Three incomes exempt from tax under the 1961 Act (as set, 1961 Act, AY 2019-20)

Section 10 lists incomes that do not form part of the total income of the previous year. Three of them are:

1. Agricultural income

Agricultural income is excluded from total income altogether (section 10(1)). It means, broadly, rent or revenue from land in India used for agriculture, income from agriculture on such land or from processes that make its produce fit for the market, and income from a farm building used by the cultivator in connection with the land (section 2(1A)). The exemption is complete, but for an individual or a Hindu undivided family with other income above the exemption limit, net agricultural income of more than ₹5,000 is brought in to fix the rate of tax on the other income (Finance (No. 2) Act, 2019, section 2(2)). This applies to the assessees of Paragraph A of Part I of the First Schedule whose total income exceeds ₹2,50,000 (₹3,00,000 for a resident aged 60 or more but under 80; ₹5,00,000 for a resident aged 80 or more): tax is worked out on total income plus net agricultural income, less tax on net agricultural income plus that limit (clause (b) of that sub-section, with its provisos).

Example (our own): a farmer in Punjab who sells his wheat crop for a net income of ₹3,00,000 pays no tax on that ₹3,00,000.

2. Sums received by a member from a Hindu undivided family

Any sum an individual receives as a member of a Hindu undivided family, paid out of the family's income (or out of the income of an impartible estate of the family), is exempt in the member's hands (section 10(2)). The family is a separate person assessed on its own income, so what it shares out is not taxed again in the member's hands; the exemption does not depend on whether the family in fact paid tax on that income. The exemption is subject to section 64(2): where, after 31 December 1969, a member has converted his own property into family property, thrown it into the common stock, or transferred it to the family, directly or indirectly, without adequate consideration, the income derived from that property is deemed to arise to him and not to the family (section 64(2)(b)), so it is included in his own total income whether or not the family pays any of it to him.

3. A partner's share of the profits of a firm

A partner's share in the total income of a firm that is assessed separately as a firm is exempt in the partner's hands (section 10(2A)). His share is worked out in the proportion of his profit-sharing ratio under the deed (Explanation to section 10(2A)). The firm pays tax on its own total income, so the share is not taxed twice. Interest, salary, bonus, commission or other remuneration that the firm pays him is different: it is taxed in his hands as business income, adjusted to the extent any of it was not allowed to the firm under section 40(b) (section 28(v) and its proviso).

Other examples: dividends referred to in section 115-O, that is, those declared by a domestic company (section 10(34)), except dividends taxed under section 115BBDA (for a resident specified assessee, the dividends above ₹10 lakh in aggregate, taxed at 10% on the excess), and income of a minor child included in a parent's income under section 64(1A), up to ₹1,500 a child (section 10(32)).