By CA Surekha Ahuja
This guide applies exclusively to Assessment Year 2026-27 (Financial Year 2025-26).
The return being filed for AY 2026-27 continues to be governed by the Income-tax Act, 1961. Although the Income-tax Act, 2025 has come into force from 1 April 2026, it applies prospectively to income earned from FY 2026-27 onwards and therefore does not govern the current filing season.
Further, Schedule EI in the current ITR utility requires taxpayers to select the relevant exemption section while reporting exempt income. The earlier generic reporting option has been removed.
Every year taxpayers receive numerous amounts that are wholly or partly tax-free — PPF maturity proceeds, EPF withdrawals, gratuity, leave encashment, scholarships, agricultural income, family gifts, inheritances, life insurance maturity proceeds and certain foreign pensions.
The biggest mistake taxpayers make is assuming:
"Exempt income does not need to be disclosed."
For AY 2026-27, that assumption can create unnecessary compliance issues because exempt income reporting has become significantly more structured.
The correct question is no longer merely whether income is exempt.
The real questions are:
- Is it exempt?
- Under which provision is it exempt?
- Has it been disclosed correctly?
Quick Answer: Is It Exempt and Where Should It Be Reported
| Receipt | Exempt? | Governing Provision | Report in ITR |
|---|---|---|---|
| Agricultural Income | Yes | Section 10(1) | Schedule EI |
| PPF Interest and Maturity | Yes | Section 10(11) | Schedule EI |
| EPF Withdrawal after 5 Years | Yes | Section 10(12) | Schedule EI |
| Sukanya Samriddhi | Yes | Section 10(11A) | Schedule EI |
| NPS Lump Sum Withdrawal | Up to statutory limit | Section 10(12A) | Schedule EI |
| NPS Partial Withdrawal | Yes | Section 10(12B) | Schedule EI |
| Life Insurance Maturity | Subject to conditions | Section 10(10D) | Schedule EI |
| Gratuity | Subject to limits | Section 10(10) | Schedule EI |
| Leave Encashment | Subject to limits | Section 10(10AA) | Schedule EI |
| Scholarship | Yes | Section 10(16) | Schedule EI |
| Gift from Relative | Excluded from taxation | Section 56(2)(x) | Consider disclosure |
| Inheritance | Excluded from taxation | Section 56(2)(x) | Consider disclosure |
| Marriage Gift | Excluded from taxation | Section 56(2)(x) | Consider disclosure |
| Dividend Income | Taxable | Taxable under Other Sources | Schedule OS |
| Mutual Fund Income Distribution | Taxable | Taxable under Other Sources | Schedule OS |
| UN Pension | Generally exempt | UN Act, 1947 | Schedule EI |
Exempt Income vs Excluded Income vs Deduction
One of the most common tax misconceptions is treating these concepts as identical.
| Category | Example | Governing Provision |
|---|---|---|
| Exempt Income | Agricultural Income | Section 10 |
| Excluded Income | Gift from Parent | Section 56(2)(x) |
| Deduction | PPF Contribution | Section 80C |
| Capital Gain Relief | House Reinvestment | Section 54 |
Understanding the distinction helps avoid incorrect disclosures and reporting errors.
What Has Changed for AY 2026-27
Schedule EI Reporting Has Become More Important
The current ITR utility requires taxpayers to identify the specific exemption provision while reporting exempt income.
The earlier generic reporting mechanism has effectively disappeared.
Consequently, taxpayers should maintain clear documentation supporting each exempt receipt.
Important Filing Due Dates
| Category | Due Date |
|---|---|
| ITR-1 and ITR-2 | 31 July 2026 |
| ITR-3 and ITR-4 (Non-Audit Cases) | 31 August 2026 |
| Audit Cases | 31 October 2026 |
Retirement and Maturity Receipts
Public Provident Fund (PPF)
Interest and maturity proceeds remain fully exempt under Section 10(11).
Employees' Provident Fund (EPF)
Withdrawal after five years of continuous service is generally exempt under Section 10(12).
However, taxpayers should separately evaluate taxation of interest attributable to contributions exceeding prescribed thresholds.
Sukanya Samriddhi Account
Interest and maturity proceeds remain exempt under Section 10(11A).
National Pension System (NPS)
Section 10(12A) exempts the eligible lump sum portion withdrawn on closure or opting out of NPS.
Taxpayers should separately verify prevailing PFRDA withdrawal regulations and corresponding tax treatment applicable on the date of withdrawal.
Partial withdrawals satisfying statutory conditions are covered under Section 10(12B).
Life Insurance Maturity
Exemption under Section 10(10D) remains subject to applicable premium and policy conditions.
High-premium policies and certain ULIPs may not qualify for full exemption.
Gratuity
Government employees generally enjoy full exemption.
For non-government employees, exemption remains subject to statutory limits and conditions.
Leave Encashment
Government employees enjoy full exemption.
For non-government employees, exemption is presently available up to ₹25 lakh, subject to applicable conditions.
Section 10(15): Specified Interest Income
Certain notified interest incomes continue to enjoy exemption under Section 10(15).
These may include specified Government securities, tax-free bonds and other notified instruments, subject to the conditions contained in the relevant notification.
Taxpayers should verify the notification governing the instrument before claiming exemption.
Gifts, Inheritance and Family Transfers
A large number of taxpayers incorrectly classify gifts as Section 10 exemptions.
In reality, gifts from specified relatives, inheritances, receipts under a will and gifts received on the occasion of marriage are generally excluded from taxation under Section 56(2)(x).
Where the amount involved is substantial, appropriate disclosure and supporting documentation should be maintained to establish source and transparency.
UN Pension: A Unique Exemption
UN pension remains one of the most misunderstood exempt receipts.
The exemption arises not under Section 10 but under the United Nations (Privileges and Immunities) Act, 1947.
The legal position is supported by:
- CIT v. K. Ramaiah (126 ITR 638)
- CBDT Circular No. 293 dated 10 February 1981
Where disclosure is required, taxpayers should clearly mention the legal basis of exemption in the description field and retain supporting records.
Master Index of Frequently Used Section 10 Exemptions
Include the expanded Section 10 reference table from the revised draft, covering Sections 10(1) to 10(57), together with historical references to Sections 10(34), 10(35) and 10(38) as withdrawn provisions.
Compliance Checklist Before Filing
✓ Identify every exempt receipt.
✓ Verify the correct exemption provision.
✓ Reconcile exempt income with AIS and TIS.
✓ Retain supporting documents.
✓ Verify treatment of gifts and inheritances.
✓ Verify NPS withdrawal treatment.
✓ Verify insurance maturity eligibility.
✓ Check foreign income disclosures.
✓ Ensure Schedule EI disclosures are complete.
Common Errors That Trigger Notices
- Failure to disclose exempt income.
- Incorrect exemption section selection.
- Treating dividend income as exempt.
- Misclassification of gifts.
- Incorrect HRA calculations.
- Unsupported foreign pension claims.
- Incorrect NPS exemption claims.
- Failure to reconcile AIS/TIS data.
The Golden Rule for AY 2026-27
Most tax disputes involving exempt income do not arise because the exemption is unavailable.
They arise because:
- The income was not disclosed.
- The wrong provision was selected.
- Supporting records were inadequate.
- Information reporting systems reflected a different position.
Tax-Free Income Is Not Invisible Income
Whether the receipt is a provident fund maturity, gratuity, scholarship, agricultural income, inheritance, family gift, insurance maturity, foreign pension or retirement benefit, proper disclosure and documentation remain the most effective safeguards against future notices and litigation.
Professional Disclaimer
This article applies exclusively to Assessment Year 2026-27 (Financial Year 2025-26). The return continues to be governed by the Income-tax Act, 1961. The Income-tax Act, 2025 applies prospectively to income earned from FY 2026-27 onwards and does not govern the current filing season.
The article is intended solely for educational and informational purposes and reflects the law, judicial precedents, CBDT circulars and compliance requirements prevailing as on 17 June 2026. Readers should obtain professional advice before acting upon any specific transaction, exemption claim or tax position.
