What are Tax-Free Income Sources in India?

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What are Tax-Free Income Sources in India?

The very mention of “income tax” can cause stress amongst many individuals who constantly look for methods to save their money. Income tax refers to the tax which is imposed on the earnings of individuals from different sources like salary, business, rent, capital gains, prizes, gifts, awards, and so on.

But are you aware that certain income sources are tax-free? So, if you’re wondering how to earn tax-free income in India, you’ve landed on the right webpage. In this blog post, we will learn about various tax-free income sources in India.

List of Tax-Free Income Sources in India

Let’s check out the list of tax-free income sources in India.

Agricultural Income

Agriculture Income is one of the most popular tax-free income sources in India. The agricultural income is, by default, exempted from taxation and not included under total income. Section 10(1) of the Income Tax Act, 1961 mentions the exemption clause.

Agricultural income refers to income generated from the following:

• Production, processing and sale of agricultural crops such as grains, vegetables, wheat, pulses, fruits, spices, and other agricultural crops.
• Rent received from properties which are utilized for the purpose of agriculture.
• The income earned by the sale or purchase of agricultural land.

The agricultural income is tax-free for not only individuals but also HUFs. Agricultural income of individuals/HUFs that is more than Rs. 5000 per annum even if exempt, is added to the gross overall income so that the applicable slab rate at which the non-agricultural income will be taxed can be determined. So, even if the agricultural income is 100% tax-free, it’ll still increase the overall income tax rate on other income if declared. 

Interest Income

The Income Tax Department allows for tax exemption for various interest income sources, including:

• Interest earned on Bank FDs up to Rs. 10,000 a year per individual
• Interest earned on Gold Deposit Bonds
• Interest earned on PPF and EPF for contributions less than 2.5 Lakh a year
• Interest Income earned from Sukanya Samriddhi Scheme
• Interest on Gold Deposit Bonds
• Interest on Tax-Free FDs
• Interest earned on on tax-free bonds and tax-free Infrastructure Bonds that are eligible for investment to avoid Capital Gains
• Interest on bonds issued by the Local Authorities
• Interest earned from NRE Accounts

Gifts Received On Wedding

We often see wealthy people receiving fancy gifts for their weddings from their friends and family members. Karan Johar gifted Kiara a handbag worth Rs. 70 and a jacket worth Rs. 50 lakh to Siddharth Malhotra for their wedding. There is no doubt that these gifts were given as tokens of love and congratulations to the newlyweds. However, we must also consider the tax angle of such gifts. These gifts would’ve been taxable as income in normal situations. But, when the gifts are given as wedding gifts, they are considered as non-taxable income. This means that the couple doesn’t have to pay any tax on the gift’s value, no matter how expensive the gift is.

As per the Income Tax Act, 1961, any gift which is received by an individual from any relative is completely tax-free on receipt regardless of the price of the gift. This gift can be in the form of jewelry, property, car, bike, money or any other kind which can be valued.

The term ‘relatives’ is defined by the Income Tax Department as:

a) Spouse of an individual (Husband or Wife);

b) Siblings of an Individual (Brother or Sister);

b) Brother or Sister of the spouse of that respective individual;

d) Brother or Sister of either of the parents of the individual;

e) Any lineal ascendant or descendant of the individual;

f) Any lineal ascendant or descendant of the individual’s spouse;

g) Spouse of the persons referred to in (b) to (f).

If an individual is a non-relative, a gift worth a maximum of Rs. 50,000 received by an individual can be considered tax-free. A gift will be taxable in the hands of the individual if it’s worth more than Rs. 50,000.

An exemption to this clause is gifts which are received at the time of an individual’s marriage. Regardless of how expensive the gift is, if it’s a wedding gift then there’s no tax whether a relative or non-relative gifts it. There’s no upper limit to the amount of the gift one can receive for their marriage. Gift, property or wealth received by an individual from their ancestors by any kind of will or inheritance is also considered as tax-free income. In this case too, there is no upper limit for the kind of receipts.

Income from Scholarships or Relief Funds

If a student receives a scholarship or an award from a government institution, private organization or other institution for their education, they are not liable to pay any taxes for such a scholarship or award.

Additionally, any reward given by the government or authorized by the government is exempt from taxes according to Section 10(17A) of the Income Tax Act. National Awards, Nobel Prize, Bharat Ratna Award, etc. are all completely tax-free.

Government sanctions or relief funds which are received for floods, famine, riots or any other natural or man-made disasters are also exempt from taxes in the hands of the individuals who receive such funds.

Insurance Money

Any amount received, including bonus amount, from an insurance company by a policyholder or nominee is tax-free in India. This is applicable for certain insurance and its provisions defined under Section 10(10D) of the Income Tax Act. 

However, the exemption would not be available if the premium paid for any year during the policy's term exceeded 15% of the "actual capital sum assured," or the "minimum capital sum assured," as defined by the policy in the event that the insured event occurred at any point during the policy's term. Premium paid to the extent of 15% of the “actual capital sum assured” is exempt from tax under Section 80C and is applicable for the policies issued on or after 01.04.2013.

Conclusion

Knowing all the tax-free income sources in India is essential for individuals who want to earn money without having to pay any taxes on their income. Even though the income sources mentioned in this article are tax-free, it is still crucial to maintain a complete documentation and record of these sources to avoid any issues when tax audits take place. For assistance, you can connect with tax specialists at Registrationwala.

Disclaimer: This blog is for informational purposes only. It is advised to consult with a tax professional to make an informed decision.

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