The mere mention of "income tax" can induce stress in many individuals who constantly seek ways to save money. Income tax is a tax imposed on our earnings from various sources such as salary, business, capital gains, rent, awards, prizes, gifts, interest, and more, if we have earned money in a given year. However, not all sources of income are taxable. There are some income sources that are exempt from income tax, and the government cannot charge tax on them. So, if you want to save taxes,
it is essential to know about the top 11 tax-free income sources in India before filing your ITR online. Let's delve into these sources right away.
Never forget to write your query and feedback & share if you like it
टिप्पणी करना, अपने प्रश्न और प्रतिक्रिया लिखना कभी न भूलें
1.AGRICULTURAL INCOME
Ask anyone about some tax-free income sources in India and Agricultural Income will be on their list. The government of India has made Agricultural Income free from tax liabilities for the benefit of our farmers and our agricultural industry ever since the Income Tax Act of 1961 was established and has been free from taxes ever since. Agricultural Income is completely non-taxable as per Section 10(1) of the Income Tax Act. Agricultural income refers to the income earned from:
A) Production, Processing & Sale of agricultural crops like Grains, Pulses, Vegetables, Fruits, Spices, etc.
B) Rental Income from agricultural land or building.
C) Profits/Capital Gains made from the sale of Agricultural Land
This is applicable to Individuals and HUF. Also, an Individual or HUF who has an agricultural income greater than Rs.5000 per year even if exempt, is added to the gross overall income in order to determine the applicable slab rate at which the non-agricultural income will be taxed. So, even if agricultural income is not taxed and is completely tax free, it will increase the total income tax rate on other income if declared.
2. GIFTS RECEIVED
Have you ever wondered why we often see wealthy people receiving lavish gifts from their friends and family for their weddings? Take, for example, K L Rahul, who recently received a staggering Rs. 2.17 Crore worth of BMW car from Virat Kohli as a wedding gift, and MS Dhoni, who gifted Rahul a Kawasaki Ninja bike worth Rs. 80 Lakhs. While these gifts are undoubtedly given as tokens of love and congratulations to the newlyweds, there is also a tax angle to consider.
In normal circumstances, such gifts would be taxable as income. However, when the gifts are given to mark the occasion of a wedding, they are considered non-taxable income. This means that the couple does not have to pay any tax on the value of the gift, no matter how extravagant it may be. So, the next time you see a celebrity receiving a pricey wedding gift, you'll know that there's more to it than just a grand gesture of goodwill. Let’s dive deeper into this.
As per the Income Tax Act, any gift which is received by an individual from any relative is totally tax-free on receipt. This gift can be in the form of money, jewellery, property, vehicle, or any other kind which can be valued. The income tax department defines relatives as
i) Spouse of an individual (Husband or Wife);
ii) Siblings of an Individual (Brother or Sister);
iii) Brother or Sister of the spouse of that respective individual;
iv) Brother or Sister of either of the parents of the individual;
v) Any lineal ascendant or descendant of the individual;
vi) Any lineal ascendant or descendant of the spouse of the individual;
vii) Spouse of the persons referred to in (ii) to (vi).
In the case of non-relatives, a maximum of Rs. 50,000 worth of gift can be received by an individual which will be considered tax-free. Any gift which is worth more than Rs. 50,000 will be taxable in the hands of the individual.
An exemption to this clause is one that we discussed at the start i.e. Gifts received at the time of the marriage of the individual. To summarise, any gift that is received by an individual at the time of their marriage from either relatives or non-relatives is totally tax-free. There is no upper limit to the amount of the gift that one can receive. These gifts will be fully exempted.
Any individual who receives gifts, property, or wealth from their ancestors by any kind of will or inheritance will also be considered as a tax-free income. This too has no upper limit for the kind of receipts.
3. MONEY RECEIVED FROM INSURANCE
Any sum of money that is received from a Life Insurance Policy (LIP) including the sum assured (S.A.) and the sum allocated by a way of bonus on such policy is not included in the total income of the individual as per Section 10 (10d) of the Income Tax Act. Following is a summary of the exemption available under Section 10 (10d) according to the date of issuance of such policies:
| For policies issued before 01/04/2003 | Any sum received under a LIP including the sum allocated by the way of bonus is exempt. |
| For policies issued between 01/04/2003 and 31/03/2012 | Any sum received under a LIP including the sum allocated by the way of a bonus is exempt. However, such exemption would not be applicable if the premium payable for any of the years during the term of the policy exceeds 20% of the actual S.A. |
| For policies issued on or after 01/04/2012 but before 01/04/2013 | Any sum received under a LIP including the sum allocated by the way of a bonus is exempt. However, such exemption would not be applicable if the premium payable for any of the years during the term of the policy exceeds 10% of the actual S.A. |
| For policies issued between 01/04/2013 and 31/03/2023 | Any sum received under a LIP including the sum allocated by the way of a bonus is exempt. However, such exemption would not be applicable if the premium payable for any of the years during the term of the policy exceeds 15% of the actual S.A. i.e. minimum capital sum assured” under the policy on the happening of the insured event at any time during the term of the policy. |
| For policies issued on or after 01/04/2023 | Any sum received under a LIP including the sum allocated by the way of a bonus is exempt. However, such exemption would not be applicable if the aggregate premium of one or multiple insurance policies exceeds Rs. 5 Lakhs in a year. |
4. GRATUITY
An amount received by an individual as a gratuity is tax-free depending on the type of employment of the individual. In case of an individual being a government employee, the whole amount received as gratuity is tax-free. However, in case of a non-government employee, the calculation is a little different.
If the organisation of a non-government employee is covered under Gratuity Act, 1972, the least of the following is exempted from taxation.
A) The actual amount of gratuity received
B) Rs. 20 Lakhs
C) Last drawn salary (includes only basic salary & D.A.) x number of years of employment x 15/26
If the organisation doesn’t fall under Gratuity Act, 1972, then the least of the following is exempted from taxation.
A) The actual amount of gratuity received
B) Rs. 10 Lakhs
C) Previous 10 months’ average salary x number of years of employment x ½
5. RECEIPTS FROM HINDU UNDIVIDED FAMILY (HUFS)
An individual who receives any kind of payment from a HUF as a member is not liable to pay any tax for the same. This is because HUF is taxed and treated as a separate entity and is liable to pay taxes for the income that it earns. And hence if the HUF has made a separate income tax assessment and has paid the liable taxes, the members don’t need to pay any tax on the receipts they get from such HUF.
6. RECEIPTS FROM A PARTNERSHIP FIRM OR LIMITED LIABILITY PARTNERSHIP (LLP) AS PROFIT SHARE
If an individual is a partner of a Partnership Firm or LLP and has a profit share in the firm, the income that he/she receives as a profit share is fully exempted from Income Tax under Section 10(2). The condition here is that the Partnership Firm or LLP must have been assessed separately. Other receipts that the individual receives; like interest or salary are completely taxable.
7.INCOME FROM PROVIDENT FUNDS
Usually in India, some portion of an employee’s salary is deducted and allocated towards Provident Funds. Even if it is not compulsory for employees with a salary of Rs. 15000 and above, it is a common practice. These contributions if made continuously for 5 years, is totally exempted from Income Tax when the particular employee retires and receives the money. Even the amount received from the maturity of PPF or other superannuation funds is non-taxable.
8. INCOME FROM PENSION
Pension Income received by an employee or their family member from UNO is exempt from taxation. Pension received by the family members of the Indian Armed Forces is also exempt from taxes. Also, the winners of Gallantry Awards such as Maha Vir Chakra, Paramvir Chakra, Vir Chakra, or other such awards as specified by the Central Government are exempt from paying any taxes on the pension they receive.
9. INCOME FROM SCHOLARSHIPS, REWARDS, AND RELIEF FUNDS
Any students that receive scholarships or awards from government institutions, private organisations, or other institutions for their education are not liable to pay any taxes for the same.
Also, any rewards or awards given by the central government, the state government, or any other government authority or any other award that is authorised by the Indian government are considered as exempt from taxes according to Section 10 (17A). Some examples of awards that are entirely tax-free are the National Awards, the Nobel Prize, the Bharat Ratna Award, the Arjuna Award, Awards given by the government to the winners of the Olympic Games, Asian Games, Commonwealth Games, etc.
Apart from this, Government sanctions or reliefs received for any kind of natural calamity, riots or any other incidents are also exempt from taxes in the hands of the individual.
10. INTEREST INCOME
There are various interest income sources that have been exempted from taxes by the Income Tax Department, a popular few of which are listed below:
1. Interest on Bank Fixed Deposits up to Rs. 10,000 a year per individual;
2. Interest earned on Gold Deposit Bonds;
3. Interest earned on PPF and EPF for contributions below 2.5 Lakh a year;
4. Interest Income earned from Sukanya Samriddhi Scheme;
5. Interest on Gold Deposit Bonds;
6. Interest on Tax-Free Fixed Deposits;
7. Interest on tax-free bonds and tax-free Infrastructure Bonds that are eligible for investment to avoid Capital Gains;
8. Interest on bonds issued by local authorities;
9. Interest earned from NRE Accounts is tax-free in India.
11. VARIOUS COMPONENTS IN SALARY RECEIVED BY AN EMPLOYEE
A salary that is offered by an employer has various components in it which are given to employees for meeting different kinds of expenditure over and above basic salary. These components are known as allowances. As per the Income Tax Act, these allowances are divided into 3 categories, Taxable, Partially Taxable, and Non-Taxable allowances.
Non-Taxable Allowances
These allowances form a part of the salary and are fully exempted from tax. These allowances are deducted from the overall salary while calculating the tax. A few common fully exempted allowances are
1. Allowances paid to Government Employees abroad - Allowances or perquisites paid or allowed to the citizen of India by the government for the services rendered by them outside India are exempted from tax.
2. Allowances paid to UNO employees - Allowance paid by UNO to its employees is not taxable.
3. Allowances to the judges of the High Courts and Supreme Court
4. Uniform Allowance - Allowance granted to an employee for purchasing or maintenance of a uniform to wear in the office during the duty of employment is exempted from tax to the limit of actual money spent on the same.
5. Helper Allowance - Helper Allowance is granted to the employee for meeting the expenditure incurred on a helper when a helper is hired for performing official duty.
6. Other Non-Taxable Allowances include Academic/Research Allowance, Conveyance Allowance, Daily Allowance, etc.
Partially Taxable Allowances
The allowances that are exempted from Income Tax but only to a certain limit are classified as Partially Taxable Allowances. Here are some common Partially Taxable Allowances:
1. House Rent Allowance (HRA)
HRA is an allowance that is granted to an employee for compensating towards the payment of rent of residence. As per the Section 10 (13A), the least of the following is exempted from Income Tax
i) Actual HRA received
ii) Rent Paid - 10% of Basic Salary + DA
iii) 40% of Basic Salary + DA or 50% in metro cities
Obviously this exemption is not available to those individuals who live in their own house and has not incurred the expenses towards rent.
2. Transport Allowance
Allowance provided towards the expenditure of travel from the employee’s residence to the place of duty and back is exempted from Income Tax to the limit of Rs. 1600 per month. This exemption is doubled for persons with a disability as described in the Income Tax Act.
3. Children's Education Allowance
The allowance is granted to compensate the expenses incurred on the education of children. An amount of Rs.100 per child (max 2) is exempted from Income Tax.
4. Hostel Expenditure Allowance -
The allowance granted to compensate for expenses incurred on the hostel fees of their child is exempted from Income Tax up to Rs. 300 per month per child (max 2)
5. Leave Travel Allowance -
This allowance is granted to employees when they are on leave and are traveling alone or with family within India. This amount is exempted from Income Tax subject to some limitations. These are briefly mentioned below:
LTA Allowance exemption is only available for the expenses incurred towards the travel for the trip (travel by air, rail, or any other public transport). It doesn’t allow an exemption for the cost of accommodation or food.
Such exemption is only available for two trips in the block of 4 calendar years. If such exemption is not availed during the block period, it can be carried over to the immediate next block and used within the first year of the block.
The amount of exemption available is either the amount paid towards LTA by the employer or the amount actually incurred towards the cost of travel whichever is lesser.
6. Car Maintenance Allowance -
If an employee owns their car and has incurred the expenses for driver’s salary, fuel expenses, or maintenance of the car and the same has been borne and reimbursed by the employer, then the individual is eligible to claim an exemption of Rs. 2700 per month or Rs. 3300 per month depending on the engine capacity of the car.
If in the case when an employee uses a company-owned car and the expenses are borne and reimbursed by the company then the allowance is taxable to the same extent i.e. Rs.2700 per month or Rs. 3300 per month depending on the engine capacity of the car.
FINAL WORD
It is important to be aware of the various tax-free income sources in India as it can help reduce the tax burden on individuals. By claiming all the available exemptions while filing ITR, one can save a significant amount of money that can be invested in other avenues. It is also important to note that while these income sources are tax-free, it is still essential to maintain proper documentation and keep a record of these sources of income to avoid any complications during tax audits. In conclusion, understanding tax-free income sources is crucial in making informed financial decisions and maximizing one's income.
Credit with Thanks to : https://www.adityabirlacapital.com/abc-of-money/tax-free-income-sources