Certain incomes come under exemptions, partially or fully, under the Income Tax Act. Like incomes from agriculture, NRE account, provident fund, gratuity, etc. are exempt from taxes.
It’s July – time to file your ITR! The deadline to file income tax returns is July 31, like every year. But not all earning individuals are liable to pay taxes to the government because the income tax laws exempt certain income sources, partially or fully, from tax liability.
Under the old tax regime, individuals below 60 years of age with a taxable income above Rs 2.5 lakh need to pay tax. The tax-free income limit for senior citizens (60 to 80 years old) is kept at Rs 3 lakh, and for super senior citizens (above 80 years old), it is Rs 5 lakh in a financial year. Under the new tax regime, the basic exemption limit goes up by Rs 50,000 to Rs 3 lakh for all individuals. Under the income tax laws, there are various incomes that are exempt from income tax.
Which income sources are tax-free in India?
Agriculture income: Income generated from agriculture is fully exempt in India. This exemption is not only on selling crops, but it also covers rentals from agricultural land or buildings and profits earned from buying or selling agricultural land.
NRE accounts interest income: Non-Resident Indians (NRIs) can access to a special account known as the NRE (Non-Resident External) account which allows these individuals living outside the country to deposit amount in India. NRE accounts provide benefits such as tax-free interest on NRE deposits. NRIs can also transfer funds through NRE accounts to their original place of residence.
Gratuity: In the private sector, employees receiving gratuity amount of up to Rs 20 lakh upon retirement are not liable to pay tax. The tax exemption on gratuity also depends on the type of employment as government employees are exempt from paying any taxes on gratuity. The gratuity limit for government employees has been hiked by Rs 5 lakh to Rs 25 lakh recently after the last DA hike.
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Capital gains: Some capital gains are also tax-free. Individuals who receive compensation against urban agricultural land are not liable to pay taxes.
Profit from partnership firm: Under the Income Tax Act, a partnership firm’s income is taxed at the entity level. Partners working for the firm do not pay income tax because they receive their share of profit after taxes have been paid. Partners do not have to pay income tax again on the share of profit they receive from the firm.
Scholarship: Students receiving scholarships from government and private institutions for further studies are exempt from paying taxes.
Provident fund: Provident funds, mandatory savings schemes for companies registered under The Companies Act, 1956 in India, grow with age and become tax-free upon your retirement from the job. The Employee Provident Fund offers tax-free returns provided the employee has actively contributed for more than 5 years, even if they have changed employers during this period.
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Leave encashment: If you receive an amount against leave encashment upon retirement, it is partially tax-free. It depends on whether you are employed in a government or private sector organisation. Government employees is exempted from paying tax on up to 10 months of leave encashment. In case of private sector employees, this limit is now Rs 25 lakh.
Tax-free pension: Pensions from certain organizations, such as the UNO, are exempt from tax. Family pensions received by dependents of employees are also tax-exempt, up to an amount less than Rs. 15,000 or one-third of the pension, whichever is lower. Additionally, pensions awarded to gallantry award winners and their families, as well as those for armed forces personnel and their families, are fully exempt from tax.
Voluntary retirement: The amount received upon voluntary retirement before superannuation is exempt from tax up to Rs 5 lakh. Gifts received from relatives or on the occasion of marriage are also exempt from tax. However, gifts from non-relatives are exempt up to Rs 50,000. According to the Income Tax Act, 1961, “relative” refers to the wife, husband, sister, brother, or any lineal ascendant or descendant of the individual.
Allowances or any compensation: Certain allowances are exempt from tax for any individual in India. For example, the foreign allowance provided by the Government of India to its employees working abroad is tax-exempt. Additionally, compensation received from Public Sector Undertaking (PSU) companies upon voluntary or superannuation retirement is also exempt from tax.
Maturity amount received from insurance companies: If you have received any amount from insurance companies, including bonuses (except for Keyman Insurance policies), it is fully exempt from tax under Section 10(10D) of the Income Tax Act, 1961.
