25 Tax Free Incomes & Investments in India

Tax Free Incomes and Investments in India

Tax Free Incomes and Investments in India

Everyone hates Taxes and go out in full force to save it – sometime legally and sometimes beyond the law. Fortunately there are still some incomes & investments which are tax free. Learn about them and use it to your advantage.

Tax Free Incomes:

1. Agriculture Income

India started as agrarian economy and to encourage farming agriculture income was made tax free. Unfortunately even after so many years it has remained so due to its political sensitivity. For tax free income, Agriculture income refers to

  • Processing & sale of agricultural crops
  • Rental income from agriculture land or building and
  • Gains from sale/purchase of agriculture land

Unfortunately this loophole is being used big time to make income tax free illegally. A catch in this is for computing tax liability, you need to include agriculture income in your total income if:

  • Net agriculture income is more than Rs 5000 for the financial year or
  • Total income (excluding agriculture income) is more than income tax exemption limit.

Also Read: How are your Investments Taxed?

2. Some Components of Salary:

Some components of salary are either fully or partially exempted from tax. Medical Reimbursement, Transport Allowance, Meal Coupons, Mobile Phone and Internet Bill Reimbursement, Leave Travel Allowance, etc are exempted to certain limit. You can read more details in the link below.

Also Read: 13 Tax Free Components You Must have in Salary

3. Share of Profit from Partnership Firms:

The share of profits received from partnership firms as partner is totally tax free in your hands because the tax is already paid by the firm on it. However all other payments like salary, interests etc are taxable.

4. Receipts from HUF for its members:

Any receipts from HUF income to its members is tax free. This is because HUF in itself is treated as separate tax entity and taxes are already paid by it on its income.

5. Retirement Benefits:

Retirement benefits such as Gratuity, Leave encashment etc are either fully or partially exempted from tax depending if you are government or non-government employee and the amount received.

Also Read: How to Pay 0 Income Tax on Rs 11 Lakh Salary?

6. Commutation of Pension:

On retirement Central & State Government employees, Local Authority, Defense Services and PSU employees can encash a part of their pension in lumpsum known as Commutation of Pension. This amount is tax free. In case of other employees the commuted pension is partially exempted from tax.

7. Tax Free Pension:

Pension received from some organizations like UNO is tax free. Also one-third or Rs 15,000 (whichever is less) is exempted from tax in case of family pension received by dependents.

8. Voluntary Retirement:

Amount up to Rs 5 lakhs received at the time of voluntary retirement or termination of service is tax free. Any excess is taxed at income tax slabs applicable to you.

Also Read: Tax Planning Guide for FY 2016-17

9. Retrenchment:

The compensation received by employees in event of closure of a company is tax free.

10. Scholarship:

Any scholarship received to cover educational expenses is tax free u/s 10(16). The scholarship need NOT necessarily be awarded by Government.  ‘Cost of education’ includes not only the tuition fees but all other expenses which are incidental to acquiring education. Scholarship may have been given by Govt., University, Board, Trust, etc.

11. Awards by Government:

All payments receive in cash or kind as an award given by the central or state governments or by a body recognized by the central government is tax free.

Also Read: Highest Interest Rate on Bank Fixed Deposits

12. Government Relief Funds

Any amounts offered by government to individuals from Prime Minister’s National Relief Fund or students fund or foundation for communal harmony is tax free.

13. Gifts:

Gifts received from relatives are tax free u/s 56(2) without any upper limit. Also gifts up to Rs 50,000 from non-relatives are tax exempted. The good this is all gifts received at the time of marriage from relatives or non-relatives are fully exempted from tax.

Following are considered relatives as per income tax laws:

  • Spouse of Individual
  •  Brother or sister of Individual
  • Brother or sister of spouse of Individual
  • Brother or sister of either of parents of Individual
  • Any lineal ascendant or descendant of Individual
  • Any lineal ascendant or descendant of spouse of Individual
  • Spouse of person referred to in clauses above

Also Read: High Rated Companies Offering more than Bank Fixed Deposits 

Tax Free Investments

14. Long Term Capital Gains on Equity or Equity Mutual Funds:

Long term capital gains on sale of equity or equity mutual funds (mutual funds which hold more than 65% of portfolio in equity) are tax free Under Section 10(38). To qualify as long term, the investment tenure should be more than 1 year.  Also remember that income is tax free only if STT (Securities Transaction tax) has been paid at the sale/purchase of the equities.

Also Read: Best ELSS (Tax Saving Mutual Fund) to Invest

15. Dividend Income from Equity or Mutual Funds:

Dividends received from Indian companies are tax free under Section 10(34). Budget 2016 changed the limit of tax free dividend to Rs 10 lakh. Any excess dividend received by individuals or HUFs have to pay tax at 10%.

Dividends received from mutual funds are tax free under Section 10(35). The above limit of Rs 10 lakh does not apply to it.

Also Read: How are Mutual Funds Taxed?

16. Tax Free Bonds:

As the name suggests any interest received on tax free bonds is NOT taxable.

17. Interest on Saving Account:

Interest received up to Rs 10,000 in saving account (either banks or post offices) is tax exempted u/s 800TTA. Any excess interest is taxed at marginal income tax rates.

18. Interest on NRE Accounts:

The interest earned on NRE (Non Resident External account) deposits for NRIs are completely tax free. The money in NRE account is fully repatriable – means if you are in US and you invest some money in India in your NRE account, the principle and interest money can be taken back to US. So NRE deposits are ideal way for NRIs to get tax free income.

Also Read: Tax Planning Guide for FY 2016-17

19. EPF (Employee Provident Fund):

The EPF is tax free if it’s withdrawn after 5 years of continuous service. In case withdrawal happens before 5 years, it’s fully taxable. Five year of continuous service means that your EPF account is active (has received active contribution) for more than 5 years even if you have changed multiple employers in the period.

20. PPF (Public Provident Fund):

The maturity amount or partial withdrawals from PPF are completely tax free.

21. Sukanya Samriddhi Account:

The interest received on Sukanya Samriddhi Account is tax free. This makes it good investment option for girl child.

Also Read: Latest Small Savings Scheme Interest Rate

22. Life insurance policy Maturity Amount:

Maturity Amount of life insurance policy is tax free if the premium paid for all the years are less than 10% of the maturity amount. Surrender amount for endowment/traditional insurance is exempt from tax after 3 years while its tax free for ULIPs after 5 years.

Also Read: Does Your Life Insurance Offers Tax Benefit?

23. Sovereign Gold Bonds

There is no capital gains tax if the bonds are held till maturity. However the interest received is taxable. Also if the bonds are sold before maturity it entails capital gains tax.

24. Gold Monetization Scheme:

The interest received is tax free. Also there is No Capital Gains Tax on the appreciation in the value of gold deposited.

Also Read: Sovereign Gold Bonds latest issues

25. Inheritance:

Thankfully there is NO inheritance tax in India. So all the assets, money etc you receive from inheritance or will is tax free.  But after it’s transferred to you, any income generated using inherited asset is your income and taxed accordingly.

One thought on “25 Tax Free Incomes & Investments in India

  1. Thamil selvi says:

    Thanks for all the valuble informations.

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