Powerful Tax-Free Income Sources in India for 2024-25 to Maximize Your Savings
In India, the Income Tax Act, 1961, outlines specific sources of income that are exempt from tax. These exemptions help taxpayers reduce their tax liability and enhance their savings. This article delves into the various tax-free income sources in India for the financial year 2024-25, providing comprehensive details on each exemption category.
Tax-Free Income Sources: Agricultural Income
Agricultural income, under Section 10(1) of the Income Tax Act, is exempt from tax. This provision supports the agricultural sector, which is a significant part of the Indian economy. Agricultural income includes several components:
- Income from Agricultural Operations: This includes income derived from activities such as cultivating crops, harvesting, and selling agricultural produce. For instance, a farmer growing wheat and selling it in the market will have this income exempted from tax.
- Rent: Income earned from renting out agricultural land or buildings used for agricultural purposes is also exempt. These buildings must be situated on or near the agricultural land and used for activities directly connected to agriculture, such as storage or residential purposes for cultivators or workers.
- Capital Gains from Land: Profits generated from the sale of agricultural land are considered agricultural income and are exempt from tax. However, if agricultural income exceeds ₹5,000 and the taxpayer’s non-agricultural income exceeds the basic exemption limit, it becomes taxable.
Tax-Free Income Sources: Gifts
The taxability of gifts is governed by Section 56(2)(x) of the Income Tax Act. While gifts are generally taxed in the hands of the recipient, there are specific instances where gifts are exempt from tax:
- Gifts from Specified Relatives: Gifts received from certain relatives are fully exempt, regardless of the amount. Specified relatives include:
- Spouse
- Brother or sister
- Brother or sister of the spouse
- Brother or sister of either of the parents
- Any lineal ascendant or descendant
- Any lineal ascendant or descendant of the spouse
- Spouse of the persons mentioned above
- Gifts on Marriage: Gifts received by a taxpayer on the occasion of their marriage are exempt, irrespective of the amount or source.
- Gifts through Will or Inheritance: Gifts received under a will or by way of inheritance are fully exempt from tax.
- Gifts in Contemplation of Death: Gifts received in contemplation of death by the payer are exempt in the hands of the recipient.
- Gifts from Local Authorities: Gifts received from any local authority are exempt.
- Gifts from Charitable Trusts: Gifts received from any fund, foundation, university, educational institution, hospital, medical institution, or any other charitable or religious trust or institution registered under Section 12A or 12AA are exempt.
Additionally, gifts up to ₹50,000 are exempt. This includes money, property, shares, securities, jewelry, archaeological collections, drawings, paintings, sculptures, any work of art, bullion, and virtual digital assets.
Tax-Free Income Sources: Gratuity
Gratuity is a lump sum payment made by an employer to an employee as a token of appreciation for their services. Under Section 10(10) of the Income Tax Act, gratuity is exempt from tax under certain conditions:
- Government Employees: Gratuity received by government employees is fully exempt from tax. This includes gratuity received on retirement or death.
- Non-Government Employees Covered Under the Payment of Gratuity Act, 1972: The least of the following amounts is exempt from tax:
- Actual gratuity received.
- Rs. 20 lakhs.
- 15 days’ salary for each completed year of service, calculated based on the last drawn salary (including basic and dearness allowance).
- Non-Government Employees Not Covered Under the Payment of Gratuity Act, 1972: The least of the following amounts is exempt from tax:
- Actual gratuity received.
- Rs. 10 lakhs.
- Half month’s average salary for each completed year of service (average salary based on the last 10 months’ salary).
Tax-Free Income Sources: Leave Encashment
Leave encashment refers to the amount received by an employee for the leave period not availed. Under Section 10(10AA) of the Income Tax Act, leave encashment is exempt in certain cases:
- Government Employees: Leave encashment received at the time of retirement or termination of employment is fully exempt for central and state government employees.
- Non-Government Employees: Leave encashment received by non-government employees is exempt up to a certain limit, which is the least of the following:
- Actual Leave Encashment Received: The actual amount of leave encashment received by the employee.
- Cash Equivalent of Unavailed Leave: Cash equivalent of the leave salary for the period of earned leave that is not availed by the employee at the time of retirement, subject to a maximum of 30 days for each completed year of service.
- Maximum Limit: Rs. 25,00,000. This limit was previously ₹3,00,000 but was increased to ₹25,00,000 in Budget 2023.
- Average Salary: 10 months’ average salary preceding the retirement or termination.
Tax-Free Income Sources: Pension
Pension is a regular payment made to retired employees. Certain types of pensions are exempt from tax:
- Pension from UNO: Pension received by employees of the United Nations Organization (UNO) or their family members is exempt under the Income Tax Act.
- Family Pension for Armed Forces: Family pension received by the dependents of Indian Armed Forces personnel is tax-free.
- Family Pension for Others: For other recipients, there is a deduction under Section 57(iia) at the lower of ₹15,000 or one-third of the amount received.
Tax-Free Income Sources: Share of Income from HUFs
A Hindu Undivided Family (HUF) is a joint family that conducts business and earns income collectively. Under Section 10(2) of the Income Tax Act, the share of income received by a member from the HUF is exempt from tax. However, this exemption is applicable only if the HUF has filed its income tax return and paid the applicable taxes.
Tax-Free Income Sources: Share of Income from LLP or Partnership Firm
As per Section 10(2A), the share of income received by partners from a Limited Liability Partnership (LLP) or partnership firm is exempt if the firm has filed its tax return and paid the applicable taxes. This exemption applies only to the share of the partners in the firm’s profits. Other receipts, such as salary or interest on capital, are fully taxable in the hands of the partners.
Tax-Free Income Sources: Income from Provident Funds
Provident funds are savings schemes where both employees and employers contribute to build a corpus for the employee’s retirement. The tax treatment of provident funds is as follows:
- Statutory Provident Fund: The amount received from a Statutory Provident Fund by government employees is tax-free.
- Recognized Provident Fund: For private employees, the amount received from a Recognized Provident Fund is tax-free if the employee has rendered continuous service for five years.
- Public Provident Fund (PPF): The amount deposited in the PPF, including the interest, is completely exempt from tax if withdrawn after 15 years.
Tax-Free Income Sources: Maturity Amount from Life Insurance Policy
Under Section 10(10D) of the Income Tax Act, the maturity proceeds from a life insurance policy are tax-free. However, this exemption applies only if the amount of premium paid on policies issued on or after April 1, 2012, does not exceed 10% of the sum assured. For policies issued before this date, the premium should not exceed 20% of the sum assured.
Tax-Free Income Sources: Interest Income from Various Sources
Interest income is exempt in the following cases:
- Public Provident Fund (PPF): Interest earned on the PPF is exempt under Section 10(11) for contributions below ₹2,50,000 per year.
- Employee Provident Fund (EPF): Interest earned on the EPF is also exempt under Section 10(11) for contributions below ₹2,50,000 per year.
- Sukanya Samriddhi Accounts: Interest earned on Sukanya Samriddhi Accounts is exempt under Section 10(11A).
- Tax-Free Fixed Deposits: Interest received on tax-free fixed deposits is exempt.
- Tax-Free Infrastructure Bonds: Interest earned on tax-free infrastructure bonds, bonds issued by local authorities, and gold deposit bonds is exempt.
- Non-Resident External (NRE) Accounts: Interest earned from NRE Accounts is exempt from tax.
Tax-Free Income Sources: Scholarships
Scholarships granted to meet the cost of education are exempt under Section 10(16). This exemption helps students by reducing their financial burden and encouraging higher education. Any scholarship received by a deserving student that is used to meet the cost of education is exempt from tax.
Tax-Free Income Sources: Rewards
Recipients of various gallantry awards, such as ‘Paramvir Chakra’, ‘Mahavir Chakra’, and ‘Vir Chakra’, awarded to those in the service of the Central Government or State Government, are exempt from tax on such rewards under Section 10(18)(i). The exemption also applies to the pensions received by the awardees.
Contact Information
For assistance with filing income tax returns, visit Techmin Consulting and filing the income tax return by self visit Income Tax Filing Portal.
Conclusion
Understanding the various tax-free income sources in India can significantly aid taxpayers in maximizing their tax savings. By leveraging these exemptions, individuals can effectively manage their finances and comply with the provisions of the Income Tax Act. For detailed guidance and professional assistance in filing income tax returns, taxpayers can consult with tax professionals or visit online tax filing portals.
