Any individual in the income tax category will look for ways to slash down the tax amount & avail of the deductions allowed under the Income Tax Act 1961 Section 80C to 80U. Luckily, there are several investments and sources of non-taxable income. In this guide, we are going to discuss some of the sources of Tax-Free Income in India as per the Income Tax Act 1961.
Agricultural Income
India’s economy depends on agriculture, which is the base of everything. Hence, the government of India allows rebates in this source to promote agriculture in the country. Any type of farming is a non-taxable investment, such as selling and processing of crops in agricultural land. There is no tax imposed by the government on the agricultural level in any way.
Agricultural income includes:
- Rental income from agricultural building or land
- Processing, production, and sale of crops like rice, wheat, vegetables, pulses, spices, and fruits.
- Profits from the purchase or sale of agricultural land.
Some Components of Salary
An individual is liable for the payment of income tax if his or her annual salary exceeds the non-taxable income limit. But there are still some non taxable allowances, such as –
- Meal coupons
- Medical allowances
- Transport allowances
- Internet bills
- Mobile phone bills
- LTC (Leave Travel Concession)
- Leave Travel Allowance
- Reimbursement of liveries bill
House Rent Allowance Provided by The Company
Any fund that the company issues for an employee’s accommodation or house rent allowance from the employer are exempted from the tax up to a specific limit. But when an employee lives in a house that is co-owned or owned by them, the house rent allowance falls under the tax limit.
Condition 1 – If an employee lives in the company’s accommodation, there is no tax charged on the house rent. Since the accommodation is allotted by the employer and rent is paid by the employee for residential purposes to his/her employer, the employee is supposed to be living in that rented house.
For example, the Net salary of a person is Rs. 3,00,000 p.a. and he receives Rs. 1,00,000 p.a. as house rent from the company. Then the deduction of at least Rs. 90,000 goes to him as part of the house rent allowance. According to section 80GG, 30% of salary is the standard deduction.
Condition 2 – Employee also has the option to get Rs. 5000 per month as a rebate if he doesn’t want any allowance from his employer, i.e. Rs. 60,000 per year.
Share From HUF
The HUF income is taxable because HUF is a taxable body in itself. A person has to pay the income tax when he earns from HUF. Later on, the rest of the income is distributed among the members. So, members don’t have to pay income tax.
Profit Earned From Partnership firm
As the name suggests, a partnership firm is formed by two or more individuals and it is a joint organization. The firm already gets income after deduction of income tax and then the partners get their shares. Hence, a partner does not need to pay income tax after receiving the share.
Benefits After Retirement
An employee is entitled to get some benefits after his/her retirement from his employer. Such types of benefits are either partially or completely exempted from tax. It depends upon whether the employee was working in a private company or a government organization. Some of these non taxable benefits are –
- Gratuity
- Provident Fund
- Leave encashment
Income Earned From Provident Funds
Every registered company under the Companies Act, 1956 has to pay provident funds to each of its employees in India. The savings increase gradually with age. An individual earns a specific amount of money out of their provident fund after retirement. The income earned from EPF is tax-free if it has over 5 years of active contribution, even after changing several employers in the given period.
Gratuity
An employer provides gratuity to its employee as a gift in the following conditions:
- Resignation – An employee who resigns his/her job for any reason may receive gratuity from his employer.
- Superannuation – When an employee turns 60 years or older.
- On any health hazard, physical damage, or even death due to disease or accident of an employee.
Calculating Gratuity – An employee is entitled to get relaxation on the gratuity of up to Rs. 30 Lakhs. Most of this amount is taxable. However, some part of this income is non-taxable. Here’s the formula to calculate gratuity:
Last Salary (including basic and DA) x 15/26 x years of service = Gratuity received
For example – Suppose an employee serves an organization for 29 years and 8 months, it will be rounded up to 30 years. His last salary is Rs. 1 Lakh (Basic + DA).
How to Calculate Gratuity?
Rs. 1,00,000 x 15/26 x 30 = Rs. 17,30,769 (Gratuity)
Since the amount of gratuity is less than Rs. 30,00,000, the whole amount is exempted from tax.
Let’s take another example when years of service are 29 years and 5 months and the amount of gratuity is higher than the maximum limit. In this case, the tenure will be rounded up to 29 years for calculation. The last salary drawn is Rs. 2 Lakh.
Here’s how gratuity is calculated in this case –
Rs. 2,00,000 x 15/26 x 29 = Rs. 33,46,153
According to the Income Tax Act, 1961, the gratuity amount which exceeds Rs. 30 Lakh of non-taxable limit is taxable.
Leave Salary
If you are a state or central government employee, you may encash your unused leaves that are collected over a particular period of your service. At the time of resignation, superannuation, or retirement, you may encash your leave. You have at least 10 months of leave to encash and it is completely tax-free. For private employees, the calculation of leave salary varies. Leaving a salary of up to Rs. 3,00,000 is non-taxable.
Pension
There are some organizations like UNO that provide pensions to their employees that are tax-free. If dependents of an employee withdraw a family pension, it is partially tax-free. It is Rs. 15,000 or 1/3rd of pension, whichever is less. Some of the tax-free pensions are –
- Family pension and pension of people who’ve won a gallantry award
- Family pension by family members or self for army personnel
Commutation of pension
State and central government employees, defense employees, local authority, and PSU employees can encash their pension partly in a lump sum on retirement. This encashment is tax-free and is called a commutation of pension.
Superannuation Fund
When an employee deposits money regularly into a fund for future pension, it is known as a superannuation fund. According to this concept, you will be paying money during your tenure of job and receive funds on retirement. The amount received by the legal heir of an employee or employees themselves from superannuation funds is non-taxable.
Retrenchment
It is an amount of compensation provided by an organization or company to its staff because of closure and it is non-taxable.
Scholarship
A lot of private organizations and government institutions provide scholarships to award brilliant students and these awards are non-taxable.
Voluntary Retirement
An employee can go for voluntary retirement before superannuation. Hence, up to Rs. 5 Lakh is non-taxable.
Rewards/Awards from the government
If any government body or state or central government gives any award or reward for scientific, artistic, or literary work or for serving the poor, the ailing, and the weak, for Gallantry awards, and excellence in games and sports, that amount is tax-free.
Gifts (in cash or any other form)
All types of gifts are completely non-taxable from any relative. The gift can be in the form of property, money, jewelry, vehicle, or anything. But one can receive a maximum of Rs. 50,000 as a gift if it is received from a non-relative person. Any amount more than this limit is taxable. At the time of marriage, any gift from both non-relatives and relatives is non-taxable. If a person accepts gifts (either in cash or other forms) from anyone under Section 56 (II) of the Income Tax Act, there are some exceptions.
Gifts From Relatives
The Income Tax department has defined some of the relatives who can offer gifts:
- Spouse
- Brother/Sister
- Brother/Sister of a spouse
- Brother or Sister of parents of either husband or wife
- Any lineal descendant/ascendant of the spouse
- Any lineal descendant/ascendant of the person
If the amount of gift is below Rs. 50,000, it is treated as a non-taxable source of income.
As discussed above, the maximum limit of tax-exemption is Rs. 50,000 in case of a gift from a non-relative person. This value can be in the form of cash or anything. If the value exceeds the limit, the whole gift will be taxable.
On the occasion of Marriage
There is no limit for receiving gifts of any value or in any kind or form on the occasion of marriage.
Gifts through inheritance, from the will, or in case of death of the payer
People generally receive wealth, property, or gifts from their ancestors. Anything they accept through inheritance or any will is non-taxable. This type of gift has no upper limit. One can receive any amount.
Relief Funds
In case of riot, natural disasters, or any kind of distress, the government sanctions a certain amount of relief funds. If an individual receives money from PM Relief Fund or other funds, the whole amount is tax-free.
Amount from government schemes
If you belong to India (whether you are an NRI or not) or you are an Indian citizen, you can have an income from tax-free investment in these cases –
- If you earn from a national Savings Certificate or other Central Government securities issued before June 2002 and opted for the same in foreign currency like Euro, Dollar, etc.
- Any payment you receive from Sukanya Samriddhi Yojana.
- Notified Provident Fund or Public Provident Fund.
- Any income you earn as interest from bonds, government securities, savings certificates, annuity certificates, etc.
- Gold Monetization Scheme.
- Partial withdrawal, i.e. around 25% of the contribution from an NPS employee.
Capital Gains
Here are the non-taxable capital gains for Indian citizens:
- When listed equity shares are transferred.
- Compensation on mandatory acquisition of agricultural land in urban areas.
- Capital gains when you sell the share, mutual fund units, or stock up to Rs. 1 Lakh.
- Income under AP Capital City Pooling Scheme, 2015.
Remuneration from a foreign government
If an Indian resident receives income from a foreign government related to any technical assistance that is co-sponsored, it is non-taxable.
Compensation/Allowances from your employer
Here are the allowances received by an Indian citizen from their employer that are completely non-taxable –
- Compensation during superannuation or Voluntary retirement from a PSU company
- Foreign allowance to the government employees who are posted in a foreign country by the Government of India
Claim/ Maturity from Insurance Company
Any amount of money received in the form of bonus from insurance companies is 100% non-taxable, either by the nominee or policyholder himself/herself, in the following cases –
- The nominee receives the amount on the death of policyholder from life insurance companies
- The policyholder receives the amount of maturity from life insurance companies and claims from an endowment policy
Dividend from Domestic Companies
As of FY 2016-17, any income from dividend received by an individual, when it is announced by the company, is completely non-taxable for the retail investor, if the net value doesn’t exceed Rs. 10 Lakh in the financial year.
A retail investor should receive dividends from a SEBI-registered company based in India. The company will pay the taxes for distributing dividends according to the amount of dividend that goes to the government before its respective shareholders.
Income from Interest of NRE accounts
Non-Resident External Account (NRE) is a great source of investment for NRIs in India. Only NRIs can invest in those accounts. All the amounts of interest they earn on deposits are exempted from taxes. The income goes back to the foreign country where the NRI lives.
Income from Tax-free interest in Post Offices and Banks
The maximum non-taxable savings account limit is Rs. 40,000 as interest from any financial institution or scheduled bank for a financial year. If you earn more interest than this prescribed amount, it is taxable. For example, if you earn Rs. 50,000 in the form of interest, the remaining amount (Rs. 10,000 = 50,000-40,000) is taxable.
The maximum non taxable interest for senior citizens is Rs. 50,000 from FD or Term Deposits in post offices or banks if they receive a pension.
Benefits for Sikkim Residents
Permanent residents in the state of Sikkim don’t have to pay income tax, despite their income. The state of Sikkim is exempted by the government from income tax. People from Sikkim don’t have to pay tax, no matter what the source of their income is. They also don’t have to pay tax on shares or equities earned from dividends or interest.
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