Key Highlights
- Exempt incomes now in Section 11, ITA 2025 + Schedules II to VII (previously Section 10 of ITA 1961 with 100+ sub-clauses)
- Agricultural income is fully exempt for all taxpayers
- HRA, LTA, Gratuity, Leave Encashment, Provident Fund — partial or full exemption
- LTCG exemption on reinvestment under Sections 175–177
- Exempt incomes under new regime: only those in Schedules II–VII that are income-source based (HRA/LTA not available)
- PPF interest and maturity: fully exempt
- Life insurance maturity proceeds: exempt if premium conditions met
1. Overview
The Income Tax Act does not tax every rupee of income — certain categories of income are specifically exempt from tax. Under the old ITA 1961, all exempt incomes were listed in Section 10 — a section so large it had sub-clauses running from 10(1) to 10(50) with dozens of further sub-sub-clauses, making it one of the most unwieldy provisions in Indian tax law.
The Income Tax Act, 2025 reorganises these exemptions under Section 11, which provides the charging framework, read with Schedules II to VII which list specific exempt incomes in a tabular format. This makes the exemptions far easier to locate and verify.
2. Agricultural Income (Schedule II)
Agricultural income is completely exempt from income tax for all taxpayers under Schedule II of ITA 2025. This has been the position since independence and is constitutionally protected (agriculture is a state subject).
However, there is a concept of partial integration for high-income individuals: if a person has non-agricultural taxable income above the basic exemption limit AND agricultural income above ₹5,000, then agricultural income is included for rate purposes only — not for actual computation of tax. This ensures that agricultural income does not reduce the effective tax rate on non-agricultural income for high earners.
3. Exempt Salary Components (Schedule II)
| Exempt Income | Limit / Condition | Regime Available |
|---|---|---|
| HRA (House Rent Allowance) | Least of: Actual HRA; Rent paid − 10% salary; 40%/50% salary | Old Regime only |
| LTA (Leave Travel Allowance) | Actual travel cost; 2 journeys in a block of 4 years; economy class air or AC first class rail | Old Regime only |
| Uniform Allowance | Actual amount spent on uniform for work | Both |
| Meal Coupons / Food Allowance | Up to ₹50 per meal (2 meals/day) | Both |
| Telephone / Mobile Reimbursement | Actual expense for official use | Both |
| Child Education Allowance | ₹100 per month per child (max 2 children) | Both |
| Hostel Allowance | ₹300 per month per child (max 2 children) | Both |
| Transport Allowance (disabled) | ₹3,200 per month for blind/deaf/orthopedically handicapped | Both |
4. Gratuity Exemption (Schedule II)
| Category | Exemption |
|---|---|
| Government Employees | Fully exempt — no limit |
| Private Sector (covered by Payment of Gratuity Act) | Least of: Actual gratuity; ₹20,00,000; or 15 days salary × years of service |
| Private Sector (not covered by PG Act) | Least of: Actual gratuity; ₹20,00,000; or half-month salary × years of service |
5. Leave Encashment Exemption (Schedule II)
- Government Employees: Fully exempt on retirement / death
- Private Sector Employees: Exempt at retirement up to ₹25,00,000 (enhanced from ₹3 lakh — Finance Act 2023 amendment, carried into ITA 2025)
- During service: Leave encashment received during employment is fully taxable for all employees
6. Provident Fund Exemptions (Schedule II)
| Type | Exemption |
|---|---|
| EPF — employer contribution | Exempt up to 12% of salary; excess taxable |
| EPF — interest on employee contribution | Exempt on contribution up to ₹2.5 lakh/year (₹5 lakh for no employer PF) |
| EPF — maturity proceeds | Exempt if 5+ years of continuous service |
| PPF (Public Provident Fund) — interest | Fully exempt — no limit; EEE status |
| PPF — maturity amount | Fully exempt |
7. Life Insurance Maturity / Proceeds (Schedule II)
Proceeds from a life insurance policy (including bonus) are exempt provided:
- Premium paid does not exceed 10% of sum assured (for policies issued after 1 April 2012)
- For ULIP (Unit Linked Insurance Plan): premium ≤ 10% of sum assured; AND annual premium ≤ ₹2.5 lakh (for policies issued after 1 February 2021)
- On death of the insured: proceeds are always fully exempt regardless of premium amount
8. Other Major Exempt Incomes
| Income | Exemption Under ITA 2025 |
|---|---|
| Interest on PPF | Fully exempt (Schedule II) |
| Interest on Sukanya Samriddhi Account | Fully exempt (Schedule II) |
| Scholarship for education | Fully exempt (Schedule II) |
| Dividend from Indian companies | Taxable (exemption removed from AY 2021-22) |
| LTCG on equity shares (STT paid) | Exempt up to ₹1.25 lakh (Section 195) |
| Voluntary retirement proceeds (VRS) | Exempt up to ₹5,00,000 (Schedule II) |
| Awards from Central/State Government | Exempt (Schedule II) |
| Gallantry awards income | Fully exempt (Schedule II) |
| Income of foreign diplomats | Fully exempt (Schedule II) |
| Income from Sovereign Gold Bond on maturity | Capital gain exempt at maturity (8 years) |
| Death-cum-retirement gratuity (Govt) | Fully exempt (Schedule II) |
| Income of NRE accounts (interest) | Exempt for NRI/RNOR; taxable for ROR |
9. Income of Charitable Trusts (Schedule VI)
Registered charitable and religious trusts enjoy income exemption under Schedules V and VI of ITA 2025, subject to compliance with Chapter XVII-B (Registration, 85% application of income, Form 10B audit etc.). This replaces the old Sections 11–13 regime of ITA 1961.
10. Exempt Incomes NOT Available in New Tax Regime
The following exemptions are specifically allowed only in the Old Tax Regime under ITA 2025:
- HRA exemption
- LTA exemption
- Children education allowance (beyond ₹100/month level)
- Any other allowance specifically excluded by CBDT notification for new regime
11. Latest Updates Under ITA 2025
- Leave encashment exemption enhanced to ₹25 lakh (Finance Act 2023) — confirmed in Schedule II of ITA 2025
- EPF interest exemption: ₹2.5 lakh (₹5 lakh without employer contribution) — confirmed in Schedule II
- ULIP proceeds: taxable if annual premium exceeds ₹2.5 lakh — confirmed in ITA 2025
- Reorganisation of all Section 10 sub-clauses into Schedules II–VII makes them easier to find and verify
12. Why TaxClue
Many taxpayers miss exempt income disclosures or incorrectly include exempt amounts in taxable income — both leading to errors. TaxClue ensures your ITR correctly identifies all exempt incomes, claims the right amounts, and discloses them in the correct schedules. Contact us for complete ITR filing under ITA 2025.
13. Resources & Checklist
- ☐ Identify all exempt salary components in Form 16
- ☐ Verify gratuity received is within exemption limits
- ☐ Check EPF withdrawal — 5-year service condition for exemption
- ☐ LIC maturity — verify premium-to-sum-assured ratio
- ☐ PPF interest and maturity — fully exempt, report in ITR
- ☐ Carry forward of losses from LTCG not exempt — report correctly
14. Contact Us
Understanding which income is exempt and which is taxable is the first step to correct tax filing. TaxClue's experts ensure you neither over-report nor under-report income. Contact us for expert ITR support under the Income Tax Act, 2025.