Filing ITR Here's Why You Should Also Declare Exempt Income

Income Tax Return or ITR is a legal form through which an individual or a legal entity declares details of their sources of income to the Income Tax Department of India. This helps the government assess information about the taxpayers' income and determine their tax liability. Through ITR, you are required to disclose your taxable and exempt income.
 

What is exempt income in ITR?

Exempt income is that part of your income, which, as per the Income Tax Act, 1961, is not liable to attract any income tax. However, the taxpayer is liable to submit all information relating to the source of income. Examples of exempt income include agriculture income, certain gifts, provident funds, superannuation funds, scholarships, etc. Many taxpayers do not disclose details of exempt income as it is not taxable. However, you should refrain from doing so.

Also Read: All You Need To Know About the New Income Tax Return Forms
 

Why it is necessary to disclose exempt income in ITR?

1. For the sake of transparency

   The Income Tax Act, 1961 mandates disclosure of all sources of income, whether taxable or non-taxable. Hence, to maintain transparency, it is essential to disclose the same in your ITR.
    

2. The return will be incomplete and invalid without income

   Any return is considered invalid if all sources of income are not reflected as this is a mandatory requirement while filing ITR.
    

3. The intention of the taxpayer may be doubted

   If all sources are not mentioned, the intention of the taxpayer may appear fraudulent in the tax report. Hence, to avoid ambiguity, you must disclose all sources of your income.
    
   Examples:

• If you enter into a high-value transaction, you will be required to disclose your income sources. In such scenarios, it will be difficult to explain the transaction if you have used proceeds from the exempt income. 
• To ensure that if there is an enquiry by the Income Tax Department later, you can rest assured that previous ITRs have appropriately disclosed all your income sources. This proves to be a testimony that you have maintained transparency and do not have any hidden sources of income. 

Exempt Income Under Income Tax Act

 The Income Tax Act of 1961 provides an extensive list of exemptions. However, the following are some of the most common types of exempted income:
 

1. House Rent Allowance (HRA)

   If your salary break-up includes HRA and you are also paying the rent for your residential accommodation, you are eligible for exemption. The details of this exemption are outlined below. 
    
   Conditions: 

   • Actual HRA received
   • 50% of your annual salary if you live in a metro city. However, if you live in a non-metro city, the percentage goes down to 40%.
   • Rent paid minus 10% of salary

   The minimum one is taken into account for HRA exemption.
    

2. Leave Travel Allowance (LTA)

   Several companies offer LTA to employees so they can take a vacation with their families. Allowances of this nature are exempt from taxation. However, you can only claim an exemption if you actually took off for a trip and have bills to prove it.
    

3. Agriculture Income

   If you earn an agricultural income, you are exempt from paying taxes on that income. Some of the incomes that fall under the category of agriculture income are:
    

   • If the rental income is generated by land that is used for agricultural purposes.

    

   • If the income/ revenue is generated by any buildings owned and occupied on or near agricultural land.

    

   • If the income is earned by the processing of agri-products. 

    

4. Transport Allowance

   Travel allowance is also subject to the provisions of the tax exemption. However, the exemption is only valid if the expense is incurred while commuting from home to work.
    

5. The Payout from Life Insurance Policy

   The payment (sum assured + any bonus) that you, as a beneficiary, receive from the life insurance policy maturity/ surrender/ death benefits is completely tax-free. 
    

6. Certain Kind of Interest Income 

   • Interest income earned on bonds and debentures issued by public sector companies. 

    

   • Interest income earned through the notified gold deposit bonds. 

    

   • Interest income through the bonds that are notified by local authorities. 

    

Also Read: Tax Tips 2020 - How to get the biggest tax refund
 

Conclusion

The ITR is an account of your income and tax liability and is a crucial document. The benefits of filing an ITR are countless. It can help you avail loans, ensure faster visa processing, employing an insurance policy, availing income tax refund or employing a two-wheeler loan. If you are freelancing, the ITR will be proof of your income. Tax experts recommend filing the return even if your income falls below the tax bracket.

Disclaimer: This post was first published on 18 February 2022 and has been updated for the latest information, freshness, and accuracy.