Tax-Free Income in India: What Every Taxpayer Should Know in 2024-25
According to the Income Tax Act of 1961, some forms of income are not taxed in India. The IT Department is not allowed to deduct taxes from income that qualifies as "tax-free income." Therefore, by utilising these exemptions when filing their ITRs (Income Tax Returns), people can figure out how to reduce their taxes. Before you file your income tax return, it is important to understand the sources of your tax-free income. According to the new tax regime, which is implemented as the default starting with the financial year 2023–2024, the appropriate exemptions are likewise valid. Let's examine tax-free income in India in greater detail in 2024–2025.
Table of Contents
Agricultural Income
According to Section 10(1) of the Income Tax Act, income derived from farming and agriculture is exempt from taxes in India. Agricultural income has been free from taxation in India since the Income Tax Act of 1961 was put into effect. The exemption is intended to improve farmer welfare and promote industry expansion in the agriculture sector. As long as this exemption is maintained, agricultural revenue in India will be tax-free in 2024–2025. Income from agriculture includes money made from:
Producing, preparing, and marketing agricultural products, including cereals, spices, fruits, vegetables, pulses, and grains
Capital and/or earnings from the selling of farmland
Rental income from a structure or piece of agricultural land
Nonetheless, there is tax applicability if the non-agricultural income exceeds the basic exemption ceiling and the net agricultural revenue (i.e., income less expenses) exceeds Rs. 5,000. For further information, see this article.
Money Received from Life Insurance
According to Section 10 (10d) of the Income Tax Act, any amount received from a Life Insurance Policy (LIP), including the sum assured (S.A.) and the amount allotted as a bonus on such a policy, is excluded from the individual's total income. The exemption granted under Section 10 (10d) in accordance with the date these policies were issued is summarised as follows:
Policies issued before January 4, 2003: Any money obtained through a LIP is excluded, including any bonus money given out.
Policies issued between April 1, 2003, and March 31, 2012: These are free from paying any amount under an LIP, including any bonus amounts. This exemption, however, would not be available if the premium for any year during the policy's term exceeded 20% of the actual S.A.
Policies issued on or after January 4, 2012, but before January 4, 2013: Any money received under a LIP—including money allotted as a bonus—is excluded. This exemption, however, would not be available if the premium for any year during the policy's term exceeded 10% of the actual S.A.
Policies issued from April 1, 2013, to March 31, 2023: Any amount received under a LIP is exempt, including any amount granted as a bonus. This exemption, however, would not be applicable if the premium paid for any year during the policy's term exceeded 15% of the actual S.A., or the minimum capital sum assured, as defined by the policy if the insured event occurred at any point during the policy's term.
Policies issued on or after April 1, 2023: Any amount earned under an LIP, including the amount allotted as a bonus, is excluded for policies issued on or after April 1, 2023. However, if the total premium for one or more insurance policies exceeds Rs. 5 lakhs in a year, then this exemption would not be applicable.
Pension
When a pension is commuted under specific circumstances, the payment is exempt. Employees of the government are completely excluded from it. Whereas the following sum is exempt in the case of other employees:
If gratuity is received by the employee, it is equal to ≓ x (commuted pension received / commutation%) x 100.
If the worker receives no gratuity, multiply 100 by ½ x (commuted pension received / commutation%).
For an employee and their families, a pension from a UNO-affiliated organisation is a tax-free source of income. Dependents of an employee are eligible for a partially tax-exempt family pension. In this scenario, the pension would be tax-free up to Rs. 15,000 or 33% of the pension, whichever is less. Family members of the Indian Armed Forces are eligible for a tax-free pension.
Gratuity
Amounts received as gratuities are regarded as tax-free depending on the employee's job status. If a person works for the government, the whole sum received as gratuity is exempt from taxes. An employee in a non-governmental organisation protected by the Gratuity Act of 1972 is not required to pay taxes on the minimum of the following:
The precise amount of the gratuity received
Rs 20 lakh
Last salary withdrawn (consists just of basic pay and dearness allowance) Duration of employment 15)/26
If a company does not follow the Gratuity Act of 1972, the bare minimum listed below is not subject to taxes.
Provident Fund
Government workers are not required to pay taxes on any money they receive from Statutory Provident Funds. In India, if a private employee has worked consistently for five years, the amount they get from the Recognised Provident Fund is considered tax-free income. A portion of an employee's pay is deducted and contributed to provident funds in India. Additionally, there is no taxation on any cash deposited into the Public Provident Fund, including interest.
Interest Income
According to Section 10(15) of the Income Tax Act, some interest incomes are fully exempt. They are mentioned as follows.
Interest received from banks through the Sukanya Samriddhi Scheme
Interest received from bonds issued by gold depositories
Earned interest on Tax-Exempt Fixed Deposits
Interest received from bonds for infrastructure that are tax-free
An interest in bonds issued by local government
The interest that the government or local authority pays on loans
Interest earned on PPF and EPF payments less than INR Rs. 2.5 lakh annually
Victims of Bhopal Gas Deposit Interest
Interest that is produced via NRE accounts
Scholarships and Rewards
In India, scholarships awarded by educational institutions to students for academic purposes are considered tax-free income. Tax exemptions are granted to students who receive awards or scholarships from governmental, private, or other educational institutions. Section 10 (17A) exempts from taxes any student honours or rewards that come from the state, federal, or other government authority, as well as any other award that has been approved by the Indian government. Pension recipients who have won gallantry awards, such as Paramvir Chakra, Mahavir Chakra, Vir Chakra, and others, are not subject to taxes on their pension income.
Gifts
As per Section 56 of the Income Tax Act, 1961, gifts received from relatives, on a person's marriage anniversary, under a will or inheritance, in anticipation of the giver's passing, from a local government, from a trust, from a medical or educational institution, etc., are exempt from taxation in India. These consist of cash, real estate, jewels, artefacts, drawings, paintings, sculptures, and any kind of bullion, including digital assets in the form of virtual currency. Up to Rs. 50,000 in gifts from individuals not on the list provided in section 56 are excluded during a fiscal year. Here are details regarding tax exemptions for different types of gifts:
Cash: The entire amount of cash received as a gift is taxable if it exceeds Rs. 50,000.
Movable Property
Without Consideration: Fair Market Value is taxable if the aggregate FMV of the property exceeds Rs. 50,000.
The difference is taxed if the FMV is at least Rs. 50,000 more than the consideration.
Immovable Property (land or building)
Stamp Duty Value (SDV) if it is above Rs. 50,000, without consideration.
Inadequate Consideration - The difference is taxed if the SDV-Consideration exceeds Rs. 50,000 and more than 10% of the consideration.
HUFs' receipts
In India, money received by an individual as a member of the Hindu Families Union is exempt from taxes. Nonetheless, the IT Act should have required a separate evaluation of this specific HUF. Members of the HUF are exempt from paying taxes on any receipts they get from the HUF if the HUF has calculated its own income taxes and has already paid the necessary taxes.
Leave Encashment
A Central or State Government employee's leave encashment upon retirement is completely exempt from taxes. Employees in the private sector may, however, only encash a certain amount of leave upon retirement or resignation. The tax exemption threshold for workers in the private sector has been raised from Rs. 3 lakhs to Rs. 25 lakhs with the implementation of Budget 2023.
Share from a partnership firm or an LLP
A taxpayer's share of earnings is fully exempt from taxation if they are a partner in an LLP or partnership firm that has had a separate income tax assessment made against it. Nonetheless, a separate evaluation of the partnership firm and the LLP was necessary. A wage or interest payment, for example, is fully taxable.
Non-Taxable Allowances
These allowances are entirely tax-exempt and are paid on a salary basis. When determining tax, these allowances are subtracted from the total salary. Several typical entirely exempted allowances that are:
Allowances for the judges of Supreme Court and High Court
Allowances provided to Government Employees Abroad: Tax exemptions apply to allowances or privileges granted by the government to Indian citizens in exchange for their services performed outside of India.
Allowances given to UNO employees: UNO does not impose taxes on the allowances it pays to its employees.
Helper Allowance - When an employee hires a helper to undertake official duties, they are reimbursed for the costs of hiring that assistance.
Uniform Allowance - Up to the actual amount paid on the uniform, an employee's allowance for its purchase or upkeep is tax-free. The employee must wear the allowance in the office while doing their job duties.
Additional Non-Taxable Allowances consist of Daily Allowance, Conveyance Allowance, Academic/Research Allowance, etc.
Conclusion
Understanding the many tax-free revenue streams available in India is crucial since it can lessen the burden of taxes on individuals. One can save a substantial sum of money by submitting an ITR with all of the available exemptions, money that can then be put towards other endeavours. It's also critical to remember that, even if some types of income are exempt from taxes, maintaining accurate records and paperwork is still necessary to prevent issues during tax audits. To sum up, knowing where to find tax-free income is essential to managing finances and maximising one's earnings.
FAQ
Q1. Which investment is 100% tax-free?
While no investment is completely tax-free, there are few that offer significant tax advantages. The Public Provident Fund (PPF) is one such choice. Investing in the PPF might lower your taxable income under section 80C.
Q2. Which income is fully exempted from tax in India?
Under Section 10(1) of the Income Tax Act, income derived from agricultural operations is completely exempt from taxes and is considered tax-free in India. Any income received by any member of the HUF, 1961 from family property or income, or from the impartible family estate, is also completely exempt from taxes.
Q3. Is INR ₹7 Lacs income tax-free in India?
People who earn up to INR ₹7 Lacs are exempt from paying tax under the new tax system. They will be qualified for a section 87A reimbursement.
Q4. Is salary income tax-free in India?
No. The Income Tax Act generally applies to salary income. On the other hand, in specific circumstances, some allowances and privileges are permitted.
Q5. Is agriculture income tax-free in India?
In India, revenue from agriculture is not taxable. However, the notion of partial integration applies to agricultural income if net agricultural income exceeds Rs. 5,000 and non-agricultural income exceeds the basic exemption limit.
Q6. Can I opt for the new regime if I have tax-free income?
Yes, even with tax-free income, you can choose the new system.
Q7. What is the tax-free income limit in India?
The upper limit of tax-free income in India is explained in the following sections.
Under the previous tax system, a person under 60 years old was exempt up to Rs. 2.5 lakhs, senior citizens between the ages of 60 and 80 was exempt up to Rs. 3 lakhs, and a super senior citizen over 80 years old were exempt up to Rs. 5 lakhs.
For those who choose to adopt the new tax system, the maximum amount free from taxes is Rs. 3 lakhs.
Q8. What is fully exempted income?
Exempt incomes are those that, according to income tax legislation, are not subject to taxation; that is, they are not included in the ,total income for calculating taxes whereas taxable incomes are subject to taxation. Income that is not expected to be subject to tax is known as exempt income.
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