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Microlesson · 5-min read

Exempt Incomes under Section 10

# Certain Incomes Fully Exempt under Section 10

These incomes are not included in computing Total Income at all. They are not merely deductions — they are excluded at the source.

## List of Fully Exempt Incomes

1. Agricultural Income in India — fully exempt (subject to partial integration rules for rate-determination purposes; see separate lesson).

2. Amount received by a member from income of HUF — to avoid double taxation since HUF income is taxed in HUF's hands.

3. Share of Profit received by partner from Firm/LLP — since the firm/LLP is already taxed on the income.

4. Compensation on Disaster — Amount received from the Government or local authority by an individual or his legal heirs on account of any disaster.

5. Interest on Public Provident Fund (PPF) — fully exempt.

6. Interest on Non-Resident External (NRE) Account with any bank in India, provided:

  • The individual is a Non-Resident as per FEMA, OR
  • He is permitted by RBI to maintain such account.

## Why These Exemptions?

  • Agricultural income — constitutional limitation (State subject under Entry 46, List II).
  • HUF member receipts & partner's share — avoidance of economic double taxation.
  • Disaster compensation — humanitarian relief.
  • PPF / NRE interest — incentivize savings and inward remittances by non-residents.

Worked example

### Example 1

Identifying Exempt vs Taxable

Mr. A, a partner in a firm, receives:

  • Share of profit from firm: ₹5,00,000 → Exempt u/s 10(2A)
  • Interest on capital from firm @ 12%: ₹1,20,000 → Taxable (not covered by exemption)
  • Remuneration as working partner: ₹3,00,000 → Taxable as PGBP

### Example 2

NRE Interest

Mr. Ravi (NR as per FEMA) earns interest of ₹2,00,000 on NRE account with SBI.

Fully exempt under Section 10 since both conditions are met (NR as per FEMA, account permitted by RBI).

If Mr. Ravi becomes Resident as per FEMA, the NRE interest becomes taxable from that year.

⚠️ Common exam mistakes

  • Treating interest on partner's capital as exempt — only the SHARE OF PROFIT is exempt; interest on capital and remuneration to working partners are taxable.
  • Treating ALL agricultural income as exempt — only Indian agricultural income; foreign agricultural income is fully taxable.
  • Treating NRE interest as exempt without verifying FEMA residential status — the FEMA status (not Income Tax status) governs the exemption.
  • Treating compensation received from a private insurer for a disaster as exempt — only government/local authority compensation qualifies under this clause.
  • Treating amounts received by HUF members other than share-of-income (e.g., gifts from HUF to member) the same way without checking section 56 rules.
Reference: Section 10 — Income Tax Act, 1961
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