Imagine your total income is ₹9,00,000, and buried inside it is ₹1,50,000 that the Act says no tax is payable on. Unfair situation: that exempt income still drags your taxable portion into a higher slab. Section 110 is the relief valve — it gives you a deduction from the tax computed, not from income, so you don't overpay because of that exempt chunk.
Here is the mechanic. First, compute tax on your entire total income (yes, including the part on which no tax is payable — this sets your slab rate). Then calculate the average rate of tax: that is simply (Tax on total income ÷ Total income) × 100. The deduction you get under Section 110 = Average Rate × Amount on which no tax is payable. Subtract this deduction from the gross tax figure, then add Health & Education Cess of 4% on the resulting net tax. That is your final liability.
Why average rate and not the marginal rate? Because the law wants to refund only the proportionate tax attributable to the exempt income, not the highest-slab tax saved by including it. It is a mathematically fair middle-ground. Key distinction: Section 10 incomes are excluded from total income altogether and never enter this calculation. Section 110 applies only when income is included in total income but a specific provision elsewhere in the Act says no tax shall be charged on it — these are different situations and easy to mix up. This section appears in CA Inter exams as a 4-mark computation sub-part embedded in a full tax-liability problem; missing the relief step is a common way to drop marks silently.