Tax Free Income in India For 2024-25

What are Tax-Free Income Sources in India?

In India, the Income Tax Act 1961 has legal rules and regulations under which taxability is determined and the tax liability is calculated. While determining the taxability one can observe in the Act sources of Income that have been exempt, ie made a tax-free source of income. Therefore, the incomes from the tax-free sources are not subject to tax. Let us explore these instances that an individual taxpayer must be aware of while filing their income tax return.

Agricultural Income

Section 10(1) of the Income Tax Act specifically exempts farming income derived from agricultural land. Agricultural Income includes:

• Income from Agricultural Operations: Income derived from agricultural activities such as cultivating crops, harvesting, and selling agricultural produce.
• Rent: Income earned from renting agricultural land or buildings used for agricultural purposes and situated on or near agricultural land. The building should be used for storage, residential use of the cultivator or workers, or other purposes directly connected with agricultural activities.
• Capital Gains derived from Land: Capital gains or profits generated from the sale of agricultural land.

However, income tax shall be applicable on Agricultural Income if it exceeds ₹ 5,000 for the year and the non-agricultural income of the taxpayer exceeds the applicable basic exemption limit.

Gifts

The taxability of gifts is governed by Section 56(2)(x). Gifts are usually taxed in the hands of the recipient.

List of exempt gifts:

• Gifts received from specified relatives are fully exempt regardless of the amount involved. Specified relatives include:

1. Spouse
2. Brother or sister
3. Brother or sister of the spouse
4. Brother or sister of either of the parents
5. Any lineal ascendant or descendant
6. Any lineal ascendant or descendant of the spouse
7. Spouse of the persons mentioned above

• Gifts received on the occasion of Marriage by a taxpayer are exempt irrespective of their amount or source.
• Gifts received under a will or by way of inheritance are fully exempt from tax.
• Gifts received in contemplation of death by the payer are exempt in the hands of the recipient.
• Gifts received from any Local Authorities are exempt.
• Gifts received from any fund, foundation, university, educational institution, hospital, medical institution or any other charitable or religious trust or institution registered under Section 12A or 12AA are exempt.

The term gift or gifts in the above list includes money, property, shares, securities, jewellery, archaeological collections, drawings, paintings, sculptures, and any work of art or bullion, including virtual digital assets.

Any gifts apart from the above, are exempted up to ₹ 50,000 in the following cases:

• Gifts of Money - if a cash gift received exceeds ₹ 50,000, then the whole amount is taxable.
• Movable Property-

1. Without consideration - if the fair market value (FMV) of gifts in the form of movable property (like shares, jewellery, etc.) exceeds Rs. 50,000, the entire FMV is taxable.
2. With consideration - when the FMV exceeds the consideration by more than ₹ 50,000, then the difference is taxable.

• Immovable Property -

1. Without consideration (gift) - if the stamp duty value of the immovable property exceeds Rs. 50,000, then the stamp duty value is taxable.
2. Inadequate consideration - is paid for the immovable property and the difference between the stamp duty value and the consideration exceeds the higher of Rs. 50,000 or 10% of the consideration, such difference is taxable.

Gratuity

Gratuity income received is exempt under Section 10(10) of the Income Tax Act 1961.

• Gratuity income received by government employees is fully exempt from tax. Gratuity income obtained on retirement or death for government employees is fully exempted.
• Non-Government Employees Covered Under the Payment of Gratuity Act, 1972: The least of the following amounts is exempt from tax:

1. Actual gratuity received.
2. Rs. 20 lakhs.
3. 15 days’ salary(15/26) for each completed year of service, calculated based on the last drawn salary (salary includes basic plus dearness allowance).

• Non-Government Employees Not Covered Under the Payment of Gratuity Act, 1972: The least of the following amounts is exempt from tax:

1. Actual gratuity received.
2. Rs. 10 lakhs.
3. Half month's average salary for each completed year of service (average salary based on the last 10 months' salary).

Leave Encashment

Leave encashment received by an employee in certain cases is exempt under Section 10(10AA) of the Income Tax Act 1961.

• For Government Employees: Leave encashment received at the time of retirement or termination of employment is fully exempt for central and state government employees.
• For Non-Government Employees: Leave encashment received by non-government employees is exempt up to a certain limit, least of the following:

1. Actual Leave Encashment Received: The actual amount of leave encashment received by the employee.
2. Cash Equivalent of Unavailed Leave: Cash equivalent of the leave salary for the period of earned leave that is not availed by the employee at the time of retirement, subject to a maximum of 30 days for each completed year of service.
3. Maximum Limit: Rs. 25,00,000. This was previously at ₹ 3,00,000 but recently changed to ₹ 25,00,000 in Budget 2023.
4. Average Salary: 10 months' average salary preceding the retirement or termination

Pension

Pension received by United Nations Organization(UNO) employees or their family members is exempt under the Act. Family pension received by the dependents of the employee is only partially as there is a deduction available under Section 57(iia) at lower of:

• ₹ 15,000 or
• 1/3rd of the amount received

Pension received by family members of the Indian Armed Forces is tax-free.

Share of income from HUFs

Under Section 10(2) share income of the Hindu Undivided Family(HUF) that is received by the member is exempt. This exemption can only be availed if the HUF has calculated and filed its Income Tax Return and paid the tax liability. Only then can the members will be exempt from paying tax on the income received from such earnings of the HUF.

Share of income from LLP or Partnership Firm

As per Section 10(2A) if the firm has filed its income tax return and paid applicable taxes then the share of that income received by the partners of the LLP or partnership firm shall be exempt in their hands. This is only for the share of the partners in the firm’s profits. Other receipts like salary or interest on capital are fully taxable in the hands of the partners.

Income from provident funds

Amount received from a Statutory Provident Fund by government employees is tax-free. If a private employee has rendered service continuously for 5 years, then the amount received by them from the Recognized Provident Fund is to be tax-free. The Amount deposited to the Public Provident Fund, including the interest, is completely exempt from tax if it is withdrawn after the lapse of 15 years.

Maturity amount from a Life Insurance Policy

Under Section 10(10D) of the Income Tax Act, maturity receipts from a life insurance policy are tax-free. The maturity proceeds shall only be exempt from tax if the amount of premium paid on policies issued on or after April 1, 2012, does not exceed 10% of the sum assured and 20% in case the policy is issued before that.

Interest income from various sources

Interest incomes in certain cases are exempt under the Income Tax Act 1961:

• Interest earned on Public Provident Fund(PPF) or Employee Provident Fund(EPF) is exempt under Section 10(11) on contributions below ₹ 2,50,000 per year.
• Section 10(11A) exempts interest earned on Sukanya Samriddhi Accounts.
• Interest received on tax-free fixed deposits.
• Interest earned on tax-free infrastructure bonds, local authorities’ bonds and gold deposit bonds.
• Interest earned from Non-Resident External(NRE) Accounts.

Scholarships

Under Section 10(16), scholarships granted to meet the cost of education are exempt. A scholarship is a grant that is awarded based on achievement to support the student’s education. Any scholarship received by a deserving student that is used to meet the cost of education is exempted.

Rewards

The winners of various gallantry awards awarded to those in service of the Central Government or State Government like ‘Paramvir Chakra’, ‘Mahavir Chakra’, ‘Vir Chakra’ and other notified gallantry awards that receive pensions are exempted from tax on such pension under the Section 10(18)(i).