14 Tax Free Income in India for efficient Tax Planning

Here is a list of 14 tax free income which will enable you to plan your taxes efficiently:

Tax Free Income in India - main
Paying Income tax is one of the liabilities that one cannot avoid. People earn income through various sources, however only few are aware that not all of them are subject to tax. There are certain tax free income which are wholly or partially exempted from tax and does not get accumulated for tax liability. This post will take you through the list of such incomes which are deemed as tax-free in the hands of an individual as per Section 10 of the Income Tax Act, 1961.

1. Agricultural Income

Indian economy constitutes three sectors, and one of them is Agriculture. However, the contribution of agriculture sector to country’s GDP is lowest. Thus to encourage the agriculture industry, the Income Tax department has declared earnings by the taxpayer from the agricultural source as tax free income according to Section 10(1) of the Indian Income Tax Act, 1961. As per section 2(1A), agricultural income is defined as follows:

 Any rent or revenue generated from land situated in India and is used for agricultural purposes.
 Any income generated from such land by the agricultural activities which include processing of agricultural produce to make it useful for the marketing or sale activities of such produce.
 Any income attributable to a farm house subject to the satisfaction of certain conditions specified in this regard in section 2(1A).

Note: Income derived from saplings or seedlings grown in a nursery is deemed to be an agricultural income.

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2. Income from Hindu Undivided Family (HUF)

As per Section 10(2), any amount received by an individual being a member of the HUF from the earnings of the HUF, or in case of impartible estate, any sum received by an individual out of the income from the estate that belongs to the HUF is completely exempted from tax in the hands of the individual of that family and is deemed as a tax free income.

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3. Share of profit received from a partnership firm

Under the provision of Section 10(2A) of the IT Act, any share of profit received by a partner from a firm is deemed as tax free income in the hands of the partner. Also, the share of profit received by a partner of LLP from the LLP is tax exempted in the hands of such partner.

Note: Such exemption is restricted to the share of profit received from such partner and does not extend to any interest on capital and remuneration received by the partner from the LLP/firm.

4. Interest on notified savings certificates

Any income received by an individual being a citizen of India or a person of Indian origin being a non-resident, as interest on notified savings certificates which were issued before June 01, 2002, is deemed as tax free income as per Section 10(4B) of the Indian Income Tax Act.

5. Leave Travel Concession/Allowance (LTA)

Most of the employers provide travel concession to its employees for vacation with their family members provided the travel is within the country. Family members of the individual for this purpose include spouse and children, whether dependent or not and parents, brothers & sisters who are wholly or mainly dependent on the individual. The claim can be made by the employee for 2 journeys in a block of 4 years. The applicable block for the current calendar year is from 2014 to 2017. The sum received by the employee is deemed as tax free income as per Section 10(5) of the IT Act. Important points to consider in this regard are listed below:

 In case of the journey performed by air, the amount of exemption will be lower of the amount of economy class fare of the National Carrier through the shortest route of the actual amount spent.
 In case of the journey performed by rail, the amount of exemption will be lower of the amount of air-conditioned first class fare by the shortest route or the actual amount spent.
 If the place of origin and destination are not connected by rail, and the journey is performed by any other mode of transport than by air, the exemption will be provided as follows:

1. In case of recognised public transport: The exemption will be provided on the lower of the first class or deluxe class fare through the shortest route or the actual amount spent.
2. In case there is no recognised public transport available: Exemption will be available on the lower of the amount of air-conditioned first class rail fare by the shortest route (assuming that the journey has been performed by rail) or the actual amount spent.

 If the employee does not avail the travel concession for 2 permitted journeys in a given block of 4 years, then he/she is entitled to carry over 1 journey to the next block. In such a scenario, the exemption will be available for 3 journeys in the next block. To avail the exemption benefit, it is required that the individual claim at least 1 journey in the 1st year of the next block.
 If no journey is performed, no exemption is available.
 An exemption is limited to only 2 surviving children born after October 01, 1998. However, there is no such restriction for the children born before October 01, 1998.

6. Allowance/perquisites to Government employee outside India

Any allowances or perquisites paid outside India by the government to an India citizen for rendering services outside India is exempt from tax as per Section 10(7) and is deemed as tax free income.

7. Gratuity

 Death-cum-retirement gratuity received by Government servants:

Under the provision of Section 10(10)(i), gratuity received by any government employee is fully exempted from tax.

 Gratuity received by a non-Government employee covered under the Payment of Gratuity Act, 1972:

As per Section 10(10)(ii), the exemption allowed will be lower of the following:

 15 days’ salary × years of service
 Maximum amount specified, i.e., Rs. 10,00,000
 Actual Gratuity received

 Gratuity received by a non-Government employee who does not come under the Payment of Gratuity Act, 1972:

In this scenario, the exemption allowed will be lower of the following as per Section 10(10)(iii):

 Half month’s salary for each completed year of service, i.e. [Average monthly salary × ½] × Completed years of service
 Actual Gratuity received
 Rs. 10,00,000

Also read: All you need to know about Gratuity & Its Tax Implications

8. Pension

Any commuted pension i.e. pension received in advance in lieu of monthly pension by a government employee is fully exempt from tax as per Section 10(10A). In case of non-government employees, the exemption will be applicable as follows:

 If the employee receives a gratuity, one-third of the full value of commuted pension is tax exempted under section 10(10A).
 If the employee does not receive a gratuity, one-half of the full value of commuted pension is tax-free under section 10(10A).

Note: Uncommuted pension or any monthly pension if fully taxable as salary in the hands of the pensioner.

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9. Leave Salary

Leave encashed by a government employee at the time of retirement (whether on superannuation or otherwise) is tax free as per Section 10(10AA). In case of a non-government employee, the exemption will be given on the least of the following:

 Cash equivalent to earned leaves (Period of earned leaves in months * Average monthly salary)
 10 month’s average salary
 Actual Leave encashment received on retirement
 Maximum amount as specified by the government i.e. Rs. 3,00,000 for the employees retiring after April 01, 1998

Also read: All you need to know about Leave Encashment and its Tax Implications

10. Payment at the time of voluntary retirement

As per Section 10(10C), any amount received by an individual on voluntary retirement or termination of service is deemed as tax free income, if the following conditions are satisfied:

 Compensation is received by a person who is an employee of any of the following undertakings:

a. Public sector company
b. Any other company
c. An authority established under a State, Central or Provincial Act
d. A local authority
e. A co-operative society
f. A University incorporated by or under a State, Central or Provincial Act and an institution declared as a University as per Section 3 of the University Grants Commission Act, 1956 (3 of 1956)
g. Notified institutes recognised throughout India or in any State or States
h. An IIT within the meaning of clause (g) of section 3 of the Institutes of Technology Act, 1961 (59 of 1961)
i. Notified institute of management
j. Any State Government
k. Central Government

 Compensation is received as per the scheme of voluntary retirement/separation, which is framed under the guidelines prescribed under Rule 2BA of Income-tax Rules, 1962.
 The maximum amount of exemption is Rs. 5,00,000.

11. Amount paid on Life Insurance Policy

Under the provision of Section 10(10D), any amount including bonus received from the life insurance policy is deemed as tax free income. Important points to be considered in this regard are listed below:

 There are no conditions for exemption on any sum received from a policy issued on or before March 31, 2003.
 For policies issued on or after April 01, 2003, the exemption is available only if the premium amount paid on such policy does not exceed 20% (10% in respect of policy taken on or after April 01, 2012) of the actual capital sum assured in any financial year.
 The amount received on the death of the person will continue to be exempt without any condition.

12. Exemption in respect of sum received from Public Provident Fund

As per Section 10(11)/(12), tax treatment for various provident funds are illustrated in the table below:

Types of Provident Fund for tax-free incomes

13. House Rent Allowance

As per Section 10(13A) the exemption allowed to the individuals in case of HRA will be lower of the following:

 50% of salary, if the residential house is located in Mumbai, Kolkata, Delhi or Chennai and 40% of salary if the residential house is located at any other place
 Actual HRA received by the employee in respect of the period during which the employee occupies rental accommodation in the previous year
 Rent paid more than 10% of salary

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14. Prescribed Allowances or Benefits

Apart from the incomes listed above, there are few other prescribed allowances granted to an employee are tax free up to a certain limit as per Section 10(14) as illustrated in the table below:

Types of Allowances for tax-free incomesFinal Words

As I have mentioned earlier, one cannot avoid paying taxes. However, the incomes listed above can certainly help you to plan your taxes efficiently and reduce the tax burden.

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