Tax-free income in India: Certain income sources are exempted from tax in India under the Income Tax (I-T) Act 1961. These tax-free incomes allow individuals to save on taxes when filing their income tax returns (ITR).
Tax-free incomes in India: Certain income sources are exempt from taxation under the Income Tax (I-T) Act of 1961 in India. These tax-free incomes allow individuals to save on taxes when filing their Income Tax Returns (ITRs). Being aware of these exemptions is essential, especially with the new tax regime introduced as the default from the financial year 2023-24. Understanding these exemptions can also help individuals make informed decisions and optimise their tax savings while filing their ITRs. Here’s a detailed look at the various tax-free income sources in India for 2024-25.
- Agricultural Income
Under Section 10(1) of the I-T Act, income from farming and agriculture is tax-free. This exemption has been in place since the act’s implementation in 1961 to support farmer welfare and agricultural growth. Agricultural income includes:
- Income from the sale of agricultural crops such as fruits, vegetables, pulses, grains, and spices.
- Rental income from agricultural land or buildings.
- Profits from the sale of agricultural land.
- However, if the net agricultural income exceeds Rs 5,000 and the non-agricultural income surpasses the basic exemption limit, taxes may apply.
2. Gifts
As per Section 56 of the Income Tax Act, gifts from relatives, on the occasion of marriage, under a will or inheritance, in contemplation of the payer’s death, or from local authorities, trusts, or educational/medical institutions are tax-free. This includes money, property, jewellery, art, and virtual digital assets. Gifts from non-relatives are tax-exempt up to Rs 50,000 per financial year.
3. Scholarships and Rewards
Scholarships provided for educational purposes by private organisations, government institutions, or other bodies are tax-free. According to Section 10(17A), awards from the government or recognised authorities are also exempt from taxes. Additionally, pension recipients of Gallantry Awards such as the Param Vir Chakra, Mahavir Chakra, and Vir Chakra are exempt from tax on their pensions.
4. Gratuity
Gratuity received by government employees is fully tax-free. For employees of non-government organisations covered under the Gratuity Act, 1972, the minimum exempt amount is the actual gratuity received, Rs 20 lakhs, or the formula-based calculation. For organizations not covered under the act, the minimum exempt amount is the actual gratuity received, Rs 10 lakhs, or a formula-based calculation. Government employees’ gratuity on retirement or death is fully exempt.
5. Leave Encashment
Leave encashment received by central or state government employees upon retirement is fully tax-exempt. For private sector employees, the tax exemption limit for leave encashment has been increased to Rs 25 lakhs as per the Union Budget 2023.
6. Receipt from HUFs
Receipts obtained as a member of a Hindu Undivided Family (HUF) are tax-free if the HUF has been separately assessed under the IT Act. The HUF must have paid the necessary taxes for its members to benefit from this exemption.
7. Share from an LLP or Partnership Firm
Partners of an LLP or partnership firm, which has been separately assessed for income tax, are exempt from taxes on their share of profits. However, other receipts such as salary or interest are fully taxable.
8. Pension
Pension payments are exempt from tax when commuted under certain conditions. For government employees, it is fully exempt. For others, the exemption amount varies based on whether they receive gratuity. Pensions from organisations such as the United Nations are tax-free, and family pensions received by dependents of Indian Armed Forces members are also tax-free.
9. Income from Provident Funds
Amounts received from a Statutory Provident Fund by government employees are tax-free. Private employees’ amounts from the Recognised Provident Fund are tax-free if they have served continuously for five years. Deposits and interest in the Public Provident Fund are completely exempt from taxes.
10. Maturity Amount from a Life Insurance Policy
Under Section 10(10D), life insurance policy maturity proceeds are tax-free if the premium paid does not exceed 10 per cent of the sum assured for policies issued after April 1, 2012, and 20 per cent for policies issued before.
11. Interest Income
- Certain interest incomes are fully exempt under Section 10(15), including:
- Interest from the Sukanya Samriddhi Scheme.
- Interest on gold deposit bonds.
- Interest on local authority bonds.
- Interest for Bhopal Gas Victims deposits.
- Interest from tax-free infrastructure bonds.
- Interest paid by local authorities or government on borrowed money.
- Interest on EPF and PPF contributions below INR 2.5 lakhs annually.
- Interest from NRE accounts.
- Interest on tax-free fixed deposits.
