Even if some income is tax-free, you must still report it in your ITR. This helps show your full financial picture, avoids mismatches with AIS or Form 26AS, and keeps you safe from tax notices. From agricultural earnings and gifts to tax-free interest, here’s why declaring exempt income is important and how you can file them correctly.
Form ITR-1 does not contain a dedicated schedule for exempt income; however, it includes a specific section within the “Income Details” schedule for this purpose.
It is important to report all exempt income in the Income Tax Return (ITR) even though it is not taxable. It will ensure complete disclosure of the taxpayer’s financial profile and prevent any mismatch with information available to the income tax department.
There are more than 50 categories of exempt income, each of which come under different sections of the Income-Tax Act, based on the nature of income, residential status or other specified conditions. For instance, agricultural income is exempt under Section 10(1), interest on tax-free bonds under Section 10(15), gifts received from specified relatives under Section 56(2), interest amount of Rs 10,000 in savings bank account under Section 80TTA, life insurance proceeds including bonus under Section 10(10D) subject to prescribed conditions.
Each category has its own limits and conditions — for example, gifts above Rs 50,000 from non-relatives are taxable. Filing exempt income in the ITR will enable the Income Tax Department to match data from Annual Information Statement (AIS), Form 26AS, and other third-party reports.
“Reporting exempt income in the ITR serves as a form of voluntary disclosure, allowing the income tax department to verify and validate the exemption claimed,” says Neeraj Agarwala, partner, Nangia & Company.
Consequences of not reporting
Omission in reporting may raise red flags during data-matching by the department, potentially leading to a tax notice seeking clarification. In some cases, non-reporting could also invite interest or penalty if the department later deems part of the exempt income as taxable.
While there is no immediate penalty for non-disclosure of exempt income due to genuine oversight, the implications change significantly if an income is intentionally claimed as exempt and is later deemed taxable.
In such instances, the amount will be added to the total taxable income, resulting in additional tax liability, with penalties under Section 270A potentially applicable. “Depending on the nature of the case, this may be classified as under-reporting, or, in cases involving misrepresentation of facts, as deliberate misreporting may attract a penalty of up to 200%,” says Sandeep Sehgal, partner, Tax, AKM Global, a tax and consulting firm.
The income tax department deploys data analytics to cross-check information from multiple sources, including the Annual Information Statement (AIS), third party information and verification, SFT and employer reporting. Any inconsistency between these records and the income reported in the ITR can trigger a scrutiny notice.
How to report exempt income
Form ITR-1 does not contain a dedicated schedule for exempt income; however, it includes a specific section within the “Income Details” schedule for this purpose. In contrast, ITR-2 and ITR-3 feature a separate Schedule EI for reporting exempt income other than salary-related exemptions.
Additionally, a new schedule has been introduced to claim exemption for House Rent Allowance (HRA) under the old tax regime (Schedule EA – Section 10(13A)). Providing complete and accurate disclosure helps ensure smooth return processing and minimises the chances of unnecessary scrutiny.
Agriculture income
If net agricultural income is below Rs 5,000 and the non-agricultural total income is otherwise taxable, the agricultural income is required to be reported under the exempt income schedule in the ITR. For example, Form ITR 1 contains a special drop down for agricultural income below Rs 5,000 in the section for exempted income (Schedule EI) . No special computation is needed if agricultural income does not exceed Rs 5,000. If it exceeds Rs 5,000, income must be reported under ITR-2, and additional details are to be provided accordingly.
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