Section 10 of the Income-tax Act: Misusing these provisions to save tax may result in a 200% penalty

As income tax return (ITR) deadline is just a day away, Section 10(14)(i) has emerged as a widely discussed tax-saving provision among salaried employees. Several users on social media platforms such as X (formerly Twitter) and tax forums claim that this provision can help in reducing your tax liability.

But what many people don’t know is that the income tax department can verify these claims, so using the exemption without meeting the prescribed conditions could invite scrutiny and related consequences.

If you are genuinely eligible to claim a tax benefit under this section, there is nothing wrong in doing so in your tax return. The problem arises only when taxpayers misuse the provision by claiming allowances or expenses that are not actually applicable to them.

What does Section 10(14)(i) state?

Section 10(14)(i) exempts certain special allowances or benefits granted by an employer wholly, necessarily and exclusively for the performance of official duties, and the exemption is available only to the extent the allowance is actually spent for that purpose.

“Merely claiming the exemption because it reduces tax liability, without satisfying the prescribed conditions, can result in the claim being disallowed,” said Nishant Shanker, tax controversy & dispute resolution expert at Navraj Global Advisors.

Further, if your claims are found to be inconsistent with the salary particulars reported in Form 16 or are unsupported by documentary evidence, it may attract scrutiny by the income tax authorities.

However, the absence of the exemption in Form 16 does not automatically mean that the employee is ineligible, according to Shanker, who noted that an employee must independently establish that the allowance was received, was eligible for exemption and was actually utilised for official duties.

What happens if you claim incorrect exemptions?

If the claim is found to be incorrect after assessment by the income tax department, the claimant will be required to reverse the amount, which will result in an additional tax liability. Hence experts have advised taxpayers to claim deductions and exemptions that they are entitled to.

The taxpayer may also face additional interest and, depending on the facts, penalty for under-reporting or misreporting of income. Under the Income-tax Act, 2025, penalties for misreporting can extend up to 200% of the tax payable on the misreported income, creating a substantial monetary burden.

What to do if you already claimed a false exemption?

If you have already claimed a false deduction or exemption while filing ITR, then you should voluntarily undo it before receiving a tax notice, according to Siddharth Maurya, Managing Director at Vibhavangal Anukulkara Pvt Ltd. Here’s what he advises taxpayers to do in different scenarios:

• If you are within the filing period for a return revision, do a corrected return and pay the tax and interest owed
• If you are past the return revision period, but the return has not yet been processed or assessed, then clear and honest responses to inquiries from the tax department should help you curb the extent of the litigation.
• If the bad claim will be found during an assessment, then it is better to undo the claim first, as undoing it after the fact will help mitigate some of the consequences.

Documents required to claim the exemption

To qualify for an exemption under Section 10(14)(i), appropriate documentation is necessary. Taxpayers should maintain employer-issued documents that explain the type of allowance, such as salary structures, appointment letters, HR policies, letters sanctioning the allowance, Maurya said.

Where applicable, travel documentation, reimbursement statements, vouchers, employer-approved expenditure statements, and other documents that support the expenditure was incurred in the course of employment should be retained.

“The exemption is usually available to the extent the taxpayer establishes the expenditure was incurred in the course of performing official duties,” he said.

Therefore, the documentation should be retained to substantiate the claim in the event the income tax department seeks to verify the claim in the future. This will not only save you from bearing penalties but also avoid unnecessary hassle.