Rs 10,000 from AY 2013-2014.
 SECTION 80G
For the sake of convenience, the donations have been divided into four categories depending on the
quantum of deduction.
A. Donations made to following are eligible for 100% deduction without any qualifying limit:
1. Prime Minister’s National Relief Fund
2. National Defence Fund
3. The Africa (Public Contribution - India) Fund
4. The National Foundation for Communal Harmony
5. Approved university or educational institution of national eminence
6. The Chief Minister’s Earthquake Relief Fund, Maharashtra
7. The National Blood Transfusion Council or a State Blood Transfusion Council.
8. Army Central Welfare Fund or Indian Naval Benevolent Fund or Air Force Central Welfare Fund.
9. Swachh Bharat Kosh and Clean Ganga Fund
 SECTION 80G

B) Donations made to the following are eligible for 50% deduction without any
qualifying limit:
1. Jawaharlal Nehru Memorial Fund
2. Prime Minister’s Drought Relief Fund
3. National Children’s Fund
4. Indira Gandhi Memorial Trust
5. The Rajiv Gandhi Foundation.
 SECTION 80G
C) Donations to the following are eligible for 100% deduction subject to
qualifying limit (i.e. 10% of adjusted gross total income):
1. Donations to the Government or a local authority for the purpose of promoting
family planning.
2. Sums paid by a company to Indian Olympic Association
D) Donations to the following are eligible for 50% deduction subject to the
qualifying limit (i.e. 10% of adjusted gross total income).
1. Donation to the Government or any local authority to be utilized by them for any
charitable purposes other than the purpose of promoting family planning.
 SECTION 80G
 The quantum of deduction is as follows :-
Category A - 100 % of amount donated
Category B - 50 % of the amount donated
Category C – 100% of the amount donated in the funds subject to maximum limit of 10% of Adjusted
GTI.
Category D – 50% of the amount donated in the funds subject to maximum limit of 10% of Adjusted
GTI.
 The total of these deductions under categories A,B,C, & D is the quantum of deduction under this
section without any maximum amount.
Adjusted Gross Total income means Gross Total Income minus LTCG, short term capital gain taxable
u/s 111A, and all deductions u/s 80C to 80U (except any deduction under Sec 80G) and income
referred to under Section 115A to 115AD (income of NRIs and foreign companies taxable at a special
rate of tax).
 ILLUSTRATION
During the P.Y. 2012-13, the gross total income of Mr. X is Rs 4,00,000. During the P.Y.
he pays the following premiums on Mediclaim insurance policy by cheque. Calculate the
amount of tax benefit under section 80 D.
Amount (in Rs)
1. Mr. X 6,000
2. Mrs. X 4,000
3. Son (not dependent) 3,000
4. Daughter (dependent) 2,000
5. Father (not dependent, age 69 years & resident in India) 1,500
6. Mother (dependent) (age 68 years & resident in India) 2,000
 ILLUSTRATION
X is a resident individual. During the P.Y. 2012-13 he spends Rs 25,000 towards medical
treatment of his father who is wholly dependent upon him. The disability is one which
comes under Persons with Disability Act, 1995. A copy of certificate is also submitted.
Determine the amount of deduction under section 80DD for the A.Y. 2013-14.