Section 10 of the Income Tax Act lists incomes that are fully or partially kept outside your taxable income — subject to conditions. These Section 10 income tax exemptions cover a wide range: HRA, LTA, agricultural income, gratuity, life insurance proceeds, and several others. If you're a salaried employee, knowing exactly which ones apply to you can make a real difference to your tax outgo every year.
Popular Section 10 Exemptions at a Glance:
When working out an individual's tax liability, certain income categories don't enter the total income calculation at all. Section 10 is where all those categories are listed. From a salaried employee's standpoint, the exempt allowances and other exempt incomes break down like this:
1. Exemption on Allowances
2. Other Exemptions on Salaried Income
3. Exemptions on Other Income
Amounts received from a life insurance policy — including any bonus — are exempt from tax under Section 10(10D). Three categories of policies don't qualify, though:
If your policy falls outside these exceptions, the full maturity amount stays out of your taxable income.
The portion of your salary meant to cover rent is partially shielded from tax under this clause. What most employees don't realise is that the exemption isn't the full HRA amount — it's the lowest of three figures:
Metro cities for this purpose: Delhi, Mumbai, Chennai, Kolkata, Bengaluru, Hyderabad, Pune, and Ahmedabad.
Only costs tied directly to your rented accommodation count. Expenses outside that scope don't qualify. The HRA calculation formula income tax rules follow is straightforward — but the "lowest of three" part catches a lot of people off guard.
Parents receiving a children's education allowance can claim ₹3,000 per month per child as exempt. Taxpayers who are blind, deaf-mute, or physically challenged and receiving a transport allowance can separately claim ₹3,200 per month on that allowance.
This clause is broader than most people expect. It covers:
The key condition throughout Section 10(14): the allowance must be used for the stated purpose. Unspent amounts become taxable.
LTA exemption covers domestic travel costs only — airfare, train fares, or bus tickets. What it doesn't cover: local transport at the destination, sightseeing, hotel stays, or food. The exemption is also capped at the LTA component in your CTC — not what you actually spend above that.
Practical example: an employee with ₹30,000 LTA who spends ₹20,000 on travel gets a ₹20,000 exemption. The remaining ₹10,000 becomes taxable income.
Interest earned from a provident fund — on resignation or retirement — is exempt here. One important limit from FY 2021-22 onwards: where annual contributions to the fund exceed ₹2,50,000, the interest accrued on the excess portion is taxable. The Sukanya Samriddhi Account follows a similar treatment, with maturity proceeds fully exempt.
Government employees get full exemption on gratuity received. Private sector employees get a partial exemption — the exact amount depends on whether they're covered under the Payment of Gratuity Act or not.
Unused leaves can be carried forward, lapsed, or encashed — the choice varies by employer policy. Leave encashment during service is fully taxable. It's only at resignation or retirement that the exemption kicks in.
Government employees get full exemption. Non-government employees are exempt up to the lowest of:
Government employees receive full tax exemption on the lump sum received from commuting their accumulated pension. Private sector employees have a partial exemption that depends on whether gratuity is also being received.
Compensation paid on transfer of employment or shutdown of an industrial unit qualifies for exemption under this clause. The exemption covers the lowest of:
Amounts received on voluntary retirement are treated as profits in lieu of salary — but Section 10(10C) provides an exemption up to the lowest of:
The following categories of agricultural income are fully exempt:
A partner's share in the profits of a firm or LLP is fully exempt — with no upper limit. This applies to the profit share itself, not to any salary or remuneration paid to the partner.
Interest from post office savings accounts, notified securities, bonds, annuity certificates, and other specified savings instruments is exempt up to:
Institutions whose total annual receipts don't exceed ₹5 crore qualify for exemption under this clause. Larger institutions have a separate registration and approval process under the same section.
Members of Scheduled Tribes in Tripura, Nagaland, Mizoram, Manipur, and Arunachal Pradesh are exempt on income earned from sources within those states, or from dividends and interest on securities.
Sikkimese individuals are exempt on any income arising within Sikkim, or from dividends and interest on securities — regardless of where those securities are held.
Dividends received from Indian companies were exempt up to ₹10,000 under this clause. This exemption applied only until 31st March 2020. Dividends received after that date are taxable in the hands of the recipient.
The amount received on shares bought back by a domestic company before 01.10.2024 is fully exempt. Buyback proceeds received after that date are taxable as per the amended rules.
Income from the sale of units of specified mutual funds was exempt under this clause — but only for income earned up to 31st March 2020.
Capital gains arising from the compulsory government acquisition of urban agricultural land are exempt, provided:
Long-term capital gains on listed equity shares and equity-oriented mutual funds were exempt under this clause, provided Securities Transaction Tax was paid. This exemption applied only to gains earned up to 31st March 2018.
An entrepreneur operating a business in a Special Economic Zone set up between 01.04.2006 and 01.04.2021 can claim:
Note: Though the Income Tax Act 2025 takes effect from 01st April 2026, the provisions of the 1961 Act apply for AY 2026-27 — since that assessment year relates to income earned up to 31st March 2026. Section 10 of the 1961 Act is not replaced by Section 11 of the 2025 Act.
Claiming a Section 10 exemption doesn't require a separate form — it's done directly in your ITR. Report each eligible exempt income in the relevant fields, apply the exemption amounts, and compute your final taxable income from there.
Keep these documents within reach when filing:
Select the correct ITR form based on your income sources, file before the due date, and e-verify — skipping e-verification leaves the return invalid regardless of how accurate the filing is.
Section 10 exemptions for salaried employees work by pulling specific allowances and receipts out of the total income calculation. HRA, LTA, gratuity, leave encashment, employer PF contributions — each one that applies reduces your taxable income, and a lower taxable income means lower tax.
The best tax exemptions for salaried employees in India aren't always the most talked-about ones — the meal allowance and internet allowance under Section 10(14), for instance, are often claimed without a second thought, but they add up over a full year.
There's one important caveat here, and it's worth being direct about: if you've opted for the new tax regime, most Section 10 exemptions simply don't apply. The regime trade-off — lower rates in exchange for fewer deductions — is genuine. Figuring out which regime saves more money requires running the actual numbers for your specific income structure. There's no single right answer.
Example — Mr. Raj (New Tax Regime):
Since the rebate under Section 87A covers taxable income up to ₹12 lakh under the new regime, Mr. Raj's net tax liability works out to zero — with Section 10 exemptions doing a significant share of the work.
Section 10 covers a range of exempt incomes — HRA, LTA, agricultural income, gratuity, life insurance maturity proceeds, provident fund interest, leave encashment at retirement, and several others. Each exemption comes with its own conditions and limits. The full list spans over 20 sub-sections, and not all of them apply to every taxpayer — your eligibility depends on income type, employment category, and which tax regime you've opted for.
No. Opting for the new tax regime means giving up most Section 10 exemptions — including HRA, LTA, and several allowance-based ones. The new regime offers lower slab rates in exchange for a simpler structure with fewer deductions. If exemptions form a large chunk of your planned tax saving, it's worth comparing both regimes before choosing.
Report the exempt HRA amount in the relevant exempt income field of your ITR — usually under "Allowances to the extent exempt u/s 10." The exempt figure is the lowest of: actual HRA received, 40% or 50% of Basic+DA depending on your city, or actual rent paid minus 10% of Basic+DA. Keep rent receipts and your lease agreement as supporting documents — these may be asked for during scrutiny.
Yes, fully. Leave encashment received while still employed is taxable in the year of receipt, with no exemption available under Section 10(10AA). The exemption only applies when the encashment happens at the time of resignation or retirement — and even then, government and non-government employees are treated differently.
The maximum is ₹5,00,000, but the actual exempt amount is the lowest of four figures: the amount received, ₹5 lakh, three months' salary multiplied by completed years of service, or last drawn salary multiplied by the remaining months until retirement. Once this exemption is claimed for a particular employer, it can't be claimed again for any future voluntary retirement.
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