Section 10 of the Income Tax Act, 1961 enumerates specific categories of income that are wholly or partially exempt from income tax — that is, incomes that shall not be included in computing the total income of an assessee. Under Indian law, Section 10 contains over 60 sub-clauses covering exemptions ranging from agricultural income and House Rent Allowance to gratuity, VRS compensation, and educational scholarships.
Legal definition
Section 10 of the Income Tax Act, 1961 opens with:
Section 10: In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included—
Key exemptions include:
| Clause | Income Type | Exemption Limit |
|---|---|---|
| 10(1) | Agricultural income | Fully exempt from central IT |
| 10(5) | Leave Travel Allowance (LTA) | Actual travel expenses, 2 journeys per 4-year block |
| 10(10) | Gratuity | Rs 25,00,000 (government) / limit for private sector |
| 10(10A) | Commuted pension | Fully exempt for government; partially for others |
| 10(10AA) | Leave encashment on retirement | Rs 25,00,000 |
| 10(10C) | VRS compensation | Rs 5,00,000 |
| 10(13A) | House Rent Allowance (HRA) | Least of: actual HRA, rent paid minus 10% salary, or 50%/40% of salary |
| 10(14) | Special allowances | Prescribed limits per Rules |
| 10(16) | Scholarship for education | Fully exempt |
| 10(26) | Income of Scheduled Tribes in specified areas | Fully exempt |
| 10(34) | Dividend income (until AY 2021-22) | Fully exempt (now taxable post-abolition of DDT) |
| 10(38) | LTCG on listed equity (until AY 2018-19) | Fully exempt (now taxable under Section 112A) |
New regime impact: Under the new tax regime (Section 115BAC), most Section 10 exemptions are unavailable. Only specific exemptions — including Section 10(1) (agricultural income), 10(10) (gratuity), 10(10AA) (leave encashment), 10(10C) (VRS), and 10(34) (pre-2020 dividends) — continue to apply. Exemptions for HRA, LTA, special allowances, and most perquisites are not available under the new regime.
How courts have interpreted this term
CIT v. Raja Benoy Kumar Sahas Roy [(1957) 32 ITR 466 (SC)]
The Supreme Court defined "agricultural income" for the purposes of Section 10(1), holding that the exemption applies to income derived from land used for agricultural operations — meaning the basic operations of tilling, sowing, and harvesting, and subsequent operations performed on the produce to make it fit for the market. Income from activities beyond market-rendering (such as manufacturing processes applied to agricultural produce) does not qualify for the exemption. The Court drew the line between agricultural income (exempt) and manufacturing income (taxable) at the point where the produce undergoes a change in character.
DIT v. GE Indian Technology Centre Pvt. Ltd. [(2010) 327 ITR 456 (Karnataka HC)]
The High Court held that payments made by a company to employees as part of a systematic programme for higher education qualify for exemption under Section 10(16) as a "scholarship granted to meet the cost of education." The Court distinguished between a scholarship (exempt) and a reimbursement of expenses tied to employment (taxable as perquisite), holding that the purpose and character of the payment determines its treatment.
CIT v. J.K. Bankers [(2003) 131 Taxman 626 (Allahabad HC)]
The Court held that exemptions under Section 10 must be strictly construed — the assessee must bring the income clearly within the specific clause to claim exemption. Where the income does not squarely fall within any sub-clause, the benefit of doubt does not accrue to the assessee. This principle of strict construction of exemption provisions has been consistently followed.
Why this matters
Section 10 is the first port of call for any tax computation — before deductions under Chapter VI-A (Sections 80C to 80U) and before applying tax rates, the assessor must exclude all incomes that fall within Section 10. For salaried employees, the exemptions for HRA, LTA, gratuity, and leave encashment represent significant tax relief that can reduce taxable income by lakhs.
For employers, correctly structuring salary components to maximise Section 10 exemptions is a core element of compensation planning. The allocation between basic salary, HRA, special allowances, and reimbursements directly affects the employee's tax burden. Post the new tax regime's introduction, employers must offer employees the flexibility to choose between the old regime (with exemptions) and the new regime (without exemptions but lower rates).
A common misconception is that agricultural income is entirely invisible to the income tax system. While agricultural income is exempt under Section 10(1) from central income tax, it is included for the purpose of computing the tax rate on non-agricultural income — a mechanism known as "partial integration" under the First Schedule to the Finance Act. This means that a taxpayer with both agricultural and non-agricultural income may pay a higher effective tax rate on the non-agricultural component.
Related terms
Parent concept:
Sibling provisions:
Specific exemptions:
Frequently asked questions
Is HRA exemption available under the new tax regime?
No. The HRA exemption under Section 10(13A) is not available to assessees who opt for the new tax regime under Section 115BAC. Under the new regime, the slab rates are lower, but most exemptions including HRA, LTA (Section 10(5)), and special allowances are forfeited. Taxpayers must compare the total tax under both regimes to determine which is more beneficial.
What is the exemption limit for gratuity under Section 10(10)?
For government employees, gratuity is fully exempt. For non-government employees covered under the Payment of Gratuity Act, the exemption is the least of: actual gratuity received, Rs 25,00,000 (raised from Rs 20,00,000 by notification effective March 29, 2018, for the Gratuity Act; the IT Act limit was aligned subsequently), or 15 days' salary for each year of completed service. The calculation uses last drawn salary and completed years of service.
Is agricultural income completely tax-free in India?
Agricultural income is exempt from central income tax under Section 10(1). However, it is used for rate calculation purposes — if the total non-agricultural income exceeds the basic exemption limit, the tax rate applicable to non-agricultural income is computed by aggregating agricultural and non-agricultural income, calculating tax on the aggregate, and then subtracting the tax attributable to agricultural income. Additionally, some state governments levy taxes on agricultural income.
Can educational scholarships be taxed?
Scholarships granted to meet the cost of education are exempt under Section 10(16). This covers scholarships for study in India or abroad. However, stipends or payments received as part of employment (such as training stipends from an employer) may not qualify as scholarships and could be taxable as salary or income from other sources, depending on the nature of the arrangement.
This entry is part of the Veritect Indian Legal Glossary, a comprehensive reference of Indian legal terminology grounded in statutory text and judicial interpretation.
Last updated: 2026-03-27. Veritect provides this content for informational purposes and does not constitute legal advice.