Tax-Free-Income-in-India

Tax Free Incomes in India

Tax Free Incomes in India

Certain types of incomes earned in India are exempt from the scope of Income Tax as per the Income Tax Act. These incomes are known as tax-free incomes. This article provides a list of tax-free incomes in India.

Agricultural Income

Under Section 10(1) of the Income Tax Act, agricultural income is fully exempt from income tax. However, for individuals and HUFs, an agricultural income of more than Rs.5000 is added to the total income. The addition is made exclusively for the purpose of computing the slab rate that will be applicable for the taxpayer on other income. In this context, other income means income earned from sources other than agriculture. Hence, there is no tax on agricultural income, but declaring agricultural income increases the overall income tax rate.

Receipts from Hindu Undivided Family

Receipts received by an individual as a member of a HUF is exempt from income tax. However, the HUF should have been separately assessed to and paid Income Tax.

Share from a Partnership Firm or LLP

If an assessee is a partner of a partnership firm or LLP, which has been separately assessed for income tax, the share of the assessee in the total income of the partnership firm will be exempt from income tax.

NRI Tax Free Incomes

Certain types of incomes or receipts earned by NRIs are exempt from income tax. Income earned by way of interest on the bonds notified by the Central Government is exempt from income tax. Also, any premium which is applicable to the redemption of the specified bonds is exempt from tax.

Income Earned by Foreigners

Certain types of incomes and receipts of foreigners are exempt from income tax. Remuneration received by a foreigner who is an official of an embassy is exempt from income tax. Also, any money received by a foreigner from his employer for himself, his spouse, or children, in connection with his proceeding on home leave out of India or after retirement or termination of service, is fully exempt from income tax. Also, allowances and perquisites paid by the Government of India to a citizen of India, while rendering services outside of India, are exempt from the scope of Income Tax.

Gratuities

Any amount of gratuity received by a government employee due to death or retirement is exempt from income tax. The gratuity received by private-sector employees on retirement or on becoming incapacitated or on termination is exempt subject to a maximum ceiling limit of ten lakh rupees. The exemption is subject to further limits which are specified by the Income Tax Act. The specified limits are half a month’s salary for each year of completed service, calculated on the basis of the average salary for the ten months immediately preceding the year in which the gratuity is paid, or actual gratuity paid.

Commutation of Pension

The amount received in commutation of pension by a Government servant or any payment in commutation of pension from LIC or any other insurer from their pension funds is exempt from income tax. For private sector employee, only the following amount of commuted pension is exempt:

  • Where the employee has received any gratuity, the commuted value of one-third of the pension which he is normally entitled to receive
  • In any other case, the commuted value of half of the amount of pension.

The monthly pension receivable by a pensioner is liable to income tax like any other item of salary or income, and no standard deduction is available in respect of pension received by a taxpayer.

Leave Salary

The maximum amount receivable by an employee of the Central Government as a cash equivalent, up to ten months of leave at the time of their retirement, whether on superannuation or otherwise, is exempt from income tax.

For private-sector employees, the exempt amount would be least of:

  • Ten months average salary calculated on the basis of the salary during ten months preceding the employees’ retirement on superannuation or voluntary retirement
  • Earned leave standing to the credit of the employee limited to 30 days for every year of actual service rendered for the employer from whose service he has retired
  • The amount of leave encashment actually received
  • A standard amount of three lakh rupees

Voluntary Retirement or Separation Payment

Any amount received by an employee of a public sector company, of a local authority, of a statutory authority, of a cooperative society or university at the time of voluntary retirement or voluntary separation is completely exempt from tax. The maximum amount of exemption available for the income received at the voluntary retirement has been capped at five lakh rupees.

Money Received from Insurance

Any amount received under a Life Insurance Policy (LIP) or under a Keyman Insurance Policy (KIP) or under an insurance policy for which the premium payable for any of the years during the term of the policy exceeds 10% of the actual capital sum assured, is fully exempt from tax. Also, all proceeds received on the death of an insured person is fully exempt from income tax. Hence, money received from life insurance policies, whether from the LIC or any other private insurance company is exempt from income tax.

Money Received from Provident Fund

Any amount received from a government-recognised provident fund (PF), approved superannuation fund or PPF is fully exempt from income tax.

Special Allowances and Benefits

Any special allowance or benefits received by an employee which is not in the nature of a perquisite is not covered within the scope of income tax. However, the allowance should have been specifically granted to meet the expenses incurred in the performance of duties connected with employment.

Interest Income Exempt from Income Tax

Certain types of interest payments are fully exempt from income tax under Section 10(15) of the Income Tax Act. The following are some of the interest income exempt from income tax. However, this list is subject to change from time to time:

  1. Income by way of interest, the premium obtained on redemption or other payment on securities, bonds, annuity certificates, savings certificates, and other certificates issued by the Central Government
  2. Interest on securities held by the issue department of the Central Bank of Ceylon constituted under the Ceylon Monetary Law Act, 1949
  3. Interest payable to any bank incorporated in a country outside India and authorised to perform central banking functions in that country on any deposits made by it, with the approval of the Reserve Bank of India, with any scheduled bank
  4. Interest payable by Government or a local authority on money borrowed by it, including hedging charges on currency fluctuation
  5. Interest on Gold Deposit Bonds
  6. Interest on deposits for Bhopal Gas victims
  7. Interest on bonds of local authorities
  8. Tax Free Bonds and Tax Free Infrastructure Bonds which are eligible for investment for securing exemption from Capital Gains
  9. Interest received by a non-resident or non-ordinarily person on deposits made with an Off-shore Banking Unit
  10. Interest from Tax Free Infrastructure Bonds
  11. Bank interest of a girl child from the Sukanya Samridhi Scheme

Scholarships and Awards

Scholarship granted to meet the cost of education and certain awards is exempt from income tax.  Also, the amount provided as pension and family pension of Gallantry Award Winners like Paramvir Chakra, Mahavir Chakra, and Vir Chakra and also other Gallantry Award winners notified by the Central Government are exempt.

Dividends on Shares and Mutual Funds

Dividend income and income of units of Mutual Funds are completely exempt from income tax.

Capital Gains from Transfer of Agricultural Land

The capital gains received on transfer of agricultural land is eligible for exemption. However, the land should have been used in the past two years for agricultural purposes. Also, the proceeds should be reinvested in agricultural land again.

Capital Gains on Transfer of Securities

Income arising to a taxpayer on account of sale of a long-term capital asset which falls under the category of securities is completely outside the purview of tax liability. However, the transaction should have been subjected to a Securities Transaction Tax (STT). Thus, if the shares of any company listed in the stock exchange are sold after holding it for a minimum period of one year, then there will be no liability to payment of capital gains. However, the exemption benefit shall be available only until 31.03.2018.

Gifts Received

Gifts received from a relative and gifts received during the assessee’s wedding are fully exempt from income tax without any limit. Gift received from any other person is taxable subject to an exemption for up to a limit of fifty thousand rupees.

Reverse Mortgage Scheme

Transfer of a capital asset in a transaction of reverse mortgage for senior citizens would not attract capital gains tax. Further, the loan amount is also exempt from tax.

Other Related Guides

Form 52A Form 52A - Income Tax Statement to be furnished to the Assessing Officer under section 285B of the Income-tax Act, 1961, in respect of production of ...
Form 10CCBBA Form 10CCBBA - Income Tax Audit report under section 80−IB(7A) − Any undertaking claiming deduction u/s 80−IB(7A
Form 26B Form 26B - Income Tax Form to be filed by the deductor, if he claims refund of sum paid under Chapter XVII-B of the Income-tax Act, 1961
Form 22 Form 22 - Income Tax Statement of tax deducted at source from contributions repaid to employees in the case of an approved superannuation fund
Form 26QC Form 26QC - Income Tax Challan -cum-statement of deduction of tax under section 194-IB

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