We all love hearing the word “Tax free”? Right! So, we thought of sharing a list of few Tax free Incomes in India to help you lower your tax burden to some extent.
Income tax…This one word gives you a feeling to shed extra money out of your pockets. Hearing this, you hesitate, you get restless! But, you don’t have any choice. You have to pay Income tax on your earnings if you fall in the taxable slab limit.
That’s how it goes…you have many thoughts running in your mind like: How to save taxes? How to plan your investments wisely? How to get good returns plus tax benefits on your investments?
And, you try to find ways to reduce your tax burden. You also plan your investments to save some of your taxes.
Higher the income, higher the taxes you need to pay! But, do you have any idea that there are few incomes which are not taxable in your hands.
Thinking….Yes, that is true! There are few incomes that are completely tax free.
Keep reading! Grab complete details on the same.
In India, you have to pay income tax on the income that you earn during a financial year as per the Income tax slabs. However, there are certain tax free incomes on which you don’t need to pay any tax. In simple words, such incomes are not taxable in your hands.
You just need to be aware about such tax free incomes. So, you can enjoy the tax benefits to the maximum and lower your overall tax burden as well. Go ahead and get to know about such tax free incomes in India.
12 Tax free Incomes in India
1. Agricultural Income:
Under Section 10(1) of The Income Tax Act, 1961 the agricultural income is fully exempt from tax. The agricultural income should be from a land situated in India. The land must be used for agricultural purposes only.
But, for computing the tax rate and actual tax liability, you have to include agriculture income in your total income if:
(i) Net agricultural income > Rs.5000 during the financial year and
(ii) Total Income (excluding agricultural income) > Basic exemption limit as per Income tax slabs.
2. Gifts Received:
As per Section 56(2) of The Income Tax Act, 1961 any gift received from relatives are fully exempt from tax. In case of gifts received from non relatives, the gifts are exempt to a maximum of Rs.50000 during a financial year. The gift may be in the form of money, jewellry, or property, etc.
*Important Note: Gift received on occasion of marriage is an exception where gifts are exempt even when received from non-relatives. This means if you receive any gift on your marriage from a relative or non relative it is fully exempt in your hands.
Here definition of “relatives” covers:
a. Spouse of Individual.
b. Brother or sister of Individual
c. Brother or sister of spouse of Individual
d. Brother or sister of either of parents of Individual
e. Any lineal ascendant or descendant of Individual
f. Any lineal ascendant or descendant of spouse of Individual
g. Spouse of person referred to in clauses b to f.
For additional details on Gifts refer: All about Income tax on gifts received in India!
3. LTCG or Long Term Capital Gain on Equity Shares or Equity Mutual Funds:
The long term capital gains on sale of shares or Equity mutual funds is also exempt upto Rs.1 lakh only. Here, Long term Capital Gain arises when shares or mutual funds are held for more than 1 year.
So, the profits that you earn on sale of shares or mutual funds (that were held for minimum 1 year) shall be Long term capital gain which is exempt from tax upto the specified limit.
This exemption is not applicable to debt mutual funds. Refer Tax on mutual funds for detailed study.
*Important note: This exemption is allowed only when STT or Securities Transaction tax has been paid and you buy on a recognized stock exchange (BSE or NSE).
Also, if you are following the SIP route in case of mutual funds, each instalment is considered as a separate and fresh investment. The Short term or Long term Capital Gain is calculated accordingly based on your holding period.
4. Dividend Income:
As per Section 10(34) of The Income Tax Act, the dividend income that you received on your stocks from an Indian company was tax free in your hands. As per Section 10(35), any dividend received by investing money in mutual funds was also exempt.
As per Budget 2016, if the dividend received by an Individual or HUF exceeds Rs.10 lakhs then the person receiving such amount was liable to pay tax @ 10%.
*Important Amendment: Budget 2020 has proposed to make Dividend taxable in the hands of shareholders at the individual income tax slab rates. The Dividend Distribution Tax (DDT) levied earlier is being abolished. Hence, the dividend income from shares and mutual funds shall become taxable in the hands of recipient. So, Dividend Income shall no longer remain a tax free income. If the Dividend income exceeds Rs.5000 in a financial year, a TDS (Tax deducted at source) @ 10% shall be applicable.
5. Interest on Savings Bank Account:
The interest that you earn on your savings account is not taxable upto Rs.10,000 per financial year. You can claim Tax Deduction under Section 80TTA on your savings bank account interest upto maximum of Rs.10000.
So, if your annual interest income from Savings account is upto Rs.10000 only, then you need not worry. You can claim the deduction and enjoy the tax free income.
Further, senior citizens can enjoy a tax-free income of upto Rs.50,000 from fixed or term deposits also under Section 80TTB.
*Important note: You will firstly have to include your Savings interest income under the head “Income from other sources”. Then claim deduction Under Section 80 TTA to reduce your taxable income.
6. Share of Profit received by Partners in a Firm:
If you are a partner in a partnership firm, your share in profits of the firm is fully exempt from tax. So, being a partner in a firm you can enjoy this tax benefit.
However, any other amount received other than share in profits remains taxable in the hands of a partner like remuneration/salary or interest on capital.
7. Receipts from HUF:
If you are a member of HUF and you receive any sum out of the income of HUF, such amount shall not be taxable in your hands. So, if a member of HUF, gets any amount from HUF Income, it shall be fully exempt in the hands of the member irrespective of whether the HUF Income is taxable or not.
8. Interest earned in NRE account:
If you are an NRI and are thinking to open an account, this one is for you. The interest that you earn on your NRE or Non Resident External account is completely tax free.
The interest on both normal savings account as well as NRE fixed deposits accounts is 100% tax free. The money in NRE account is fully repatriable. So, for an NRI, this is an ideal way to invest your money and earn tax free returns.
9. EPF or Employee Provident Fund amount:
Your EPF or Employee Provident Fund amount is tax free if the same is withdrawn after 5 years of continuous service. In case you withdraw the lump sum amount in your EPF account before completion of 5 years of service, the same becomes taxable in your hands.
10. PPF or Provident Fund Income:
PPF or Public Provident Fund is one long term investment that is completely tax free. It is good tax saving option for safe investors who can’t bear any risk and want to earn fixed interest. PPF is exempt at all 3 stages also known as EEE category:
- Amount that you contribute: Eligible for Tax deduction Under Section 80 C
- Amount that you earn in the form of interest and
- Maturity amount i.e. Principal+ Interest at the time of withdrawal all are tax free.
So, this is one tax saving option that should form part of your financial portfolio so that you can reduce your tax burden to some extent.
11. Amount received through will or inheritance:
If you receive any money or property through will or inheritance, that is also tax free in your hands. You don’t have to pay any inheritance tax in India.
But, if you earn any further income by investing the money that you have received or you earn income from such property received, the income earned thereon shall become taxable. e.g. If you invest the money received in Fixed deposits, the interest that you earn on such deposits will be taxable in your hands.
12. Scholarship or Awards:
The amount that you receive as scholarships for education purposes is also exempt from tax. So, you need not worry about the tax liability on any sum that has been received in the form of scholarship or award to meet your cost of education. The whole of such amount shall be exempt from tax.
Now, that you have got an idea about the various tax free incomes, what are you waiting for? Share it with your family and friends, so that they can also save their taxes.
The next time you think about how to save tax, do keep these points in your mind. You might end up saving some of your hard earned money in a genuine way.
We have tried to cover the major tax free incomes in India, there may be some others as well. If you want to add upon or give any further ideas, go ahead and help our readers to increase their knowledge. Feel free to share your valuable feedback in the comment section below!