Industry odisha Bureau, Jun 15: While the Income Tax (IT) Act, 1961 governs the levy, collection and administration of income tax collected from the eligible Indian citizens, companies and other entities, individuals in the country also desire for ‘tax-free income’ sources so that they could get exempted from being entangled by the legal dragnet and penalty.
Here are the ‘tax-free income’ sources that every tax-paying Indian citizen ought to keep oneself abreast of the legal provisions since “certain income sources are not taxable under the IT Act, 1961 since the IT Department cannot deduct taxes on the incomes that fall under these exemptions. Hence, individuals can determine a way to save on their taxes by taking advantage of these exemptions while filing their ITRs (Income Tax Returns). Just a mere disclosure of the exempt income in the appropriate field in the ITR form would suffice to claim exemption.”
1) “Agricultural Income”: “Section 10(1) of the Income Tax Act specifies that agricultural income is considered tax-free income in India.”
Hence, the income generated from “farming activities”, “sale of agricultural produce like crops, fruits, vegetables, pulses, grains, spices, etc”, “rental from agricultural land or building”, “capitals/profits obtained from the sale of agricultural land” are “tax-exempt”.
However, it is to be noted well that: “Income derived from agriculture carried out abroad is very well taxable in India for an Indian resident.”
2) “Income from Gifts”: According to Section 56 of the IT Act, 1961, gifts obtained from: “any relative”, “on the occasion of an individual’s marriage”, “under a will or inheritance, in contemplation of the taxpayer’s death”, “a local authority, any trust or educational or medical institution, etc.”
These include “money, property, jewellery, archaeological collections, drawings, paintings, sculptures, any work of art or bullion, including virtual digital assets.”
However, it all depends on the “nature of asset” and the “threshold limit”.
For instances: “If cash received as a gift exceeds Rs 50,000, the whole amount is taxable.”
When the nature of gifted asset is “Movable Property”, the threshold limit is: “Without Consideration: Fair Market Value (FMV) of property exceeding Rs 50,000, FMV is taxable,” while in “Inadequate Consideration: If paid for something less than its worth, it is taxable to the extent it has been paid less (the differential amount should exceed Rs 50,000).”
When the nature of gifted asset is “Immovable Property” (Land or Building), the threshold limit is: “Without Consideration: Stamp Duty Value (SDV) if it exceeds Rs. 50,000”, while in “Inadequate Consideration: If SDV- Inadequate amount (SDV minus amount paid) is more than Rs 50,000 and more than 10% of consideration, the difference is taxable.”
3) “Scholarships & Rewards”: “Students who get scholarships or awards from private organizations, government institutions, or other institutions for education purposes are exempt from tax under Section 10(16).”
“According to Section 10 (17A), students who receive awards or rewards from the state government, central government, or other government authority or any other award sanctioned by the Indian government are tax exempt.”
“The winners of ‘Gallantry Awards’ like ‘Paramvir Chakra’, ‘Mahavir Chakra’, ‘Vir Chakra’ and others obtaining a pension are exempted from tax on the pension being received.”
4) “Gratuity”: “If an individual receives an amount as a gratuity, it is considered tax-free, based on the individual’s type of employment. If an individual is a government employee, the entire amount obtained as gratuity is considered tax-free.”
“In a non-government organization covered under Gratuity Act, 1972, the minimum of the below is exempted from taxation for an employee.”
“The actual amount of gratuity obtained
INR ₹20 Lakhs
Last withdrawn salary (only basic salary) number of years of employment”.
“If an organization doesn’t adhere to the Gratuity Act, 1972, then the minimum of the below is exempted from taxation.”
“The actual amount of gratuity obtained
INR ₹ 10 Lakhs
Last 10 months’ average salary (only basic salary) number of years of employment”.
Pertinent to note that, “For government employees, the gratuity amount obtained on retirement or death is fully exempted.”
5) “Leave Encashment”: “Leave encashment received by a Central or State Government employee upon retirement is fully tax-exempt.”
However, “there is an upper limit on leave encashment received by private sector employees upon retirement or resignation.”
The least of the following is exempt:
“Rs 25,00,000.
Actual Leave Encashment received.
Average salary of the past 10 months as on the date of retirement.
Cash Equivalent of un-availed leave credit. (based on average salary of past 10 months)”
N.B: “Inferring from the above provisions, the maximum exemption limit is capped at Rs.25,00,000.”
6) “Receipt from Hindu Undivided Family (HUF)”: “If an individual gets a receipt as an HUF member, it is considered tax-free income in India. However, the particular HUF should have been separately assessed under the IT Act. If the HUF has made a separate income tax calculation and has already paid the liable taxes, the members don’t have to pay tax on the receipts obtained from such HUF.”
7) “Share from a Limited Liability Partnership (LLP) or Partnership Firm”: “If a taxpayer is a partner of a firm or LLP which has been separately assessed for income tax, then the taxpayer’s share of profit is entirely exempt from tax.”
However, “the LLP or the partnership firm should have been separately assessed. Other receipts, like salary or interest, are fully taxable.”
8) “Pension”: “The payment in respect of pension is exempt when it is commuted subject to certain conditions.”
“In the case of Government employees, it is fully exempt.”
Where in the case of other employees, the following amount is exempt”:-
“If the employee is in receipt of gratuity – ⅓ x (commuted pension received / commutation%) x 100”
“If the employee does not receive any gratuity – ½ x (commuted pension received / commutation%) x 100”
“The pension received from an organization like the United Nations Organization(UNO) is a tax-free income for an employee or their families.”
“The pension that family members of the Indian Armed Forces receive is tax-free.”
“The family pension that an employee’s dependents get is partially tax exempted. In such a case, either 33% of the pension or Rs 15,000, whichever would be lower, would be tax-free. If the person is taxed under the new regime, the limit of Rs 15,000 is extended to Rs 25,000.”
9) “Interest Income”: “Certain interest incomes fall under the full exemption category under the Income Tax Act Section 10(15).”
They are listed below:
“Bank interest obtained under the Sukanya Samriddhi Scheme”
“Interest income obtained on Gold Deposit Bonds”
“Interest in local authorities’ bonds”
“Bhopal Gas Victims deposit interest”
“Interest income obtained from tax-free Infrastructure Bonds”
“Interest paid by the local authority or government on borrowed money”
“Interest received on Employee Provident Fund (EPF) for contributions below INR Rs 2.5 Lakhs per year”
“Provident Fund to which there is no employer’s contribution, (Public Provident Fund (PPF) and General Provident Fund (GPF) – for contribution below R .5 lakhs per year”
“Interest generated from Non-Resident External (NRE) Accounts.”
10) “Income from Provident Funds”: “The amount received from a Statutory Provident Fund by government employees is tax-free.”
“The amount received by private employees from the Recognized Provident Fund (RPF) is considered tax-free income in India, if the employee has rendered service continuously for 5 years.”
“In India, some percentage of an employee’s salary is subtracted and contributed to Provident Funds.”
11) “Maturity Amount from a Life Insurance Policy”: “As per Section 10(10D) of the IT Act 1961, maturity proceeds from a Life Insurance Policy are tax-free if the amount of premium paid doesn’t exceed 10% of the sum assured for policies issued after April 1, 2012, and 20% in case of the policy issued before.”
“If the policy is issued on or after April 1, 2025, and the annual premium exceeds Rs 5,00,000, the proceeds received is anyway taxable. (Though the premium does not exceed 10% of the sum assured)”
