Procedure to disclose Exempt Income in ITR & Importance

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There are various Incomes which are exempted from the levy of income tax in the hands of the person who is receiving the amount. As these incomes are exempted from the levy of Income Tax, many people don’t disclose such incomes in the Income Tax Return.

Not disclosing the exempt Income in ITR is not the correct manner to file an Income Tax Return and this may have some consequences. Moreover, the new ITR Forms have specific columns wherein the Tax Dept. is specifically asking the taxpayers for the exempted incomes earned during the year.

Budget 2016 Update: If an assessee earns exempt income during the year and before claiming such exemption, his income is more than the minimum amount exempted from the levy of tax – he shall also be liable to file income tax return.

The following article focuses on the Incomes which are exempted from the levy of Income Tax and the manner of disclosing the same.

Procedure to disclose Exempt Income under Head Salaries

People earning Income under Head Salaries are given certain allowances which are exempted from the levy of Income Tax.

These Exemptions under Head Salary are required to be disclosed in Schedule S – Details of Income from Salary while filing ITR-2. A screenshot of the same is attached herewith:-

disclose-exempt-income

The Exemptions from Salaried Income are specifically mentioned in the Form 16 given by the employer and the basis of computation of the exemption allowed from some of these allowances is as under:-

  1. Exemption from House Rent Allowance
  2. Exemption from Leave Travel Allowance
  3. Income Tax Exemption on Leave Encashment
  4. Income Tax Exemption on Pension
  5. Income Tax Exemption on Gratuity
  6. Income Tax Exemption on VRS
  7. Income Tax Exemption on Perquisites

Although these Exemptions are disclosed in Form 16, these are not disclosed in Form 26AS and therefore, the taxpayer should rely on Form 16 and the Salary Slip for disclosing these incomes in the income tax return.

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Procedure to disclose Exempt Income under Heads other than Salary

Apart from Salary Allowances, there are certain other incomes as well which are exempted from the levy of Income Tax. Some of these Incomes are

  1. Interest Income which is exempted from Income Tax like Interest on PPF, Interest on EPF, Interest on Tax Free Bonds etc
  2. Dividend received from Shares and Mutual Funds
  3. Long Term Capital Gains from sale of Shares on which STT has been paid
  4. Net Agricultural Income
  5. Other Incomes like exempt income of minor child, Payment received from Family Income by a Member of HUF, Scholarship granted to meet the Cost of Education, etc.

These Incomes are required to be disclosed in Schedule EI in the Income Tax Return (ITR). A screenshot of the same is shared below:-

exempt-income

If you are using ITR – 1, there wont be a separate schedule for reporting Exempt Income. There is a single column in ITR 1 (in Taxes Paid and Verification Schedule) in which exempt income (other than agricultural income) can be reported.

Why you should always disclose Exempt Income

Exempt Income is an Income on which no tax is levied and therefore, many people don’t disclose this income in the income tax return. However, not disclosing the Exempt Income in the Income Tax Returns is not the right approach because the income tax department has specifically asked for these details of exempt income in the ITR Forms (except in ITR 1).

Moreover, if you don’t disclose such incomes in the income tax return, the income tax department will not come to know the source from where you got such income and therefore suspicion would arise.

For eg: If you have income of Rs. 7 Lakhs p.a. and you have shares which you purchase 20 years ago and are now giving you a handsome profit of Rs. 50 Lakhs. You sell these shares and purchase a property.

Now as you haven’t disclosed such exempt income in the ITR Form, the Income Tax Deptt does not know where this money came from and when you purchase a property – a suspicion will arise that from where did a person earning Rs. 7 Lakhs get so much money to buy a property and therefore chances of a scrutiny notice would be higher.

Although, when the income tax officer will call you for a scrutiny, you would be having all the documents to justify the source of income and the income tax officer will leave you without any penalty as this is exempted income.

But the point is – that why to create such a situation when such an income is exempted from the levy of income tax and can be easily disclosed without any hassles.

It is pertinent to note that the above article relates only to disclosure of exemptions and not income tax deductions and income tax rebates.

A Personal Finance enthusiast, Karan is the founder of charteredclub.com and loves to discuss about Money related matters.