Exemptions under Section 10

Exemptions under Section 10 of the Income-tax Act: A Practical Guide for FY 2026-27

Section 10 of the Income-tax Act 1961 is not one exemption — it is a catalogue of over sixty separate clauses, each carving a specific income out of your taxable total. For FY 2026-27 (Assessment Year 2027-28), the most consequential exemptions for salaried employees are HRA under Section 10(13A), LTA under Section 10(5), gratuity under Section 10(10), and leave encashment under Section 10(10AA). Agricultural income remains fully exempt under Section 10(1) regardless of which tax regime you choose. Everything else turns on a single upstream decision: old regime or new regime.

The Regime Fork: Which Section 10 Exemptions Survive Under the New Tax Regime?

The new tax regime under Section 115BAC became the default for all taxpayers from AY 2024-25. For AY 2027-28, nothing changes — if you do not file a positive election for the old regime, the new regime applies automatically.

The table below tells you what you are giving up when you stay in the new regime:

The practical implication: If your HRA and LTA together exceed Rs. 2–3 lakh per year, you need to run the numbers before defaulting to the new regime. The new regime's lower slab rates may or may not compensate for losing these exemptions — it depends on your salary structure and actual rent.

To opt into the old regime:

• Salaried employees without business income: Submit a declaration to your employer at the start of the year; also select the old regime in the ITR you file.
• Individuals with business income: File Form 10-IE before the due date of your ITR under Section 139(1). This is a once-and-done election — you cannot switch back and forth freely once business income is involved.

Section 10(1): Agricultural Income and the Partial Integration Trap

Income from agricultural land situated in India is fully exempt under Section 10(1). This covers three streams: rent or revenue derived from agricultural land, income from cultivation (including processing necessary to render produce fit for market), and income from a farmhouse attached to the land and used for agricultural purposes.

What qualifies as agricultural land?

Land must be used for agricultural purposes. Urban land (within 2 km of a municipal limit with a population above 10,000, or 8 km of a municipal limit with population above 1 lakh, depending on the notification) is generally not agricultural land for capital-gains purposes, though the cultivation income exemption still applies if the land is actually farmed.

The partial integration rule — read this carefully

If your non-agricultural income exceeds the basic exemption limit (Rs. 3 lakh under the old regime, Rs. 4 lakh under the new regime for FY 2026-27), the Income Tax Act uses your agricultural income to determine the rate at which your non-agricultural income is taxed. It does not tax the agricultural income itself.

How the calculation works:

1. Add agricultural income to non-agricultural income → compute tax on the total.
2. Add agricultural income to the basic exemption limit → compute tax on that notional figure.
3. Subtract (2) from (1) → the difference is the actual tax you pay on non-agricultural income.

This means a Rs. 5 lakh agricultural income on top of a Rs. 12 lakh salary will push part of the salary into a higher slab, increasing effective tax even though the farm income itself is not taxed directly.

Document requirement: Agricultural income must be reported in Schedule EI of the ITR. Failure to disclose is a common trigger for scrutiny notices — the AIS/TIS dashboard increasingly reflects land records data from state registries.

Section 10(13A): House Rent Allowance — Calculating the Triple-Test Exemption

HRA exemption is computed as the least of three amounts:

1. Actual HRA received from the employer.
2. Rent paid minus 10% of (Basic Salary + Dearness Allowance).
3. 50% of (Basic + DA) if you live in Mumbai, Delhi, Chennai, or Kolkata; 40% for all other cities.

The exemption is available only under the old tax regime.

Step-by-step HRA calculation

Suppose you are employed in Pune (non-metro), and for FY 2026-27:

• Basic + DA: Rs. 60,000/month → Rs. 7,20,000/year
• HRA received: Rs. 24,000/month → Rs. 2,88,000/year
• Actual rent paid: Rs. 22,000/month → Rs. 2,64,000/year

Compute the three limits:

1. Actual HRA = Rs. 2,88,000
2. Rent paid − 10% of Basic+DA = Rs. 2,64,000 − Rs. 72,000 = Rs. 1,92,000
3. 40% of Basic+DA (non-metro) = 40% × Rs. 7,20,000 = Rs. 2,88,000

Exempt HRA = least of the three = Rs. 1,92,000. Taxable HRA = Rs. 2,88,000 − Rs. 1,92,000 = Rs. 96,000.

The PAN requirement

If total annual rent paid to a single landlord exceeds Rs. 1,00,000, you must collect the landlord's PAN and submit it to your employer. Your employer needs this to allow the HRA deduction in Form 16. If the landlord does not have a PAN, obtain a declaration in the prescribed format (Rule 26C). Without this, your employer will include the full HRA in your taxable salary — you can claim it while filing the ITR, but you will need to self-certify and keep rent receipts.

Renting from a parent

You can pay rent to your parent, claim HRA exemption, and your parent declares it as income from house property. This is legitimate — but the payment must be real (bank transfer, not cash), and the parent must own the house. Rent paid to a spouse is not allowed.

Section 10(5): Leave Travel Allowance — The 2026-2029 Block Rules

LTA is exempt for two journeys in a block of four calendar years. The current block is 2026 to 2029 (calendar years, not financial years). The exemption covers the actual cost of travel, subject to a fare ceiling:

• By air: Economy class fare on the shortest route.
• By train: AC First Class fare on the shortest route.
• By other means (where train is not available): First-class or deluxe-class bus fare as per the SRTC schedule; if no SRTC, then the equivalent of AC First Class rail fare.

Eligible family members: Spouse, children (up to two children born after 1 October 1998 for full exemption — earlier children are counted for this purpose), and dependent parents and siblings.

Only India travel qualifies. International flights, even with a domestic leg, do not generate LTA exemption on the international portion.

Carry-forward provision: If you use only one LTA journey in a block, you can carry forward one journey to the first year of the next block (i.e., 2030). The carried-forward journey must be used in 2030 and is counted against the new block's entitlement of two.

New regime impact: LTA is entirely unavailable under the new tax regime for AY 2027-28. If you are on the new regime, there is no point collecting travel bills for LTA purposes.

The Retirement Cluster: Gratuity, Leave Encashment, and VRS

Section 10(10): Gratuity

For non-government employees covered under the Payment of Gratuity Act 1972, the exempt amount is the least of:

• Actual gratuity received.
• 15 days' salary for each completed year of service (calculated as last drawn salary ÷ 26 × 15 × years of service).
• Rs. 20 lakh (the current ceiling as notified).

Government employees receive gratuity as fully exempt with no ceiling.

Worked gratuity example: An employee retires after 28 years with a last drawn basic + DA of Rs. 1,20,000/month.

• Formula: Rs. 1,20,000 ÷ 26 × 15 × 28 = Rs. 19,38,462
• Ceiling: Rs. 20,00,000
• Exempt amount: Rs. 19,38,462 (the lower figure)
• Taxable gratuity: Nil

If the same employee received Rs. 22,00,000 as gratuity (ex gratia top-up), the excess Rs. 61,538 would be taxable as salary.

Section 10(10AA): Leave Encashment

For non-government employees, leave encashment on retirement or resignation is exempt up to Rs. 25 lakh (revised by notification dated 24 May 2023, effective FY 2023-24 onwards). The formula-based ceiling is: average salary of the last 10 months × number of months of leave earned (capped at 30 days per year of service).

Key distinction: Leave encashment received during service (not on retirement/resignation) is fully taxable in the year of receipt. Only the retirement/resignation encashment attracts the exemption.

Government employees continue to enjoy full exemption without the Rs. 25 lakh cap.

Section 10(10C): Voluntary Retirement Scheme (VRS)

Compensation received on voluntary retirement is exempt up to Rs. 5 lakh, subject to the scheme meeting the conditions in Rule 2BA — including the requirement that the retiring employee is above 40 years of age or has completed ten years of service, and the scheme does not result in replacement of the retiree.

Both 10(10AA) and 10(10C) exemptions are available in the same year if both events occur, but 10(10C) itself cannot be claimed more than once in a lifetime.

Section 10(10D): Life Insurance Maturity Proceeds

Maturity or death proceeds of a life insurance policy are exempt under Section 10(10D), with carve-outs introduced over successive Finance Acts:

• Pre-1 April 2012 policies: Fully exempt regardless of premium amount.
• Post-1 April 2012 policies (non-ULIP): Exempt only if the annual premium does not exceed 10% of the sum assured at any point during the policy term. If the policyholder has a disability or disease specified under Section 80DDB, the threshold is 15%.
• ULIPs issued after 1 February 2021: If aggregate annual ULIP premium across all policies exceeds Rs. 2.5 lakh, the maturity proceeds are taxed as capital gains under Section 112A — effectively removed from the Section 10(10D) tent.
• Non-ULIP high-premium policies (post-1 April 2023): If aggregate annual premium across all non-ULIP policies exceeds Rs. 5 lakh, the excess proceeds are taxable. This was introduced in Finance Act 2023 and applies from AY 2024-25 onwards.

Death claims are always exempt under Section 10(10D) regardless of premium amount — this carve-out is unconditional.

Both regimes treat Section 10(10D) identically.

Section 10(14): Special Allowances — What Actually Survives

Section 10(14) covers a long list of allowances notified by the government. Under the old regime, the following are exempt to the extent actually spent:

• Conveyance allowance: Exempt to the extent used for official duty travel (not the commute from home to office — that is covered by the standard deduction).
• Daily allowance: Exempt to the extent incurred while on tour or transfer.
• Helper, research, and uniform allowances: Exempt to the extent actually spent on the specified purpose; excess is taxable as salary.
• Children's education allowance: Rs. 100 per child per month for up to two children = Rs. 2,400/year maximum.
• Children's hostel allowance: Rs. 300 per child per month for up to two children = Rs. 7,200/year maximum.
• Transport allowance for disabled employees: Rs. 3,200/month (exempt).

None of these are available under the new tax regime. Under the new regime, you get the standard deduction of Rs. 75,000 (from FY 2024-25 onwards) in lieu of all these allowances. For most employees with modest allowance structures, the new regime's standard deduction more than compensates; for those with large conveyance or research allowances, run the numbers.

Section 10(2A) and 10(2): Partners in Firms, LLPs, and HUF Members

Section 10(2A) — Partner's share in firm/LLP profit

A partner's share of profit from a partnership firm or LLP is fully exempt, because the firm has already paid tax at 30% (plus surcharge and cess) on the same income. This prevents double taxation. The exemption applies to the distributable profit share — interest on capital and remuneration paid by the firm to the partner are taxable in the partner's hands (and deductible in the firm's hands under Section 40(b)).

If you are a partner in multiple firms, aggregate the profit shares — all are exempt.

Section 10(2) — HUF member's share

An amount received by a member from the income of a Hindu Undivided Family (HUF) is exempt, again to prevent double taxation since the HUF is assessed separately. This is relevant where HUF income has already been taxed and is being distributed as a coparcenary benefit.

Worked Example: Salaried Employee — Old Regime vs. New Regime Using Section 10

Profile: Arjun, 38, employed in Bengaluru (non-metro), FY 2026-27.

Old regime — Section 10 exemptions:

• HRA exemption: Least of (a) Rs. 3,60,000; (b) Rs. 3,00,000 − 10% of Rs. 9,00,000 = Rs. 2,10,000; (c) 40% of Rs. 9,00,000 = Rs. 3,60,000 → Exempt: Rs. 2,10,000
• LTA: Actual travel cost assumed at Rs. 55,000 (economy air, within India) → Exempt: Rs. 55,000
• Special allowances (actually spent): Rs. 50,000 → Exempt: Rs. 50,000
• Standard deduction: Rs. 50,000
• Total deductions from gross salary before Chapter VI-A: Rs. 2,10,000 + Rs. 55,000 + Rs. 50,000 + Rs. 50,000 = Rs. 3,65,000
• Net taxable salary: Rs. 13,80,000 − Rs. 3,65,000 = Rs. 10,15,000

Adding Section 80C deductions (Rs. 1,50,000) and 80D (Rs. 25,000): Taxable income = Rs. 8,40,000 Tax at old regime slabs: approximately Rs. 87,400 (after cess).

New regime — same gross salary:

• No HRA, LTA, or special allowance exemptions.
• Standard deduction: Rs. 75,000.
• No Chapter VI-A deductions.
• Taxable income: Rs. 13,80,000 − Rs. 75,000 = Rs. 13,05,000
• Tax at new regime slabs: approximately Rs. 1,17,000 (after cess).

In this case, the old regime saves Arjun approximately Rs. 29,600 in tax. For employees with lower HRA (smaller cities, shared accommodation) or lower actual rent, the arithmetic may reverse.

Common Mistakes and Pitfalls to Avoid

1. Claiming HRA for cash rent payments. Rent paid in cash above Rs. 1 lakh to a single landlord does not qualify for the mandatory PAN requirement. Cash payments in general are hard to substantiate during assessment — use bank transfers and keep a rent agreement.

2. Forgetting to report agricultural income in Schedule EI. Omitting agricultural income from the ITR — even though it is exempt — invites scrutiny. The AIS/TIS dashboard for AY 2027-28 is likely to carry land revenue data. Disclose fully.

3. Using the LTA exemption for international travel. Any portion of a journey outside India does not qualify. Only the domestic segment (computed on the shortest route fare) is exempt.

4. Treating all insurance maturity proceeds as automatically exempt. Check the issuance date and premium-to-sum-assured ratio. High-premium policies issued after April 2023 with aggregate annual premiums above Rs. 5 lakh will generate taxable proceeds. Verify each policy separately.

5. Assuming leave encashment during service is exempt. It is not. Only on retirement or resignation is the Rs. 25 lakh exemption available for non-government employees. Leave encashment paid as part of annual leave surrender mid-service is fully taxable.

6. Not switching the employer declaration before April. If you want the old regime for FY 2026-27, submit the declaration to your employer at the beginning of the year. Employers default to the new regime. Even if you elect the old regime in the ITR later, excess TDS deducted because of a mid-year switch will result in a refund — a cash-flow loss during the year.

7. Claiming partner's remuneration as exempt under 10(2A). Only the profit share is exempt. Interest on capital and remuneration paid under Section 40(b) are taxable in the partner's hands, even though the firm deducts them before arriving at distributable profit.

Key Takeaways

• HRA and LTA are old-regime-only. If you are on the new tax regime for FY 2026-27, collecting rent receipts and travel tickets serves no tax purpose.
• The retirement cluster — gratuity, leave encashment, VRS, life insurance — survives under both regimes. These are not regime-dependent; structure your retirement planning around the exemption limits (Rs. 20 lakh gratuity, Rs. 25 lakh leave encashment).
• Agricultural income is always exempt, but must always be disclosed in Schedule EI; it affects the rate on non-agricultural income through partial integration.
• HRA requires the landlord's PAN if annual rent exceeds Rs. 1 lakh. No PAN, no exemption from the employer — though you can claim it in the ITR with supporting evidence.
• LTA exemption covers two journeys in the 2026-2029 block. One unused journey from the previous block (2022-2025) may be carried forward to calendar year 2026 if not yet used.
• Section 10(10D) has become conditional. High-premium non-ULIP policies (aggregate premium > Rs. 5 lakh/year) and high-premium ULIPs (aggregate > Rs. 2.5 lakh/year) lose the full exemption on maturity proceeds.
• Run both regime calculations every year. Salary structures, rent arrangements, and investment commitments change — the better regime for FY 2025-26 may not be the better regime for FY 2026-27.