Section 10(7) of Income Tax Act, 1961 – Exemption for Government Employees

Section 10(7) of Income Tax Act 1961 provides a specific tax exemption for central and state government employees who are working abroad and receiving the specific allowance from their employers. In this article, we will explore the details of the exemption available under Section 10(7) and eligibility under this section.

Section 10(7) of Income Tax Act, 1961 – Exemption for Government Employees

Table of Contents

What is Section 10(7) of income tax act 1961?

Indian government provides the allowances and perquisites to its employees posted abroad which are exempted under this section. These allowances and perquisites are meant to help in covering high costs of living, which are usually associated with residing abroad. Some of the allowances may be for housing or cost of living adjustments, education expenses for children and other similar payments. Official cars, club memberships or furnished houses could also be some of other perquisites depending on the nature of assignment assigned.

The benefit from this exemption is that these allowances and perquisites are not taxable under Section 10(7) in India. For employees who do not have tax liability on these additional perks, this leads to a significant reduction in their tax payments.


Mr. X who works as an employee for the central government at the Singapore embassy. From his employer, he receives a monthly housing allowance of ₹100000 whereas his total monthly cost of living is ₹ 50000 given by Indian Government itself. These two sums totaling ₹150000 are excluded from taxable income according to section 10(7) of Income Tax Act. His overall tax burden goes down substantially due to this exemption.

Type of exemption under section 10(7)

Education Allowance: This is necessary to meet the expenses involved in educating the employee’s children in another country.

Housing Allowance: This perk is meant to help for paying the higher charges of renting or buying a house in another country.

Leave Travel Concession: LTC benefits may not be taxable where travel to India takes place during leave periods thus exempting it from tax under section 10(7) depending on the policy of that specific department.

Cost of Living: This additional support is given to cater for higher living costs as generally experienced overseas relative to India.

Other Allowances: Additionally, other allowance like outfit allowance, entertainment allowance and hardship allowance could also qualify for exemption under Section 10(7), depending upon assignment and designation of an employee.

Who is eligible for the exemption?

This exemption under section 10(7) pertains only to employees of either Central or State Government. It does not include officials of local bodies, statutory corporations or private sector organizations who are working abroad. Lastly, this exemption can only be claimed if these allowance is specifically granted against expenses which have been incurred while performing official duties.

Conditions to avail the exemption under section 10(7)

The following conditions must be satisfied in order to qualify for an exemption under Section 10(7) of Income Tax Act 1961:

  • This payment should be perquisites or allowances that are taxable under ‘Salaries’ head.
  • This payment should be received from the Central and State Government.
  • The employee must be an Indian citizen.
  • The employee must render the services outside India.

If all these conditions are met, any perquisite or allowance paid by the Government to an Indian citizen in respect of services rendered abroad will be exempt under Section 10(7).

Benefit of Section 10(7) of Income Tax Act

Leveling the Playing Field: This tax exemption ensures that government employees working abroad are not disadvantaged financially when compared with their counterparts serving at home where cost of living could be lower.

Higher Living Costs: Living costs can vary from one country to another. The Indian government understands that living in overseas assignments usually comes with higher housing costs, food prices, transport fares, and other basic requirements.

Read alsoEverything About Section 10(14)(i) of Income tax Act, 1961

Final Words

Section 10(7) recognizes the financial challenges that Indian government employees might face while working abroad. It is actually good because it exempts allowances and perks from income tax. This helps ease the burden of higher living expenses and makes the tax situation fairer for these employees.

Frequently Asked Questions (FAQ)

Yes, you need to provide proof of your expenses to claim the exemption. Employees need to keep detailed records like bills and receipts, to support their claims.

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