Everyone hates Taxes and go out in full force to save it – sometime legally and sometimes beyond the law. Fortunately there are still some tax Free incomes & investments. Learn about them and use it to your advantage.
Tax Free Incomes
Agriculture Income
India started as agrarian economy and to encourage farming agriculture was considered tax free income.
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.
Some Components of Salary
Some components of salary are either fully or partially exempted from tax. Meal Coupons, Mobile Phone and Internet Bill Reimbursement, Leave Travel Allowance, etc are exempted to certain limit and can form part of tax free income.
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.
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.
Retirement Benefits
Retirement benefits such as Gratuity, Leave encashment etc are either fully or partially tax free income depending if you are government or non-government employee and the amount received.
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.
Tax Free Pension
Pension received from some organizations like UNO is tax free income. Also one-third or Rs 15,000 (whichever is less) is exempted from tax in case of family pension received by dependents.
Voluntary Retirement
Amount up to Rs 5 lakhs received at the time of voluntary retirement or termination of service is tax free income. Any excess is taxed at income tax slabs applicable to you.
Retrenchment
The compensation received by employees in event of closure of a company is tax free income.
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.
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 income.
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.
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 and hence tax free income. 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
Tax Free Investments
Tax Free Bonds
As the name suggests any interest received on tax free bonds is NOT taxable and hence a good tax free investment for person in highest income tax slab. There are no fresh issues of tax free bonds now but they can be purchased through your Demat account from stock exchanges.
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.
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 is good tax free investment for NRIs.
Interest on Fixed Deposit for Senior Citizens
Budget 2018 introduced a new Section 80TTB. According to this Senior citizen can claim tax exemption up to Rs 50,000 on interest income from bank/ post office fixed deposit, recurring deposit or savings account. If a senior citizen opts to take advantage of Section 80TTB, he cannot claim further tax benefit u/s 80TTA. Non-senior citizens and HUFs are not eligible for 80TTB exemption.
EPF/VPF (Employee/Voluntary 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.
Budget 2021 has made some more changes to the taxation of EPF/VPF. Starting April 1, 2021 any interest earned on employee contribution of more than Rs 2.5 lakh a year would be taxable at marginal income tax slab rate. Even now EPF/VPF can be considered a good tax free investment.
PPF (Public Provident Fund)
The maturity amount or partial withdrawals from PPF are completely tax free and hence a great tax free investment.
Like Samriddhi Account
The interest received on Sukanya Samriddhi Account is tax free. This makes it good tax free investment option for girl child.
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.
Long Term Gains on Stocks & Equity Mutual Funds
The long term capital gains in equities & equity mutual funds used to be 100% tax free. However Budget 2020 introduced tax on capital gains. Now long term capital gains up to Rs 1 Lakh is tax free. Any gains above that is taxed at flat rate of 10.4% (including cess).
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.
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.
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.
