Top 11 tax free income in India

Tax free income, how satisfying word it is. When we receive an income, we can’t become as happy as the received amount. Correct? Because we have to pay the tax on the income we earn. But today, KeenWizard is going to show you the types of tax free income in India.

What is tax free income?

Any income received that is not subject to income taxes is accounted as tax free income. Let’s understand the top 11 tax free income in India that are exempted from tax under the Income Tax Act, of 1961.

Inheritance Income

Individuals receive income from Inheritance, which is referred to as Inheritance Income. Income includes property, assets, vehicles, and money. In India, it is a tax free income. This applies to both movable and immovable assets. If you sell it then capital gains tax will be applicable. Your ownership period will determine whether the capital gains are long-term or short-term. Taxes will be calculated accordingly. To be exempt, invest the sale proceeds in another property of equal or greater value. This is according to Section 54 of the Income Tax Act of 1961.

For more information, Read What is Inheritance Tax? Types of Inheritance in India – Complete Information

Income from Insurance

Money from a Life Insurance Policy (LIP), such as the sum assured (S.A.) and any bonus, is not included in your total income. This is according to Section 10 (10d) of the Income Tax Act. Below is a summary of the exemption available under Section 10 (10d). It is according to the date of issuance of such policies.

	Exemption u/s10 (10D)	Deduction u/s 80C
In respect of policies issued before 01.04.2003	Any sum received under an LIP including the sum allocated by way of bonus is exempt.	Premium paid to the extent of 20% of “actual capital sum assured”.
In respect of policies issued between 01.04.2003 and 31.3.2012	Any sum received under an LIP including the sum allocated by way of a bonus is exempt. However, the exemption would not be available if the premium payable for any of the years during the term of the policy exceeds 20% of the “actual capital sum assured”.	Premium paid to the extent of 20% of “actual capital sum assured”.
In respect of policies issued on or after 01.04.2012 but before 01.04.2013	Any sum received under an LIP including the sum allocated by way of bonus is exempt. However, the exemption would not be available if the premium payable for any of the years during the term of the policy exceeds 10% of the actual capital sum assured.	Premium paid to the extent of 10% of “actual capital sum assured”.
In respect of policies issued on or after 01.04.2013	Any sum received under an LIP including the sum allocated by way of a bonus is exempt. However, the exemption would not be available if the premium payable for any of the years during the term of the policy exceeds 15% of “actual capital sum assured” 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	Premium paid to the extent of 15% of “actual capital sum assured”.

Gifts Received

In India, gifts from relatives like a vehicle, money, property, jewelry, or other valuable items are completely tax-free. This applies even if it is worth millions or more.

The tax exemption applies to any gift from non-relatives. This includes gifts from friends or other acquaintances. The exemption applies up to the value of RS. 50000 only. Worth more than RS 50000 is taxable as per the income tax slab of an Individual.

If an individual receives any gift from their non-relatives at their wedding, it is completely non-taxable in India. There is no upper limit to the amount of the gift that one can receive.

For example, K L Rahul recently got an astonishing BMW car worth Rs. 2.17 Crore from Virat Kohli as a wedding gift, and MS Dhoni gifted Rahul a Kawasaki Ninja bike worth Rs. 80 Lakhs. These gifts are given as tokens of love and congratulations to the newlyweds.

Agricultural Income

Income from agricultural activity is exempt from tax liability in India. Growing fruits, vegetables, etc, and earning money from selling them is tax free income.

Rental income from agricultural land is exempt from tax. Income from buildings used for agricultural activity is also exempt. If you sell any agricultural land then also it is not liable to pay any capital gains.

Gratuity

The gratuity an individual receives is tax free income. It depends on their type of employment. If an individual is a government employee, the entire gratuity amount is non-taxable. However, for a non-government employee, the calculation is a little different.

If a private organization is covered by the Gratuity Act of 1972, then 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

For this purpose, “Salary” refers to basic salary plus dearness allowance. We consider a month to have 26 days.

If a private organization doesn’t fall under the Gratuity Act of 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

Gratuity Calculator

Provident Fund

In India, a part of an employee’s salary is usually 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 are exempt from Income Tax if made continuously for five years. The exemption applies when the employee retires and receives the money. The amount received from the maturity of PPF or other superannuation funds is tax-free.

Interest Income

The Income Tax Department of India has exempted various interest income sources from taxes. Below are a few that are popular.

• Interest on Bank Fixed Deposits up to Rs. 10,000 a year per individual
• Interest earned on Gold Deposit Bonds
• Interest earned on PPF and EPF for contributions below 2.5 Lakh a year
• Interest Income earned from Sukanya Samriddhi Yojana
• Interest on Tax-Free Fixed Deposits and Tax-free Bonds

Receipts from Hindu Undivided Family (HUF)

An individual who is a member of an HUF is not required to pay income tax on any receipts they receive. The HUF, yet, ought to have received a separate income tax assessment and payment.

Profit share from a Partnership firm or a LIMITED LIABILITY PARTNERSHIP Firm(LLP)

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.

Income from Rewards, Scholarships, and Relief Funds

Students who receive scholarships or awards from government institutions, private organizations, or other institutions for their education are not liable to pay any taxes on them.

Indian government rewards or awards, including those from other government authorities, are tax-exempt under Section 10 (17A). Some tax-free awards include the National Awards, the Nobel Prize, the Bharat Ratna Award, and the Arjuna Award. Additionally, the government gives tax-free awards to winners of the Olympic Games. They also do this for the Asian Games and Commonwealth Games.

Government sanctions or reliefs for natural calamities, riots, or other incidents are exempt from taxes for individuals.

Various components of salary received from the employer

The employer offers its employees a salary allowance for meeting expenditures. They give it besides the basic salary.

According to the Income Tax Act, of 1961, allowances are added to the salary of an individual and taxed under the head Income from Salaries. We can divide the salary allowances into three categories. These are: taxable, non-taxable, and partly taxable.

Non-Taxable Allowances

These allowances form a part of the salary and are fully exempted from tax. While calculating the tax, you deduct these allowances from the overall salary. A few common fully exempted allowances are:

Allowances paid to Government Employees abroad

Allowances or perquisites paid or allowed to the citizens of India by the government for the services rendered by them outside India are exempted from tax.

Allowances paid by UNO to its employees is tax free income

Uniform Allowance

An employee’s allowance for buying or maintaining a uniform is tax-exempt. It’s limited to the actual money spent.

Allowances to the judges of the High Courts and Supreme Court

Helper Allowance

An employee who hires a helper to perform official duties receives a Helper Allowance. The allowance is to cover the expenditure incurred.

Other

Other Non-Taxable Allowances include Academic/Research Allowance, Conveyance Allowance, Daily Allowance, etc.

Partially Taxable Allowances

Partially Taxable Allowances classify the allowances that exempt Income Tax but only up to a certain limit. Here are some common Partially Taxable Allowances:

House Rent Allowance (HRA)

HRA is an allowance granted to an employee to compensate for residence rent. According to Section 10 (13A), Income Tax exempts the least of the following.

i) Actual HRA received

ii) Rent Paid – 10% of Basic Salary + DA

iii) 40% of Basic Salary + DA or 50% in metro cities

This exemption is not available to those individuals who live in their own house and have not incurred the expenses towards rent.

Transport Allowance

An allowance for travel expenses from an employee’s home to work and back is exempt from Income Tax up to Rs limit. 1600 per month. Persons with a disability, as described in the Income Tax Act, receive a doubled exemption.

Children’s Education Allowance

The allowance is granted to compensate for the expenses incurred on the education of children. An amount of Rs.100 per child (max 2) is exempted from Income Tax.

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)

Leave Travel Allowance

This allowance is granted to employees on leave, whether they are traveling alone or with family within India. Subject to some limitations, the Income Tax exempts this amount. These are mentioned below:

The LTA Allowance exemption is only available for trip travel expenses. These expenses include air, rail, or other public transportation. 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 you do not use such an exemption during the block period, you can carry it over to the immediate next block. You must use it within the first year of the block.

The available exemption is the lesser of the employer’s LTA payment or the travel cost.

Car Maintenance Allowance

An employee who owns their car has paid for the driver’s salary, fuel, or maintenance. The employer reimbursed those expenses. The employee can claim an exemption of Rs. 2700 per month or Rs. 3300 per month depending on the engine capacity of the car.

If an employee uses a company-owned car and the company reimburses the expenses, 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.

Bottomline

It is important to be aware of India’s various tax free income sources. This awareness can help reduce the tax burden on individuals. When filing an ITR, claim all available exemptions. It can save a lot of money. You can invest this money 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 record these sources of income. This will avoid any complications during tax audits.

Disclaimer

We publish generic information here for educational purposes only. KeenWizard is not liable for any decision arising from using this information.