Tax Free Income in India

Article discusses incomes and receipts which are fully exempt under section 10 of Income Tax Act, 1961 in India which includes discussion on Agricultural Income, Receipts from Hindu Undivided Family, Share from a Partnership Firm or LLP, NRI Tax Free Incomes, Income Earned by Foreigners, Allowance for Foreign Service, Interest payable to a non-resident, not being a company, or to a foreign company, Any income accrued or arisen to, or received by a specified fund as a result of transfer of capital asset (w.e.f. 01/04/2020), Travel concession or assistance received by employer, Gratuities, Commutation of Pension, Leave Salary, Voluntary Retirement or Separation Payment, Money Received from Insurance, Money Received from Provident Fund, Special Allowances and Benefits, Interest Income Exempt from Income Tax, Scholarship and Awards, Dividends on Shares and Mutual Funds, Capital Gains On Transfer of Agricultural Land, Gifts Received and receipt under Reverse Mortgage Scheme.

1. Agricultural Income

Under Section 10(1) of the Income Tax Act, agricultural income is fully exempt from income tax. However, for individuals and HUFs, agricultural income of more than Rs.5000 is added to the total income for the purposes of computing the slab rate that will be applicable for the taxpayer on income earned other than from agriculture. Hence, there is no tax on agricultural income, but declaring agricultural income increases overall income tax rate applicable for the taxpayer.

2. Receipts from Hindu Undivided Family

Receipts received by an individual as a member of a HUF is exempt from income tax. Provided that the HUF has been separately assessed and paid Income Tax.

3. Share from a Partnership Firm or LLP

If an assessee is a partner of a partnership firm or LLP, which has been separately assessed for income tax, his/her share of the total income of the partnership firm will be exempt from income tax.

4. NRI Tax Free Incomes

Certain types of incomes or receipts earned by NRIs are exempt from income tax. For instance, income earned by way of interest (including premium on the redemption of such bonds) on certain bonds notified by the Central Government from time to time are exempt from income tax. Similarly, the interest and deposit in the name of NRI NRE, FCNR and RFC account are exempt from income tax.

5. Income Earned by Foreigners

Certain types of incomes and receipts of foreigners are exempt from income tax. Remuneration received by a foreigner who is an official of an embassy is exempt from income tax. Also, any money received by a foreigner from his employer for himself, his spouse, or children, in connection with his proceeding on home leave out of India or after retirement or termination of service, is fully exempt from income tax.

6. Allowance for Foreign Service

Allowance and perquisites paid by the Government of India to a citizen of India, while rendering services outside of India are exempt from Income Tax.

7. Interest payable to a non-resident, not being a company, or to a foreign company

Any income by way of interest payable to a non-resident, not being a company, or to a foreign company, by any Indian company or business trust in respect of monies borrowed from a source outside India by way of issue of rupee denominated bond, as referred to in clause (ia) of sub-section (2) of section 194LC, during the period beginning from the 17th day of September, 2018 and ending on the 31st day of March, 2019

8. Any income accrued or arisen to, or received by a specified fund as a result of transfer of capital asset (w.e.f. 01/04/2020)

Any income accrued or arisen to, or received by a specified fund as a result of transfer of capital asset referred to in clause (viiab) of section 47, on a recognised stock exchange located in any International Financial Services Centre and where the consideration for such transaction is paid or payable in convertible foreign exchange, to the extent such income accrued or arisen to, or is received in respect of units held by a non-resident.

9. Travel concession or assistance received by employer

In the case of an individual, the value of any travel concession or assistance received by, or due to, him,—

(a) from his employer for himself and his family, in connection with his proceeding on leave to any place in India ;

(b) from his employer or former employer for himself and his family, in connection with his proceeding to any place in India after retirement from service or after the termination of his service,

subject to such conditions as may be prescribed (including conditions as to number of journeys and the amount which shall be exempt per head) having regard to the travel concession or assistance granted to the employees of the Central Government :

Provided that the amount exempt under this clause shall in no case exceed the amount of expenses actually incurred for the purpose of such travel.

10. Gratuities

The gratuity shall be payable on retirement or on after completion of at least 5yrs or  becoming incapacitated or on contemplation of death.

Any amount of gratuity received by a government employee is exempt from income tax.

The gratuity received by private sector employees shall be taxable.

The least of these items is exempt from income tax.

• The maximum amount of exemption is 20,00,000/-
• Half-month’s salary for each year of completed service, calculated on the basis of average salary for the 10 months immediately preceding the year in which the gratuity is paid, or
• Actual amount of gratuity received.

11. Commutation of Pension

The amount received in commutation of pension by a Government servant or any payment in commutation of pension from LIC or any other insurer from their pension funds is exempt from income tax.

For private sector employee, only the following amount of commuted pension is exempt:

Where the employee received any gratuity,

1.The commuted value of one-third of the pension which he is normally entitled to receive;

2.And In any other case, the commuted value of half of such pension.

Note:- The monthly pension receivable by a pensioner is liable to income tax like any other item of salary or income and no standard deduction is now available in respect of pension received by a taxpayer.

12. Leave Salary

The maximum amount receivable by an employee of the Central Government as cash equivalent, upto 10 months of leave at the time of their retirement, whether on superannuation or otherwise, is exempt from income tax.

For private sector employees, the exempt amount would be least of:

• 10 months average salary calculated on the basis of the salary during 10 months preceding the employee’s’ retirement on superannuation or otherwise.
• Earned leave standing to the credit of the employee limited to 30 days for every year of actual service rendered for the employer from whose service he has retired.
• The actual amount of leave encashment.
• Maximum amount of Rs.300000/-

13. Voluntary Retirement or Separation Payment

Any amount received by an employee of a public sector company or of any other company or of a local authority or a statutory authority or a cooperative society or university or IIT or IIM at the time of his voluntary retirement (VR) or voluntary separation is completely exempt from tax.

The maximum amount of money received at such voluntary retirement, exempt from income tax is capped at Rs.5 lakh.

Please note that where exemption has been allowed to an employee under this clause for any assessment year, no exemption thereunder shall be allowed to him in relation to any other assessment year.

Also where any relief has been allowed to an assessee under section 89 for any assessment year in respect of any amount received or receivable on his voluntary retirement or termination of service or voluntary separation, no exemption under this clause shall be allowed to him in relation to such, or any other, assessment year.

14. Money Received from Insurance

Any amount received under a Life Insurance Policy (LIP) or under a Keyman Insurance Policy or under an insurance policy for which the premium payable for any of the years during the term of the policy exceeds 10% of the actual capital sum assured, is fully exempt from tax.

However,  Also, all proceeds received on the death of an insured person is fully exempt from income tax. Hence, money received from life insurance policies whether from the LIC or any other private insurance company is exempt from income tax.

15. Money Received from Provident Fund

Any amount received from a government or recognised provident fund (PF) or approved superannuation fund, or PPF is exempt from income tax.

16. Special Allowances and Benefits

Any special allowance or benefits received by an employee which is not in the nature of a perquisite and specifically granted to meet the expenses wholly, necessarily and exclusively incurred in the performance of duties of an office or employment or profit is exempt from income tax.

17. Interest Income Exempt from Income Tax

Certain types of interest payments are fully exempt from income tax under Section 10(15) of the Income Tax Act.

The following are some of the interest income exempt from income tax, subject to change from time to time:-

• Interest on securities held by the issue department of the Central Bank of Ceylon constituted under the Ceylon Monetary Law Act, 1949.
• Interest payable to any bank incorporated in a country outside India and authorised to perform central banking functions in that country on any deposits made by it, with the approval of the Reserve Bank of India, with any scheduled bank.
• Certain interest payable by Government or a local authority on moneys borrowed by it, including hedging charges on currency fluctuation (from the AY 2000-2001), etc.
• Interest on Gold Deposit Bonds.
• Interest on certain deposits for Bhopal Gas victims.
• Interest on bonds of local authorities as notified.
• Interest on bonds of local authorities as notified.
• Certain new Tax Free Bonds and Tax Free Infrastructure Bonds to be notified from time to time.
• Interest received by a non-resident or non-ordinarily person on deposits in Off-shore Banking Unit.
• Interest from Tax Free Infrastructure Bonds.
• Bank interest of girl child from Sukanya Samridhi Scheme.
• Income by way of interest, premium on redemption or other payment on such securities, bonds, annuity certificates, savings certificates, other certificates issued by the Central Government and deposits as the Central Government may, by notification in the Official Gazette, specify in this behalf.
• Any income by way of interest payable to a non-resident by a unit located in an International Financial Services Centre in respect of monies borrowed by it on or after the 1st day of September, 2019 (w.e.f. 01/04/2020)

18. Scholarship and Awards

Scholarship granted to meet the cost of education and certain awards are exempt from income tax.

For example the amount provided as pension and family pension of Gallantry Award Winners like Paramvir Chakra, Mahavir Chakra, and Vir Chakra and also other Gallantry Award winners notified by the Central Government are exempted.

19. Dividends on Shares and Mutual Funds

Any income by way of dividends referred to in section 115-O, provided that nothing in this clause shall apply to any income by way of dividend chargeable to tax in accordance with the provisions of section 115BBDA.

20. Capital Gains On Transfer of Agricultural Land

The capital gains received on transfer of agricultural land (used in the past 2 years for agricultural purposes) is exempt from income tax, provided the proceeds are reinvested in an agricultural land again.

21. Gifts Received

Gifts received from a relative and gifts received during wedding are fully exempt from income tax without any limit.

Gift received from any other person is subject to a limit of Rs.50,000/-.

22. Reverse Mortgage Scheme

Transfer of a capital asset in a transaction of reverse mortgage for senior citizens would not attract capital gains tax. Further, the loan amount is also exempt from tax..

(Republished with Amendments)