Section 10(16) of the Income Tax Act: An Overview
The Income Tax Act, 1961, governs the taxation of income earned in India. Section 10(16) of the Act provides for the exemption of certain incomes earned by specified entities. In this blog, we will take a closer look at this section, its provisions, and the entities that are covered under it.
What is Section 10(16) of the Income Tax Act?
Section 10(16) of the Income Tax Act provides for the exemption of the following incomes:
- The income of a member of the family of a ruler of an Indian State who was recognised by the President as such before the commencement of the Constitution (26th January 1950).
- The income of a member of the family of a ruler of an Indian State who was not recognised by the President as such before the commencement of the Constitution but was recognised by the Central Government after the commencement of the Constitution.
- The income of a member of the family of a recognised ruler of a foreign State.
- The income of any person who is in receipt of a scholarship granted by a foreign Government, a university or other educational institution outside India.
Entities Covered under Section 10(16)
Let us now take a closer look at the entities covered under Section 10(16) of the Income Tax Act.
- Rulers of Indian States
The first two categories of entities covered under Section 10(16) are the members of the family of rulers of Indian States. The term “ruler” refers to the person who was in charge of the administration of an Indian State before the merger of the State with the Indian Union. The income of the members of the family of such rulers is exempted under this section.
- Recognised Rulers of Foreign States
The income of members of the family of recognised rulers of foreign States is also exempted under Section 10(16). A “recognised ruler” is a person who is recognised as such by the Central Government.
- Scholarship Recipients
Finally, the income of any person who is in receipt of a scholarship granted by a foreign Government, a university or other educational institution outside India is also exempted under Section 10(16).
Conditions for claiming exemption under Section 10(16)
In order to claim exemption under Section 10(16), the following conditions must be met:
- The income must fall within one of the categories listed under this section.
- The person claiming exemption must be a member of the family of a ruler of an Indian State or a recognised ruler of a foreign State or a recipient of a scholarship granted by a foreign Government, university or other educational institution outside India.
- The income must have been earned outside India.
- The income must not be related to any business or profession carried on in India.
- The income must not be attributable to any property located in India.
Benefits of Section 10(16)
The exemption provided under Section 10(16) has significant benefits for the entities covered under it. Some of the key benefits include:
Tax Savings: The income exempted under this section is not subject to income tax. This means that the entities covered under this section can save a significant amount of money on taxes.
Simplified Compliance: Since the income exempted under this section is not subject to tax, the entities covered under it are not required to file income tax returns for the exempted income. This simplifies compliance and reduces the burden of tax compliance.
Recognition of Legacy: The exemption provided under this section recognises the legacy of the rulers of Indian States and recognised rulers of foreign States. This recognises their contribution to the country’s history and their role in the country’s development.
Limitations of Section 10(16)
While Section 10(16) provides significant benefits, there are also some limitations to its application. Some of the key limitations include:
Limited Applicability: The exemption provided under this section is limited to certain categories of income earned by specific entities. This means that not all income earned by the entities covered under this section is exempted from tax.
Exemption only for Income earned outside India: The exemption under Section 10(16) is only applicable for income earned outside India. Any income earned within India is still subject to income tax.
Conditions to be met: In order to claim exemption under this section, certain conditions must be met. This includes the condition that the income must not be related to any business or profession carried on in India and must not be attributable to any property located in India.
Impact of Recent Changes on Section 10(16)
In recent years, there have been several changes to the Income Tax Act that have impacted Section 10(16). Some of the key changes include:
Abolition of Tax Exemption for Rulers of Indian States: In 2019, the Union Cabinet approved the proposal to abolish the tax exemption provided under Section 10(16) for the members of the family of rulers of Indian States. This means that the income of the members of the family of rulers of Indian States is now subject to income tax.
Extension of Tax Exemption to Postgraduate Students: In the Union Budget 2020, the government extended the tax exemption provided under Section 10(16) to postgraduate students who are in receipt of a scholarship granted by a foreign Government, university or other educational institution outside India.
Clarification on Applicability of Section 10(16) to NRIs: In 2020, the Central Board of Direct Taxes (CBDT) issued a clarification on the applicability of Section 10(16) to Non-Resident Indians (NRIs). The CBDT clarified that the exemption provided under this section is available to NRIs who meet the conditions specified under this section.
Future Outlook for Section 10(16)
The recent changes to the Income Tax Act have impacted the applicability of Section 10(16). While the abolition of tax exemption for the members of the family of rulers of Indian States has reduced the scope of this section, the extension of tax exemption to postgraduate students and the clarification on the applicability of this section to NRIs has expanded its scope.
As the global education sector continues to grow and evolve, it is likely that the government will further expand the scope of tax exemptions provided under Section 10(16) to support the education sector and encourage students to pursue higher education abroad.
Conclusion
Section 10(16) of the Income Tax Act provides for the exemption of certain incomes earned by specified entities. The entities covered under this section include the members of the family of rulers of Indian States, recognised rulers of foreign States, and recipients of certain scholarships granted by foreign Governments or educational institutions outside India. In order to claim exemption under this section, certain conditions must be met. It is important to consult a tax expert to ensure that all the conditions are met before claiming exemption under this section.
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Frequently Asked Questions (FAQs)
- Who is eligible to claim exemption under Section 10(16) of the Income Tax Act?
Exemption under Section 10(16) is available to certain specified entities, including former rulers of Indian States, recognised rulers of foreign States, and their family members.
2. What types of income are exempted under Section 10(16)?
The income exempted under Section 10(16) includes any income received by the specified entities as a pension, gratuity, or other similar allowance.
3. Is the exemption under Section 10(16) applicable for income earned within India?
No, the exemption under Section 10(16) is only applicable for income earned outside India.
4. Are there any conditions that must be met to claim exemption under Section 10(16)?
Yes, there are certain conditions that must be met to claim exemption under Section 10(16), including the condition that the income must not be related to any business or profession carried on in India and must not be attributable to any property located in India.
5. Are postgraduate students eligible for exemption under Section 10(16)?
Yes, postgraduate students who are in receipt of a scholarship granted by a foreign Government, university or other educational institution outside India are eligible for exemption under Section 10(16).
6. Is the tax exemption under Section 10(16) permanent?
There is no expiry or sunset clause for the exemption provided under Section 10(16), which means that it is a permanent exemption.
7. Can NRIs claim exemption under Section 10(16)?
Yes, NRIs who meet the conditions specified under Section 10(16) are eligible to claim exemption under this section.
8. Are the family members of former rulers of Indian States eligible for exemption under Section 10(16)?
Yes, the family members of former rulers of Indian States are eligible for exemption under Section 10(16), subject to certain conditions.
9. Is there a limit on the amount of income that can be exempted under Section 10(16)?
No, there is no limit on the amount of income that can be exempted under Section 10(16).
10. Is it necessary to file income tax returns for income exempted under Section 10(16)?
No, entities covered under Section 10(16) are not required to file income tax returns for the exempted income.
