List of Tax-Free Income Sources in India 2023

What is Tax?

Tax is a mandatory contribution by the citizen from their Income from salary, business and profession, and other income sources. The Income Tax Department of India regulates tax collection and imposes fines and penalties in case of irregularities.

Why are Taxes Collected?

Taxes are important for the development of a nation, i.e., The Income tax department collects tax on behalf of the government of India. The government uses these taxes to fund new public services or develop existing ones. The government also funds free schemes for people in need and spends these funds to provide free health and education services.

Who is Liable to Pay Taxes in India?

Individuals below 60 years of age with an income above Rs. 2.50 lakhs must pay tax on the excess amount. The tax-free limit for senior citizens (60 to 80 years old) is Rs. 3 lakhs; for super senior citizens (above 80 years old), it is Rs. 5 lakhs per year. Similarly, the basic exemption limit for all individuals under the new regime is Rs.3 lakhs per year.

Which Income Sources are Tax-free in India?

Various types of tax-free income in India; let’s have a glimpse at those sources:

• Agriculture Income: The economy of India is based on agriculture, and the government supports agriculture by making agriculture tax-free. This includes growing, processing, and selling crops like wheat, rice, fruits, etc. It also includes rent from agricultural land or buildings and profits from selling or buying agricultural land.
• Profit from the Partnership Firm: The Partnership firm's income is taxed at the entity level, and the partners receive their share of income after tax. A partner does not have to pay income tax again on the share of profit received from the firm.
• Individual share from HUF: HUF is a taxable entity that pays income tax on its earnings. After paying tax, HUF distributes the remaining earnings to its members. I.e., The members do not have to pay income tax on these distributions.
• Interest income from NRE accounts: A special type of account called NRE (Non-Resident External account) is available for NRIs who want to invest in India. This account is exclusive to them. They don't have to pay tax on the interest they earn from NRE deposits. They can also transfer the money from the NRE account to their original country of residence. Need to save taxes under NRI Taxation? Book eCA now to Maximize your tax savings.
• Capital Gains: Some capital gains are not taxable for any Indian individual. These include:
  • The compensation received when urban agricultural land is acquired by force
  • Capital gains under the Andhra Pradesh Capital City Land Pooling Scheme
• Scholarship: Any government and private institution that provides scholarships to students to complete their studies. The Income Tax Act does not impose taxes on such scholarships and rewards.
• Gratuity: Employers provide gratuity to the employees after death or retirement; gratuity is either wholly or partially exempted from tax depending on the employment type; for instance, if a government employee receives a gratuity after retirement, it is completely tax-free. For private sector employees, the exempted gratuity amount is limited to ₹ 10 Lakh. Check out our Free Gratuity Tax Exemption Calculator.
• Income from Provident Fund: Provident funds are mandatory savings schemes for companies registered under The Companies Act 1956 in India. The savings increase with age and are tax-free when the employee retires. The Employee Provident Fund gives tax-free returns if the employee has actively contributed for more than 5 years, even if he/ she has switched multiple employers in that period. Calculate your tax savings using our free 80C Calculator.
• Leave Encashment: The amount received for leave encashment at retirement is partially tax-free, depending on whether the employee is a government or private sector employee. Up to 10 months of leave are tax-free for government employees, and the exempted limit for private sector employees is ₹3 Lakh. However, Budget 2023 announced a big jump in this limit, making it Rs 25 lakh. Calculate your taxable salary using our Leave Encashment Calculator for Free.
• Tax-free Pension: Pension from a few organizations, such as UNO, is exempted from tax. Family pension received by the employee's dependents is also exempted from tax. The exempted amount is less than Rs. 15,000/- or one-third of the pension. However, some pensions are fully exempt from tax, such as those given to the winners of gallantry awards and their families and those given to the armed forces personnel and their families.
• Voluntary Retirement: Amount received on the voluntary retirement before his superannuation is exempted from tax up to ₹5 Lakh.
• Gifts received from Relatives or on the occasion of marriage: A gift received from relatives or gifts received on the occasion of marriage is exempted from tax. However, Gifts received from other than relatives are exempted from tax up to ₹50,000. As per the Income Tax Act 1961, "Relative," in relation to an individual, means the wife, husband, sister, brother, or any lineal ascendant or descendant of that individual.
• Allowances or compensation from the employer: Some allowances are exempt from tax for any individual Indian, such as the Foreign allowance given by the government of India to its employees who work abroad. The compensation received from the PSU companies on voluntary or superannuation retirement is also exempted from tax.
• Maturity (or) claim from Insurance companies: If the policyholder or the nominee receives any amount from the insurance companies, including a bonus [except Keyman Insurance policy], it is fully exempt from tax under Section 10 (10D) of the Income Tax Act, 1961.

Applicable in the following cases:

• The policyholder gets the maturity benefit from the life insurance companies on completion of the policy term, as well as claims from the money-back endowment policy.
• The nominee gets the death benefit from the life insurance companies on the policyholder's demise.

Not every income is taxable in India; lots of them are exempt from tax. If you are still confused or in need of professional advice, Get Tax Consultation Now!