Library / Income-tax Act, 2025: The Professional's Master Guide

6. Heads of Income and Exempt Income

6.1 Five heads (Section 13)

Head	Sections (2025 Act)	Old sections
Salaries	15 to 19	15 to 17, 10(10) etc., 16
Income from House Property	20 to 25	22 to 27
Profits and Gains of Business or Profession	26 to 66	28 to 44DB
Capital Gains	67 to 91	45 to 55A
Income from Other Sources	92 to 95	56 to 59

Income is first computed under each head, then added together (section 101), losses are set off, deductions are allowed, and tax is calculated on the total income. The order matters: the head decides which deductions, which losses and which rates apply.

Step	What happens	Reference
1	Compute income under each of the five heads	Sections 15 to 95
2	Add income of other persons (clubbing) and deemed incomes	Sections 96 to 106
3	Set off current year losses, then brought forward losses	Sections 108 to 121
4	Gross total income less deductions	Sections 122 to 154
5	Tax at slab or special rates, rebate, surcharge, cess	Sections 155, 156, 196 to 207
6	Less relief, TDS, TCS, advance tax; add interest and fee	Sections 157 to 160, 392 to 428

6.2 Exempt income (Section 11 and Schedules)

The long list of exemptions in old section 10 is now placed in Schedules. The section simply says that income listed in the Schedules does not form part of total income.

Schedule	Broad content (examples)
Schedule II	Exemptions for individuals and general exemptions, e.g. agricultural income, share of profit from a firm, HRA, gratuity, leave encashment, PPF interest
Schedules III to VII	Exemptions for specified persons and funds, e.g. investment funds, sovereign funds, specified institutions, non-residents in certain cases
Schedule VIII	Political parties and electoral trusts

Illustration 13: Citing an exemption

Under the old law you wrote "exempt under section 10(2A)" for share of profit from a firm. Now you write "exempt under section 11 read with the relevant entry of Schedule II". The exemption itself is unchanged.

Key point

Section 14 (old 14A) still applies: expenses incurred to earn exempt income are not deductible. For companies holding large equity portfolios, compute the disallowance as per the Rules and report it in Form 26.

6.3 Important exemptions explained

The table below explains the exemptions used most often in practice, now found in the Schedules read with section 11. Unless stated otherwise, they apply in both the old and the new regime.

Exemption	Explanation	New regime?
Agricultural income	Rent or revenue from agricultural land in India, income from agricultural operations and from farm buildings. Fully exempt but used for rate purposes (partial integration)	Yes
Share of profit from a firm	Partner's share of firm profit, since the firm has already paid tax	Yes
HUF member's receipt	Amount received by a member out of HUF income	Yes
Leave travel concession	Cost of travel within India for two journeys in a block of four years, by the shortest route	No
House rent allowance	Least of actual HRA, 50% or 40% of salary, and rent less 10% of salary	No
Gratuity	Fully exempt for government employees; limit of Rs. 20 lakh for others under the prescribed formula	Yes
Leave encashment on retirement	Fully exempt for government employees; up to Rs. 25 lakh for others under the formula	Yes
Commuted pension	Fully exempt for government; one third or one half for others	Yes
Retrenchment compensation and VRS	Up to Rs. 5 lakh each, subject to conditions	Yes
Life insurance maturity	Exempt if premium in any year is not more than 10% of sum assured, and aggregate premium on policies issued after 1 April 2023 does not exceed Rs. 5 lakh a year (Rs. 2.5 lakh for ULIPs)	Yes
PPF, Sukanya Samriddhi interest	Fully exempt	Yes
EPF interest and withdrawal	Exempt after 5 years of continuous service; interest on employee contribution above Rs. 2.5 lakh a year (Rs. 5 lakh if no employer contribution) is taxable	Yes
NPS withdrawal	60% of the corpus on closure is exempt; partial withdrawal up to 25% of own contribution exempt	Yes
Scholarships	Granted to meet cost of education	Yes
Minor child's income clubbed	Rs. 1,500 per child	No
Interest on NRE account and FCNR deposits	Exempt for residents outside India as defined under FEMA	Yes

6.4 Agricultural income and partial integration

Agricultural income is exempt, but for individuals, HUFs, AOPs and BOIs it is added to total income only to decide the rate of tax on non-agricultural income. This is called partial integration. It applies when agricultural income exceeds Rs. 5,000 and non-agricultural income exceeds the basic exemption limit.

Method: (1) Compute tax on non-agricultural income plus agricultural income. (2) Compute tax on agricultural income plus the basic exemption limit. (3) Tax payable is (1) minus (2), then rebate, surcharge and cess are applied.

Judicial view: What is agriculture

CIT v. Raja Benoy Kumar Sahas Roy (Supreme Court, 1957): agriculture requires basic operations on the land itself, such as tilling, sowing and planting, involving human skill and labour. Subsequent operations alone, such as tending trees that grow naturally without any basic operations, do not make the income agricultural.

Illustration 14: Partial integration (old regime, individual below 60)

Suresh has non-agricultural income of Rs. 8,00,000 and agricultural income of Rs. 3,00,000. Compute tax under the old regime.

Step 1: tax on 11,00,000 (8,00,000 plus 3,00,000)	1,42,500
Step 2: tax on 5,50,000 (3,00,000 plus 2,50,000 exemption limit)	22,500
Tax on non-agricultural income (Step 1 less Step 2)	1,20,000
Add: cess at 4%	4,800
Total tax	1,24,800

Without agricultural income, tax on Rs. 8,00,000 under the old regime would have been Rs. 72,500 before cess. The agricultural income, though exempt, pushed the non-agricultural income into higher slabs. Under the new regime the same method applies using the new slabs and the Rs. 4 lakh exemption limit.

Key point

Income from sale of agricultural produce after basic processing (such as drying of tobacco leaves) is agricultural income, but income from a manufacturing process (such as tea manufacture) is partly agricultural. For tea grown and manufactured by the seller, 40% of the income is business income and 60% is agricultural, as per the Rules.

6.5 Expenditure relating to exempt income (section 14)

Section 14 disallows expenditure incurred in relation to exempt income. The Rules prescribe a method where the books do not show a correct figure: broadly, the actual expenditure directly related to exempt income plus 1% of the annual average value of investments that yield exempt income, capped at the total expenditure claimed. The disallowance cannot exceed the exempt income earned in that year.

Judicial view: Maxopp Investment Ltd. v. CIT (Supreme Court, 2018)

The Court held that the disallowance for expenses related to exempt income applies even where shares are held as stock-in-trade, if dividend (then exempt) is earned from them. The dominant purpose of holding the shares does not matter.

Chapter summary

• Income is computed under five heads, then aggregated, losses set off, deductions allowed and tax computed.

• Exemptions are in Schedules II to VII read with section 11.

• Agricultural income is exempt but used for rate purposes through partial integration.

• Expenditure related to exempt income is disallowed under section 14.

PART B: HEADS OF INCOME

Salaries, house property, business or profession, capital gains and other sources

Each head of income has its own rules for what is taxable, what can be deducted and when. This part takes the five heads in the order of the Act, with detailed explanations, the Rules, 2026 changes for salaried employees, and many worked illustrations. Read the PGBP and capital gains chapters together, since business assets and capital assets interact.