In India, certain income sources are not taxable under the Income Tax Act,1961. Known as tax-free incomes, the IT Department cannot deduct taxes on the incomes that fall under these exemptions. Hence, individuals can determine a way to save on their taxes by taking advantage of these exemptions while filing their ITRs (Income Tax Returns). It is crucial to be aware of tax-free income sources before filing your income tax return. The corresponding exemptions are also valid under the new tax regime, which is introduced as the default from the financial year 2023-24. Let’s explore more details about tax-free income in India 2024-25.
When you file your income tax return, you must be aware of the sources below. The incomes from these sources are tax-free in India, and therefore, they are tax-exempt.
Section 10(1) of the Income Tax Act specifies that income earned from farming and agriculture is considered tax-free income in India. Since the implementation of the Income Tax Act of 1961, the Indian government has exempted agricultural Income from tax obligations. The exemption aims to bolster the farmer’s welfare and foster growth in the agricultural sector. This exemption has continued, ensuring agricultural earnings to be tax-free income in India 2024-25.
Agricultural income covers the income generated from:
i. Manufacturing, processing and sale of agricultural crops such as fruits, vegetables, pulses, grains, spices, etc.
ii. Rental income generated from agricultural land or building.
iii. Capitals/profits obtained from the sale of agricultural land
However, there is a tax applicability in case the net agricultural income exceeds Rs.5,000, and the non-agricultural income is more than the basic exemption limit. Check out this article for more details.
According to section 56 of the Income Tax Act, 1961, gifts obtained from any relative or on the occasion of an individual's marriage, or under a will or inheritance, in contemplation of the payer's death, or from a local authority, or from any trust or from any educational or medical institution etc., are considered tax-free income in India. These include money, property, jewellery, archaeological collections, drawings, paintings, sculptures, any work of art or bullion, including virtual digital assets also.
Any gifts received from people apart from the list mentioned in section 56 is exempted up to Rs. 50,000. Checkout the table below for a better understanding:
Nature of asset | Threshold Limit |
Money | If cash received as a gift exceeds Rs. 50,000, the whole amount is taxable. |
Movable Property | 1. Without Consideration- Aggregate FMV of property > Rs.50,000, Fair Market Value is taxable. 2. When FMV exceeds consideration by at least Rs. 50,000, the difference is taxable. |
Immovable Property(Land or Building) | 1. Without Consideration - Stamp Duty Value (SDV) if it exceeds Rs. 50,000. 2. Inadequate Consideration - If SDV-Consideration is more than Rs.50,000 and more than 10% of consideration, difference is taxable. |
Scholarships that institutes provide to students for education purposes are tax-free income in India. Students who get awards or scholarships from private organizations, government institutions, or other institutions for education are exempt from tax.
According to section 10 (17A), students who receive awards or rewards from the state government, central government, or other government authority or any other award sanctioned by the Indian government are tax exempt.
The winners of Gallantry Awards like Paramvir Chakra, Mahavir Chakra, Vir Chakra and others obtaining a pension are exempted from tax on the pension being received.
If an individual receives an amount as a gratuity, it is considered tax-free, based on the individual’s type of employment. If an individual is a government employee, the entire amount obtained as gratuity is considered tax-free.
In a non-government organization covered under Gratuity Act, 1972, the minimum of the below is exempted from taxation for an employee.
If an organization doesn’t adhere to the Gratuity Act, 1972, then the minimum of the below is exempted from taxation.
Note that for government employees, the gratuity amount obtained on retirement or death is fully exempted.
Leave encashment received by a Central or State Government employee upon retirement is full tax-exempt. There is an upper limit on the leave encashment received by private sector employees upon retirement or resignation. With Budget 2023, the tax exemption limit for private sector employees has been increased from Rs.3 Lakhs to Rs.25 Lakhs.
If an individual gets a receipt as an HUF member, it is considered tax-free income in India. However, the particular HUF should have been separately assessed under the IT Act. If the HUF has made a separate income tax calculation and has already paid the liable taxes, the members don’t have to pay tax on the receipts obtained from such HUF.
If a taxpayer is a partner of an LLP or a partnership firm which has been separately assessed for income tax, then the taxpayer’s share of profit is entirely exempt from tax. However, the LLP or the partnership firm should have been separately assessed. Other receipts, like salary or interest, are fully taxable.
The pension received from an organization like the United Nations Organization(UNO) is a tax-free income for an employee or their families. The family pension that an employee’s dependents get is partially tax exempted. In such a case, either 33% of the pension or Rs. 15,000, whichever would be lower, would be tax-free. The pension that family members of the Indian Armed Forces receive is tax-free.
Certain interest incomes fall under the full exemption category under the Income Tax Act Section 10(15). They are listed below.
The amount received from a Statutory provident fund by government employees is tax-free. The amount received by private employees from the Recognised Provident Fund is considered tax-free income in India, if the employee has rendered service continuously for 5 years. In India, some percentage of an employee’s salary is subtracted and contributed to Provident Funds. Also, the amount deposited to the Public Provident Fund, including interest is completely exempt from taxes if withdrawn after the maturity period of 15 years.
As per section 10(10D) of the Income Tax Act, maturity proceeds from a life insurance policy are tax-free if the amount of premium paid doesn’t exceed 10% of the sum assured for policies issued after April 1, 2012, and 20% in case of the policy issued before.
The tax-free income in India includes:
The following points clarify the limit of tax-free income in India.
Knowledge of tax-free income in India is vital to avoid unnecessarily paying taxes on the income sources discussed above. Apart from the aforementioned income sources, many other income sources may be considered tax-free income sources. However, the discussed ones are the most common tax-free income sources and help you save taxes significantly. If your income source is any of the above-discussed ones, remember to add the same to your tax return and get an exemption against it.
Certain income sources in India are tax-free under the Income Tax Act,1961, essential for tax planning when filing ITR. Agricultural income, gifts, scholarships, gratuity, leave encashment, HUF receipts, LLP profits, pension, interest income, provident funds, life insurance policy maturity are tax-free sources. Exemption limits apply based on the tax regime and taxpayer's age. Awareness of these sources is crucial for tax-saving.