Updated on: 6th August, 2023
As a salaried or self-employed individual, you pay taxes every year by filing your Income Tax Returns (ITR). But are you aware of certain earnings that act as tax-free income in India?
Key takeaways
- Agricultural income is completely exempt from income tax in India.
- Gifts received by an individual are generally not taxable under the Income Tax Act.
- Income earned from recognized provident funds, such as the Employee Provident Fund (EPF) and Public Provident Fund (PPF), is tax-free.
- Pension received by individuals, whether from the government or any other source, is partially taxable.
There exist some sources of income for which you do not have to pay taxes. Let us run through the tax-free income sources list that you need to know about:
List of Tax-Free Income Sources
When it comes to income taxation, India has a set of rules and regulations that determine how much tax an individual needs to pay on their earnings. However, there are certain types of income that are considered tax-free under the Income Tax Act. These tax-free income sources provide individuals with an opportunity to earn money without incurring any tax liability.
Income Earned from Agriculture
Agricultural income is completely exempt from income tax in India. Any income derived from agricultural activities, such as farming or agricultural land, is not taxable. This exemption applies to both individuals and Hindu Undivided Families (HUFs) engaged in agricultural activities.
Under Section 10(1), income earned from an agricultural source is fully exempt and remains a tax-free income in India. But if you are earning from agriculture, then you need to file your income tax returns regularly.
Gifts Received
Gifts received by an individual are generally not taxable under the Income Tax Act. Any monetary or non-monetary gift received from specified relatives on the occasion of marriage or under a will or inheritance is exempt from tax. However, there are certain limits and conditions to be met for this exemption.
Money Received from Insurance
Proceeds received from an insurance policy, including life insurance, health insurance, or any other type of insurance, are generally tax-free. The amount received as a claim or maturity proceeds is exempt from income tax.
Receipts from a Partnership Firm or Limited Liability Partnership (LLP) as Profit Share
Under Section 10(2), the profit earned if you are a partner of any partnership firm is exempt from taxes. And if you receive any funds from LLP (Limited Liability Partnership), which is your share of the profit, that amount is non-taxable. But other than this, any other funds remain taxable.
Income from Provident Funds
Income earned from recognized provident funds, such as the Employee Provident Fund (EPF) and Public Provident Fund (PPF), is tax-free. However, the interest earned on EPF contributions exceeding a specified limit is taxable.
Income from Pension
Pension received by individuals, whether from the government or any other source, is partially taxable. A certain portion of the pension is exempt from tax, while the remaining amount is taxable as per the individual’s income tax slab.
Income from Scholarships, Rewards, and Relief Funds
Income received in the form of scholarships, rewards, or relief funds for educational purposes is generally exempt from tax. This exemption is applicable to individuals who have received these funds for themselves or their dependents.
If you have received any scholarship or grant to minimize the cost of education, it is exempted from taxes under Section 10(16). There is no limit to the maximum amount that can be received as a scholarship or award to be claimed as tax-free income.
Interest Income
Certain types of interest income, such as interest earned on savings accounts with banks or post offices, are exempt from tax up to a specified limit. Interest earned on tax-saving fixed deposits and certain government bonds may also be tax-free.
Various Components in Salary Received by an Employee
There are certain components of an employee’s salary that are exempt from tax, such as House Rent Allowance (HRA), Leave Travel Allowance (LTA), and allowances for medical expenses. However, these exemptions are subject to specific conditions and limits.
Interest Earned from Savings Account
You can claim a maximum deduction of ₹10,000 for the interest earned from a savings account under Section 80TTA. While you file your ITR, you have to show the interest earned as your income from other sources for income tax exemption. This only applies to interest from a savings account and not a fixed deposit.
Money Received from Gratuity
Gratuity is paid to you by your employer as gratitude for your service to the company. The total gratuity amount received by a government employee is completely exempted from taxes. For a non-government employee, the least amount of the three give-below is exempted from tax:
- Total gratuity amount
- Fifteen days of salary for each year of service based on the last drawn amount
- ₹10 lakhs
The tax-free benefit holds good only if the gratuity is received on your retirement, termination, or on becoming incapacitated.
Money Received After Opting for Voluntary Retirement
An amount of ₹5 lakhs received on taking voluntary retirement is exempt from tax only if the voluntary retirement scheme follows Rule 2BA of the Income Tax Rule.
Receipts from Hindu Undivided Family (HUF)
If you get any money or inherit it as a member of HUF, the money is exempt from tax. The money received includes family income, impartible land, or income from the family estate, which can be claimed under Section 10(2).
Foreign Service Allowance
If you receive any perquisites or allowances outside India for rendering any foreign services, it remains tax-free under Section 10(7).
Wrapping Up
Identifying tax-free income sources can significantly impact an individual’s financial planning by reducing the tax burden and maximizing overall earnings. The sources mentioned above, such as tax-free investments, dividends, agricultural income, gifts and inheritances, scholarships and awards, insurance payouts, and long-term capital gains, provide individuals with opportunities to generate income without the need to pay taxes on them.
By leveraging these tax-free income sources, individuals can enhance their financial stability and make the most of their hard-earned money.
FAQs
1
How should an assessee declare tax exemption in their ITR?
To declare tax exemption in their Income Tax Return (ITR), the assessee needs to follow a specific process. Firstly, they should gather the necessary documents and information related to the tax exemptions they are eligible for, such as deductions, exemptions, or allowances. Then, while filing the ITR, they should accurately report their income and deductions in the appropriate sections of the ITR form, providing all the required details and supporting documents for claiming the tax exemptions. It is crucial to ensure that the tax exemption claims are legitimate and comply with the tax laws and regulations.
2
When would the ITR of a taxpayer be filed?
The filing deadline for the Income Tax Return (ITR) of a taxpayer varies depending on the country’s tax laws and regulations. In many countries, including India, the deadline for filing ITR is usually on or before a specified date following the end of the financial year. However, it is essential to note that the specific deadline may differ for different categories of taxpayers, such as individuals, businesses, or entities. To determine the exact deadline for filing ITR, taxpayers should refer to the tax authorities’ guidelines or consult with a tax professional.
3
How to declare salary allowance exemption in ITR filing?
To declare salary allowance exemption in the Income Tax Return (ITR) filing, individuals should follow the prescribed guidelines and procedures. Generally, salary allowances are classified into taxable and exempt categories, with specific exemptions allowed under the tax laws. When filing the ITR, individuals should provide accurate details of their salary income, including the various allowances received. In the appropriate sections of the ITR form, they should identify the exempt allowances and claim the corresponding exemptions as per the tax regulations. It is important to maintain proper documentation and supporting evidence for the claimed exemptions in case of any audit or verification.
4
What are the five taxable sources of income?
The five taxable sources of income can vary depending on the specific tax laws and regulations of a country. However, in general, the following sources of income are commonly considered taxable:
- Employment Income
- Business and Professional Income
- Investment Income
- Pension and Retirement Income
