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Tax-Free Income in India

There are now a variety of tax-free incomes and investments available in India. In this article, we'll go over some of the revenue streams in India that are tax-exempt under the 1961 Income Tax Act.

According to the Income Tax Act, some income produced in India are not subject to income tax. These earnings are referred to as tax-free earnings. A list of India’s tax-free payments is provided in this article.

Equity or Money Received from a Hindu Undivided Family

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

Agro Business Income

Agribusiness income is completely free from income tax under Section 10(1) of the Income Tax Act. However, an agricultural income of more than 5000 is added to the total income for both individuals and HUFs. The addition is only made to determine the slab rate that will apply to the taxpayer’s other income.

Gratuity Sums

Any gratuity that a government worker receives as a result of a death or retirement is free from income tax. Employees in the private sector are exempt from tax on gratuities up to a maximum of ten lakh rupees when they retire, become disabled, or are fired.

NRI Tax-Exempt Incomes

NRIs are exempt from paying income tax on several different types of income or earnings. Interest payments on bonds notified by the central government are not subject to income tax. Additionally, any premium related to the redemption of the specified bonds is tax-free.

Shares held in an LLP or Partnership Firm

If a taxpayer is a partner in a partnership firm or LLP that has received a separate income tax assessment, their portion of the partnership firm’s total revenue will be exempt from income tax.

Specific Categories of Incomes Earned by Foreigners

Foreigners’ certain categories of earnings and receipts are excluded from income tax. Income tax is not due on compensation received by a foreign national working as an embassy official. 

Additionally, a foreigner who receives money from their employer for themselves, their spouse, or their children in connection with taking a home leave outside of India, retiring, or terminating their employment is completely free from paying income tax on such money.

Leave Salaries

The maximum amount a Central Government employee may receive as a cash equivalent, together with up to ten months of leave at the time of retirement, whether or not they are receiving superannuation, is exempt from income tax.

The exempt amount for workers in the private sector would be the minimum of:

  • According to the wage over the 10 months before to the employees’ retirement on superannuation or voluntary retirement, ten months’ average salary is computed
  • For every year of actual service performed for the employer from which he has retired, the employee is only entitled to 30 days of earned leave
  • Amount of real leave encashment received
  • A typical sum of 3 Lakhs 

Insurance Amounts

Amounts received under a Keyman Insurance Policy (KIP), a Life Insurance Policy (LIP), or any insurance policy for which the premium payable for any year during the policy’s term exceeds 10% of the actual capital sum assured, are all completely exempt from tax. A

Additionally, any payouts made in the event of an insured person’s death are entirely tax-free.

Amount Receivable from PFs

Any sum received from a PPF, an authorised superannuation fund, or an employee provident fund (EPF) recognised by the government is completely exempt from income tax.

Dividends Earned from MFs and Shares

Income from dividends and units of mutual funds is tax-exempt.

Voluntary Retirement

At the moment of voluntary retirement or separation, an employee of a public sector business, a local government, a statutory authority, a cooperative organisation, or a university is tax-exempt on any compensation they receive. 

However, 5 Lakhs is the maximum amount of income that can be exempted from being received during a voluntary retirement.

Pension Commutation Received

An employee of the government who receives a pension commutation payment from the LIC or another insurer from their pension funds is not required to pay income tax on that amount. Only the following amount of a commuted pension is excluded for employees in the private sector:

  • The commuted value of one-third of the pension that the employee would typically be eligible to receive when they had received any gratuities
  • In all other circumstances, the commuted value is half the pension amount.

Specific Interest Incomes

Here are a few examples of interest income that is not subject to income tax. However, this list could occasionally be updated:

  • Income in the form of interest, the premium received upon redemption or other payment, and other payments received on securities, bonds, annuity certificates, savings certificates, and other certificates issued by the Central Government
  • Interest on securities held by the Central Bank of Ceylon’s issuing department, which was established by the Ceylon Monetary Law Act of 1949
  • Interest on deposits made with any scheduled bank with the permission of the Reserve Bank of India is payable to any bank established in a nation other than India and permitted to carry out central banking operations in that nation 
  • The government or a local authority charges interest and fees for currency hedging on money borrowed by them
  • Gold deposit bond interests
  • Interest on deposits made for victims of Bhopal Gas
  • Interest on bonds issued by local governments that are suitable for investment in order to secure an exemption from capital gains taxes.
  • Interest earned on deposits deposited with an offshore banking unit by a non-resident Indian
  • Tax-free infrastructure bond interest.
  • A girl’s bank interest from the Sukanya Samridhi Scheme.

Special Employee Benefits or Any form of Compensation

Any additional compensation that an employee receives that is not a prerequisite is not subject to income tax. However, the allowance should have been given particularly to cover costs spent while carrying out work-related activities.

Gifts

Presents from family members and gifts obtained for the concerned person’s wedding are completely free from income tax and are not subject to any cap. Gifts received from any other person are taxable but are exempt up to a maximum of 50,000.

Capital Gains upon Security Transfers

Income received by a taxpayer as a result of the sale of a long-term capital asset that is a security is not subject to taxation in any way. But a Securities Transaction Tax ought to have been applied to the transaction (STT). 

As a result, there will be no obligation to pay capital gains if shares of any company listed on the stock exchange are sold after being held for a minimum of one year.

Capital Gains upon Agricultural Land Transfers

A capital gains exemption is available for profits made on the sale of agricultural land. The land should have been put to agricultural use for the previous two years. Additionally, the money should be invested once more in agricultural property.

Reverse Mortgage

A reverse mortgage transaction for older persons does not involve the transfer of a capital asset that would trigger capital gains tax. Additionally, the loan amount is tax-free.

Scholarships and Awards

Scholarships given to cover educational expenses and several other awards are exempt from income tax. Additionally, the money given as a pension and family pension to recipients of gallantry awards such as Paramvir Chakra, Mahavir Chakra, and Vir Chakra, as well as to other recipients of gallantry awards who the central government has informed, is exempt.

Conclusion

Similar articles on income tax and other legal topics are regularly updated to you by Vakilsearch. Please feel free to comment if you have any questions on sources of tax-free income in India so we can have a fruitful discussion. Please remember to share this content if you find it useful.

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