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Reporting tax-free income in your ITR is mandatory for transparency, even though it isn’t taxable.
Exempt income must be reported in ITR. (representative image)
When it comes to filing your income tax return (ITR), most people focus only on taxable income. But what many forget is that tax-free income also needs to be reported. While you don’t pay any tax on these earnings, the Income Tax Department still requires you to disclose them in your return.
“While exempt income is not taxable, it is mandatory to disclose it in ITR under the ‘Exempt Income’ schedule,” advises Nishant Khemani, Managing Partner of the Saturn Consulting Group, as quoted by The Times of India. Many taxpayers skip this step, thinking it is not important, but failing to do so could lead to unnecessary scrutiny later on. Reporting exempt income is not just a formality; it ensures transparency and saves you from explaining large sums of money in the future.
Even though there is no penalty for not reporting exempt income, including it in your ITR can make life easier. For example, if you receive a large maturity payout from your PPF account or a life insurance plan, it will be much simpler to explain the source of funds when the disclosure is already made in your return.
Why You Must Report Exempt Income
Transparency is key when filing your tax return. The ITR is meant to capture all your financial transactions for the year, not just the ones that attract tax. This includes incomes that are completely exempt.
This disclosure becomes mandatory if your gross total income exceeds the basic exemption limit or if you are otherwise required to file a tax return. Not mentioning these incomes can also cause issues if your Annual Information Statement (AIS) already shows such transactions. If there is a mismatch, your return may be flagged for verification, leading to delays in refunds.
According to The Times of India, Umesh Jethani, Founder of Apki Return, points out another important detail: “If a large amount (more than Rs 50 lakh) is deposited in a savings bank account in a year, the bank is obliged to report it to the tax authorities.”
If you haven’t disclosed your exempt income, explaining the source of such deposits later could become troublesome.
What Qualifies as Exempt Income?
Several sources of income are exempt from tax but still need to be reported.
Interest earned on Provident Fund accounts and the Public Provident Fund (PPF) is fully exempt under Section 10(11). Withdrawals from the Provident Fund after five years also enjoy full exemption under Section 10(12). Similarly, interest and maturity proceeds from the Sukanya Samriddhi Yojana are tax-free under Section 10(11A).
Life insurance policy maturity proceeds are exempt under Section 10(10D), provided the annual premium does not exceed 10 per cent of the sum assured. Leave encashment on retirement is fully exempt for government employees and partly exempt for others under Section 10(10AA).
Retrenchment compensation enjoys relief up to specified limits under Section 10(10B), while Voluntary Retirement Scheme (VRS) receipts are exempt up to Rs 5 lakh once in a lifetime under Section 10(10C).
Tax-free bond interest from specified institutions like NHAI or REC is also covered under Section 10 (15). Gifts from specified relatives, or those received on marriage and certain ceremonies, are exempt under Section 56(2)(x). Scholarships (Section 10(16)) and government-approved awards or rewards (Section 10(17A)) are fully exempt as well.
Gratuity is exempt up to Rs 20 lakh for non-government employees under Section 10(10). Income received by a member from a Hindu Undivided Family (HUF) is exempt under Section 10(2), while a partner’s share of profit from a partnership firm is exempt in their hands (Section 10(2A)), since the firm itself pays the tax.
Agricultural income is fully exempt under Section 10(1), but must still be reported in your return. If it exceeds Rs 5,000, a separate computation in Schedule EI is required.
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