Exempted Incomes Questions and Answers
SECTION – A
Question 1.
What is exempted incomes?
Answer:
Income fully exempt from income tax do not form part of the total income of the assessee. Further, if the assessee wishes to claim any exemption under the act, the burden of proving that the income is exempt from tax rests with assessee and not with the income tax authorities.
Question 2.
What are the incomes which are exempted from tax.
Answer:
The incomes which are exempted from tax are:
- Agricultural Income.
- Income from HUF to its members
- Foreign allowances and perquisites to employee
- Pension of voluntary awardees
- Income of residents of Ladakh district
- Casual income up to 5,000
Question 3.
State any four fully exempted incomes.
Answer:
The incomes which are exempted from tax are:
- Agricultural Income.
- Income from HUF to its members
- Foreign allowances and perquisites to employee
- Pension of voluntary awaraees
- Income of residents of Ladakh district
- Casual income up to 5,000
Question 4.
How do you treat an income as an Indian income or as a foreign income?
Answer:
If the income arise/accrue (deemed to accrue or arise) or received in India (deemed to be received) in the previous year, then such income is Indian income. On the other hand, If the income does not arise/accrue (does not deemed to accrue or arise) and not received in India (not deemed to be received) in the previous year, then such income is Foreign income,
Question 5.
Mention any two special allowances notified u/S 10(14) (i) of IT Act.
Answer:
The allowances notified u/s 10(14)(i) of IT Act. are:
- Trvelling allowance
- Conveyance allowance
- Helper allowance
- Uniform allowance
- Daily allowance
SECTION – B
Question 1.
State any ten fully exempted income u/s 10 to individuals.
Answer:
Exempted Income u/s 10 (restricted to individual assessee):
| Section | Nature of Income | Exemption limit, if any |
| 10(2) | Share of income from HUF | Fully exempt |
| 10(2A) | Share of profits from partnership firm | Fully exempt |
| 10(4) | (a) Interest on securities and bonds notified by the central government prior to June 2002 including premium on redemption. (b) Interest on non resident external account by non-resident. | Fully exempt |
| 10(8) | Income of an individual serving under co-operative technical assistance program | Fully exempt |
| 10(8A) | Fees received by a non-resident consultant from an International organisation for rendering services in India. | Fully exempt |
| 10(10BB) | Payments of Bhopal Gas leak disaster victims: Any payment made to a person under Bhopal Gas leak disaster (processing of claims) Act, 1985 and any scheme framed there under. | Fully exempt |
| 10(10BC) | Compensation received on account of disaster by an individual or his legal heirs from central or state government. | Fully exempt |
| 10(16) | Scholarship received by an assessee to meet the cost of his education. | Fully exempt |
| 10(17) | Daily allowance, constituency allowance | Fully exempt |
| 10(17A) | Reward or award either in cash or in kind instituted and approved by the government | Fully exempt |
| 10(18) | Pension or family pension received by the winner of gallantray award or his family members | Fully exempt |
Question 2.
Explain the tax treatment of encashment of Leave salary.
Answer:
Encashment of leave by surrendering earned leave standing to the employee’s credit is known as “encashment of leave salary”.
Tax Treatment
| Leave salary received during the service period | Leave salary received at the time of retirement | ||
| Government employee i.e. | Non-Government employee i.e. | Government employee | Non-Government employee |
| (employees of state or central Government) | (other employees) | Least of the following is exempt from tax: 1. Leave encashment actually received, [service period x Actual earned leave – earned leave used x last drawn salary]
2. Leave salary as per I.T law [1 month or Actual earned leave, w.e.i x service period – earned leave used x average salary] 3. 10 months average salary. 4. Maximum limit of 3,00,000. |
|
| Fully taxable | Fully taxable | Fully tax free | |
Note:
1. Average salary means the total of basic salary, dearness pay, dearness allowance (if it enters into all retirement benefits), commission (if it is based on a fixed percentage of turnover achieved by the employee), for 10 months immediately preceding the date of retirement, divided by 10.
2. To find out the duration of service period, fraction of the year shall be ignored.
3. If employee receives leave salary from two or more employers in the same year, the maximum limit of 3,00,000 shall be reduced by the amount of leave salary exempted earlier. This provision is applicable for non-government employees receiving leave salary at the time of retirement.
4. Leave salary paid to the legal heirs of the deceased employee is fully exempt from tax.
5. If total earned leave less leave availed is negative, it must be taken as nil.
Question 3.
Explain the tax treatment of encashment of gratuity.
Question 4.
Explain the tax treatment of encashment of penson.
Answer:
Commutation of pension means surrendering right to receive periodic pension against lumpsum consideration.
Tax Treatment
| Government employees (i.e. employees of state or central local authority and statutory corporation) | Non-Government employees | |
| If employee receives gratuity | If employee does not receive gratuity | |
| Fully exempted from tax | Least of the following is exempt: 1. Actual commuted pension received or 2. 1/3rd of full value of commuted pension |
Least of the following is exempt: 1. Actual commuted pension received or 2. 1/2 of full of value of commuted pension. |
Question 5.
Briefly explain the tax treatment of RPF and SPF.
Answer:
Tax treatment of RPF and SPF:
| Statutory Provident fund (SPF) | Recognised Provident Fund (RPF) | |
| 1. Employer’s contribution | Tax free | In excess of 12% of employees salary is taxable |
| 2. Employee’s contribution | Qualifies for deduction U/s 80C | Qualifies for deduction U/s 80C |
| 3. Interest on Provident Fund | Tax Free | In excess of 9.5% is taxable |
| 4. Refund from Provident Fund | Tax Free | Exempt, if employee has rendered atleast 5 years continous services otherwise, tax treatment applicable for URPF refund will be applicable for RPF refund. |
Question 6.
Explain the treatment of Entertainment Allowance for Income-Tax purpose under the head “Income from Salary”.
Solution:
Entertainment Allowance is fully taxable under the Act.
But the assessee can claim certain deductions under Section 16 (ii). This deduction shall be admissible only to Central or State Government employees. The deduction shall be allowed in the following manner. Least of following shall be allowed as deduction.
- Statutory limit of 5,000 or
- 1/5 Basic Salary or
- Actual amount of Entertainment Allowance received.
Question 7.
Explain the tax treatment house rent allowance.
Answer:
HRA is given by the employer to the employees to meet his/her rental expenditure.
Tax Treatment
Least of the following is exempt:
- Actual HRA received
- Rent paid Less 10% of salary
- 40% of salary
Note:
1. Salary for this purpose includes Basic Salary, Dearness pay, Dearness allowance (if it enters into all retirement benefits) and commission (if it is based on a fixed percentage of turnover achieved by the employee.
2. If the house Is situated in Chennai, Delhi, Mumbai, Kolkata, 50% of salary will be considered in the place of 40% of salary.
3. HRA is fully taxable in the following cases:
- When employee is residing in his own house.
- When employee is living in a house, for which he is not paying any rent.