7 Incomes That Are Tax-free in India
What would be the two most dreaded words in the lexicon of a professional, a business person, or anybody with surplus income? You got that right – income tax! Nobody likes to part with hard-earned money, and people like it even less when a faceless entity called the government takes it forcibly from them. But there’s hope yet. There are quite a few incomes that are tax-free; one just needs to know how to increase earning from those sources.
Here’s a list of seven incomes that are tax-free in India:
Interest on savings bank account
As per Section 80TTA, which was introduced with effect from April 01, 2013, interest received on savings deposits (other than fixed deposits) held with banks, cooperative banks and the post office, up to a limit of Rs 10,000, is exempt from inclusion in gross total income for the purpose of taxation. The deduction is restricted to Rs 10,000, or actual interest, whichever is lower. The cap of Rs 10,000 is for the interest you receive from all your accounts across banks, and not with one bank. For instance, suppose you get Rs 5,000 as interest from one bank, and Rs 10,000 from another bank, your taxable income from savings bank interest will be Rs 5000.
Long-term capital gains on sale of shares/mutual funds
Long-term capital gains received on stocks and equity mutual funds are exempt from tax. This means that any income arising from the transfer of a long-term capital asset, be it equity shares in a company, or a unit of an equity-oriented fund, is tax-free in nature. In other words, income generated on account of sale of such instruments is non-taxable, as per Section 10(36) of the Income Tax Act. This is conditional on the equity instrument having been held for more than a year. This exemption is not applicable to debt mutual funds.
However, the exemption is allowed only when the Security Transaction Tax (STT) has been paid, which you generally pay when you buy from recognized stock exchanges.
Interest on PPF/EPF
The interest earned from an investment in the Public Provident Fund (PPF), a Union government scheme to help individuals save for their retirement privately, is tax-free. PPF is a highly recommended tax saving investment for a majority of Indians, as not only is the interest tax-exempt, one also gets a deduction on one’s income under Section 80(C). Since it is a scheme run by the Government of India, it is also totally safe. Any individual, whether salaried, or self-employed, or falling in any other category, can invest in this scheme and earn a handsome tax-free return, which is usually higher than the return offered by banks on fixed deposits.
The money one gets from one’s EPF account is also tax-free, provided the money is taken out after five years of service.
Income from life insurance policy
The amount received from life insurance companies on maturity, claim or surrender, is totally tax-free, provided the premium paid does not exceed 20 per cent of the sum assured.
As per amendments introduced in the Finance Act, 2003, any proceeds received on account of maturity/surrender of an insurance policy are exempt from tax only if the premium paid does not exceed 20 per cent of the sum assured. For example, if the annual premium is Rs 10,000, the minimum sum assured under the policy should be Rs 50,000 in order to qualify for the exemption.
Some salary components are exempted from tax. For instance, money received from the employer as LTA for the purpose of travel to any place in India along with the family is tax-free. The amount exempt should not exceed the expenses actually incurred for the purpose of such travel. This claim can be made twice in four years.
Income from government securities
Earnings from interest, premium on redemption, or other payment on securities, bonds, annuity certificates, savings certificates and other instruments issued by the Central government is tax-free.
Under the Indian Income Tax Act, Section 10(1), of 1961, agricultural income is exempt from taxation. As per section 2(1A), agricultural income generally means the following:
- Any rent or revenue derived from land which is situated in India and is used for agricultural purposes
- Any income derived from such land by agricultural operations, including processing of agricultural produce so as to render it fit for the market, or sale of such produce
- Any income attributable to a farm house, subject to satisfaction of certain conditions specified in this regard in section 2(1A)
- Any income derived from saplings or seedlings grown in a nursery
However, as per an amendment via Finance (No.2) Act, 2014, agricultural income is considered for determining the tax rate while computing the income tax liability if net agricultural income exceeds Rs 5,000 for the previous year, and total income, excluding net agricultural income, exceeds the basic exemption limit.
In the end, while paying income tax is a legally-binding duty, taking advantage of the flexibility provided by the system, by no means, constitutes breaking the law. Do take advantage of these tax benefits to lower your tax liabilities.
Suneeta Kaul is a journalist, a writer, and a blogger. She tracks the economy, the corporate sector and the stock markets, and is a keen follower of current events. Having started her career with The Economic Times, she has worked for publications such as The Asian Age, Business India, and Thomson-Reuters, among others.