In India, certain income sources are not taxable under the Income Tax Act, 1961. Known as tax-free incomes, the IT Department cannot deduct taxes on the incomes that fall under these exemptions. Individuals can save on their taxes by taking advantage of these exemptions while filing their ITRs (Income Tax Returns). It is crucial to be aware of tax-free income sources before filing your income tax return. The corresponding exemptions are also valid under the new tax regime, introduced as the default from the financial year 2023-24. Let’s explore more details about tax-free income in India for 2024-25.
What are Tax-Free Income Sources in India?
When filing your income tax return, you must be aware of the sources below. The incomes from these sources are tax-free in India, and therefore, they are tax-exempt.
1) Agricultural Income
Section 10(1) of the Income Tax Act specifies that income earned from farming and agriculture is considered tax-free income in India. Since the implementation of the Income Tax Act of 1961, the Indian government has exempted agricultural income from tax obligations. The exemption aims to bolster the farmer’s welfare and foster growth in the agricultural sector. This exemption has continued, ensuring agricultural earnings remain tax-free income in India for 2024-25.
Agricultural income covers:
- Manufacturing, processing, and sale of agricultural crops such as fruits, vegetables, pulses, grains, spices, etc.
- Rental income generated from agricultural land or buildings.
- Capital gains from the sale of agricultural land.
However, there is a tax applicability if the net agricultural income exceeds Rs. 5,000, and the non-agricultural income is more than the basic exemption limit.
2) Gifts
According to section 56 of the Income Tax Act, 1961, gifts obtained from any relative, on the occasion of an individual’s marriage, under a will or inheritance, in contemplation of the payer’s death, from a local authority, or from any trust or educational or medical institution, etc., are considered tax-free income in India. These include money, property, jewelry, archaeological collections, drawings, paintings, sculptures, any work of art, or bullion, including virtual digital assets.
Any gifts received from people apart from the list mentioned in section 56 are exempted up to Rs. 50,000. Below is a table for better understanding:
| Nature of Asset | Threshold Limit |
|---|---|
| Money | If cash received as a gift exceeds Rs. 50,000, the whole amount is taxable. |
| Movable Property | 1. Without Consideration- Aggregate FMV of property > Rs. 50,000, Fair Market Value is taxable.<br>2. When FMV exceeds consideration by at least Rs. 50,000, the difference is taxable. |
| Immovable Property (Land or Building) | 1. Without Consideration – Stamp Duty Value (SDV) if it exceeds Rs. 50,000.<br>2. Inadequate Consideration – If SDV-Consideration is more than Rs. 50,000 and more than 10% of consideration, the difference is taxable. |
3) Scholarships and Rewards
Scholarships that institutes provide to students for educational purposes are tax-free income in India. Students who get awards or scholarships from private organizations, government institutions, or other institutions for education are exempt from tax.
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 the 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 (includes only dearness allowance and basic salary) * number of years of employment * 15/26
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 * number of years of employment * 0.5
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. With Budget 2023, the tax exemption limit for private sector employees has been increased from Rs. 3 Lakhs to Rs. 25 Lakhs.
6) Receipt from HUFs
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 an LLP or Partnership Firm
If a taxpayer is a partner of an LLP or a partnership firm 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. 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 family pension that an employee’s dependents receive is partially tax-exempt. In such a case, either 33% of the pension or Rs. 15,000, whichever is lower, would be tax-free. The pension that family members of the Indian Armed Forces receive is tax-free.
9) Interest Income
Certain interest incomes fall under the full exemption category under the Income Tax Act Section 10(15). They include:
- 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 EPF and PPF for contributions below INR Rs. 2.5 Lakhs per year.
- Interest generated from NRE Accounts.
- Interest received on Tax-Free Fixed Deposits.
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 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. Also, the amount deposited to the Public Provident Fund, including interest, is completely exempt from taxes
11) Maturity Amount from a Life Insurance Policy
As per section 10(10D) of the Income Tax Act, 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 policies issued before.
Tax-free Income Limit in India
The following points clarify the limit of tax-free income in India.
- Under the old tax regime, an individual below the age of 60 years is exempt up to Rs.2.5 lakhs, senior citizens (60-80 years) are exempt up to Rs. 3 lakhs and super senior citizens (above 80 years) are exempted up to Rs.5 lakhs.
- The tax exemption limit for individuals who have opted for the new tax regime is Rs.3 Lakhs.
Conclusion
Knowledge of tax-free income in India is vital to avoid unnecessarily paying taxes on the income sources discussed above. Apart from the aforementioned income sources, many other income sources may be considered tax-free income sources. However, the discussed ones are the most common tax-free income sources and help you save taxes significantly. If your income source is any of the above-discussed ones, remember to add the same to your tax return and get an exemption against it
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