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LIFE INSURANCE

Certain Types of Incomes You Need Not Pay Tax on

Jagrity Sharma Jagrity Sharma 19 September 2019

Did you know that there are certain types of income on which you do not have to pay taxes? You can take benefits of earning such income without worrying about taxation.

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It is usually believed that one can’t have the best of both worlds, especially when it comes to earnings and income tax. The more you earn, the more would be your tax liability. However, not many people are aware of the fact that this is not entirely true. Certain types of incomes that do not attract any tax liability. Such income is not added to your taxable income while calculating taxable income for a financial year and thereby remains tax-free. Section 10 of the Income Tax Act, 1961 lists the various incomes that fall under this category. Here is a list of ten such types of incomes that do not attract income tax.

Agricultural income

India is largely an agrarian economy. To boost the agriculture sector, the Income Tax Act of India exempts any income one generates from agriculture. However, agricultural income exceeding Rs. 5,000 would be considered for calculating taxable income in case if you have other sources of income exceeding the basic exemption limit. Moreover, any capital gain from the sale of agricultural land in the rural area is exempted from taxation.

Interest earned on savings account

The interest income earned on savings bank account up to Rs. 40,000 in a financial year is allowed as tax-deductible under Section 194A of the Income Tax Act, 1961. However, this does not count as exempted income. You need to show such income as income from other sources in your Income Tax Return to claim a tax deduction.

Share of profit from a partnership firm

If you are a partner of a firm, any share you may have in the total profit of the partnership firm is exempted from income tax obligation. According to Section 10(2) of the Income Tax Act, 1961, partners are not liable to pay tax on income earned from a partnership firm. However, any other funds received by the partner of a partnership firm other than profit shares, such as remuneration or interests, are taxable. The interest income earned from capital or compensation received by the partner is not tax-deductible.

Long-term capital gains

The long-term capital gains from the sale of equity shares and equity-oriented mutual funds on which SST (Securities Transaction Tax) has been charged on sell transaction are exempted from tax. This means that any gains from the sale of equity shares held for more than one year are also tax-deductible. In other words, any income generated on account of sale of equity instruments is exempted from tax obligations under Section 10(38) of the Income Tax Act, 1961. However, this does not apply to debt mutual funds.

Scholarship or grant received

Any scholarship or grant received by any deserving student to meet the education cost is exempted from tax under Section 10(16) of the Income Tax Act, 1961. There is no upper limit on such grant or scholarship received to get tax exemption. Life insurance proceeds received upon maturity: The proceeds received on maturity of life insurance policy is completely tax exempted. However, there are certain conditions to it. The premiums paid towards life insurance policy should be within the prescribed limit as per the Income Tax Act.

Income from Gratuity

Gratuity is an amount paid by the employer as a part of gratitude for acknowledging the employee’s long-standing services. Gratuity received by government employees is completely exempted from tax. For non-government employees, atleast one of the following is considered for tax exemption:

  • Last salary (basic + DA) X (number of years of employment) X (15/26)
  • Maximum of Rs. 20 lakhs
  • Total gratuity received by the employee

Gratuity received by employees is not taxable if it is received on retirement. Moreover, if such gratuity is received by widow, children or dependents of the employee after his death is tax exempted.

In case gratuity is received from more than one employer in the same financial year, the total amount should not exceed the overall exemption limit.

Allowances or perks received from the Government of India

If you are IFS aspirant or rendering any type of service outside the country, the money gained in the form of any allowances, perquisites or remuneration from the Government of India is fully exempted from tax.

Receipts from HUF

The money that you receive or inherit as a member of HUF (Hindu Undivided Family) qualifies for tax exemption under Section 10(2) of the Income Tax Act, 1961. Hindu Undivided Family is considered as a separate assessable entity, and hence the money received as an income of the family estate is considered tax free.

Foreign Service allowance

Any amount received in cash or kind as allowances for rendering services at foreign countries is tax exempted under Section 10(7) of the Income Tax Act, 1961.

The taxation system in India is designed to make sure that there are no unnecessary taxes that may become a financial burden. Paying income tax is a legal and moral obligation of every citizen of the country. The above-listed incomes are an example of the flexibility provided by the Indian tax laws allowing tax deduction and tax exemption on several earnings.

Jagrity Sharma
Written by Jagrity Sharma
A bibliophile who hates alliterations, but loves cream, comics and content immensely! On another note, a content marketer who leverages the power of words to explain...almost anything!