From PPF To Sukanya Samriddhi Account: 10 Incomes That Are Tax-Free In India

Certain incomes are specifically exempt from tax under the Income-tax Act, 1961, enabling taxpayers to reduce their overall tax burden. While most earnings are taxable, the law provides exemptions for select incomes such as agriculture, gifts, savings instruments, and retirement benefits, subject to prescribed conditions and limits.

As per CA (Dr.) Suresh Surana, some of the common incomes in India that are tax-free are as follows:

1. Agricultural Income

In accordance with Section 10(1) read with Section 2(1A), Agricultural income earned in India is fully exempt from income tax. The term "agricultural income" covers such income derived from agricultural land situated in India, income from agricultural operations including cultivation and harvesting, as well as income from processing agricultural produce where such processing is ordinarily employed by a cultivator to make the produce marketable.

However, where an individual's non-agricultural income exceeds the basic exemption limit, the principle of partial integration applies i.e. in such cases, agricultural income is considered only for determining the applicable rate of tax and not for computing taxable income.

2. Share of Profit from Partnership Firm / LLP

Section 10(2A) provides that the share of profit received by a partner from a partnership firm or LLP is exempt from tax in the hands of the partner, provided that the firm or LLP is separately assessed to tax under the IT Act. This exemption applies only to the partner's share in the profits of the firm.

It is important to note that remuneration, interest on capital, or any other payments received by a partner from the firm are not covered under this exemption and are taxable as business income under Section 28(v). There is no monetary ceiling prescribed for the exemption of profit share.

3. Interest on Tax-Free Bonds

As per Section 10(15)(iv)(h), Interest earned on bonds specifically notified by the Central Government as tax-free bonds is fully exempt from income tax. Such bonds were historically issued by certain public sector undertakings and infrastructure financing entities with respect to government notifications.

The exemption is restricted only to interest income. Any capital gains arising on transfer or redemption of such bonds are taxable in accordance with the applicable capital gains provisions. No upper monetary limit has been prescribed for the exemption of interest income.

4. Life Insurance Maturity Proceeds

Section 10(10D) provides that any sum received under a life insurance policy, including bonus, on maturity or otherwise is exempt from tax, subject to prescribed premium conditions. For policies issued on or after 1 April 2012, the annual premium must not exceed 10% of the actual capital sum assured. For policies issued between 1 April 2003 and 31 March 2012, the permissible limit is 20% of the sum assured.

Certain exclusions apply to high-value policies. ULIPs issued on or after 1 February 2021 where the aggregate annual premium exceeds Rs. 2.5 lakh, and non-ULIP life insurance policies issued on or after 1 April 2023 where the premium exceeds Rs. 5 lakh, do not qualify for exemption. However, any sum received on the death of the insured is fully exempt without any monetary restriction.

5. Public Provident Fund (PPF)

Section 10(11) provides that Interest accrued on, and maturity proceeds received from, a Public Provident Fund account are fully exempt from tax. The exemption applies provided the account is maintained in accordance with the provisions of the Public Provident Fund Act, 1968 and the applicable scheme rules.

While the investment eligible for deduction under Section 80C is capped at Rs. 1.5 lakh per annum, there is no monetary ceiling on the amount of interest or maturity proceeds that can be claimed as exempt under Section 10(11).

6. Gifts Received from Specified Relatives

Section 56(2)(x) provides for an exclusion clause wherein any sum of money or property received without consideration from specified relatives is not regarded as income and is therefore exempt from tax, irrespective of the amount involved. Specified relatives include the spouse, parents, siblings, lineal ascendants or descendants, and the spouses of such persons.

On the other hand, gifts received from non-relatives exceeding Rs. 50,000 in aggregate during a financial year are taxable, subject to specified exceptions such as gifts received on the occasion of marriage or under a will or inheritance.

7. Scholarships

Section 10(16) provides that Scholarships granted to meet the cost of education are fully exempt from tax. The exemption applies irrespective of whether the scholarship is awarded for studies in India or abroad and covers amounts received towards tuition fees, living expenses, research costs, or allied educational purposes. There is no monetary ceiling prescribed for exemption, provided the scholarship is genuinely intended to meet the cost of education.

8. Interest on Sukanya Samriddhi Account

Section 10(11A) provides that Interest accrued on, and withdrawals from, an account opened under the Sukanya Samriddhi Yojana are fully exempt from tax. The exemption applies without any monetary ceiling, provided the account is maintained in accordance with the prescribed scheme.

9. Employer-Provided Leave Travel Concession (LTC / LTA)

Section 10(5) read with Rule 2B provides that Leave Travel Concession received by an employee for travel within India is exempt, subject to prescribed conditions. The exemption is limited to travel expenses incurred for the employee and family and does not cover accommodation or food expenses.

The exemption is available for two journeys in a block of four calendar years, subject to actual travel. The amount exempt is restricted to the fare of the shortest route by the eligible mode of transport.

10. Certain Allowances Granted to Government Employees Abroad

Section 10(7) provides that allowances or perquisites paid by the Government of India to Indian citizens for services rendered outside India are exempt from tax. The exemption applies only to government employees and does not extend to employees of public sector undertakings or private entities.