Tax-Free Income Sources in India for 2024-25

Tax-Free Income

In India, the Income Tax Act 1961 outlines the rules and regulations that determine tax liability. Within this framework, certain income sources are exempt from tax, offering individuals the benefit of tax-free income. Below, we explore various instances where income is exempt from tax, providing valuable insights for individual taxpayers as they file their income tax returns.

Agricultural Income

Section 10(1) of the Income Tax Act exempts income derived from agricultural activities. This includes:

  • Income from Agricultural Operations: Earnings from cultivating crops, harvesting, and selling agricultural produce.
  • Rent: Income from renting agricultural land or buildings used for agricultural purposes, including storage or residential use related to agricultural activities.
  • Capital Gains from Land: Profits from the sale of agricultural land.

Note: If agricultural income exceeds ₹5,000 and the taxpayer’s non-agricultural income surpasses the basic exemption limit, agricultural income becomes taxable.

Gratuity

Gratuity income, covered under Section 10(10), varies based on employment type:

  • Government Employees: Fully exempt.
  • Non-Government Employees Covered by the Payment of Gratuity Act, 1972: Least of actual gratuity received, ₹20 lakhs, or 15 days’ salary for each completed year of service.
  • Non-Government Employees Not Covered by the Payment of Gratuity Act, 1972: Least of actual gratuity received, ₹10 lakhs, or half month’s average salary for each completed year of service.

Gifts

Under Section 56(2)(x), the taxability of gifts is specified. Gifts received from certain sources are fully exempt:

  • Gifts from specified relatives (e.g., spouse, siblings, parents, and their descendants).
  • Gifts received on the occasion of marriage.
  • Gifts received through a will or inheritance.
  • Gifts received in contemplation of death.
  • Gifts from local authorities or registered charitable trusts.

Other gifts are exempt up to ₹50,000 annually. Beyond this limit, the entire amount may be taxable.

Leave Encashment

Leave encashment is addressed under Section 10(10AA):

  • Government Employees: Fully exempt at retirement or termination.
  • Non-Government Employees: Exempt up to the least of actual leave encashment received, ₹25,00,000, cash equivalent of unavailed leave, or 10 months’ average salary preceding retirement.

Pension

Pension received from the United Nations Organization (UNO) or by family members of Indian Armed Forces employees is tax-free. Family pension for other dependents has a deduction under Section 57(iia) at the lower of ₹15,000 or 1/3rd of the amount received.

Income from Provident Funds

  • Statutory Provident Fund for Government Employees: Fully exempt.
  • Recognized Provident Fund for Private Employees: Tax-free if service exceeds five years.
  • Public Provident Fund (PPF): Fully exempt after 15 years.

Income from HUFs

Under Section 10(2), income received from a Hindu Undivided Family (HUF) is exempt if the HUF has filed its income tax return and paid applicable taxes.

Share of Income from LLP or Partnership Firm

Income shared by partners from an LLP or partnership firm is exempt under Section 10(2), provided the firm has filed its tax return and paid the necessary taxes.

Interest Income from Various Sources

Certain interest incomes are exempt:

  • Interest on PPF or EPF under Section 10(11) for contributions below ₹2,50,000 per year.
  • Interest on Sukanya Samriddhi Accounts.
  • Interest on tax-free fixed deposits, infrastructure bonds, and NRE accounts.

Maturity Amount from Life Insurance Policies

Under Section 10(10D), maturity proceeds from a life insurance policy are tax-free if the premium paid does not exceed 10% of the sum assured for policies issued after April 1, 2012, and 20% for policies issued before that.

Scholarships

Under Section 10(16), scholarships granted to meet educational costs are exempt from tax.

Scholarships

Section 10(18) exempts the winners of different gallantry medals, such as “Paramvir Chakra,” “Mahavir Chakra,” “Vir Chakra,” and other notified bravery awards, that are given to those working for the Central or State governments from paying taxes on their pensions.

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