Income and Income Tax are normally coined together. Further, India follows progressive system of taxation- More earning results in higher tax liability due to difference in the slab rate and impact of surcharge over the income. However, there are certain incomes which are outside the net of Income Tax. These are referred to as Exempt income or Tax Free income. Some of the important items of income which are fully exempt from income tax & can be used by taxpayers for tax planning are as under.

  1. Agricultural Income:
    All agricultural income received by the taxpayer is exempt from Tax u/s 10(1) of the Income Tax Act. For Income Tax Act, “Agricultural income” includes

(a) Any rent or revenue derived from land which is situated in India and is used for agricultural purposes;

(b) Income from saplings and seedlings in a nursery. Though agricultural income is exempt from tax, there is a provision for aggregating the income for calculating tax if agricultural income for Individual/HUF exceeds Rs. 5,000/-. By virtue of this provision, agricultural income is required to be aggregated with the other income of the taxpayer for computing tax on the total income. As a result, tax liability increases slightly but the tax on agricultural income remains Nil.
[Taxpayers should note that any income derived from saplings and seedlings grown in a nursery would be agricultural income and will be fully exempt from tax. Even share of profit from partnership firms shall remain tax free in the hands of the partner and would not be subject to aggregation rule].

  1. Income from Sale or compulsory acquisition of Agricultural Land:

Any income arising on sale of rural agricultural land is not liable for any income tax. Further, capital gains received on transfer of urban agricultural land by way of compulsory acquisition would be fully exempt from tax if such land was used in the past 2 years for agricultural purposes

  1. Interest on NRI on Non Resident (External) Account:

Interest on money standing to the credit of person’s resident outside India in respect of a Non-Resident (External) Account in a bank is exempt under Section 10(4).

  1. Amount received from Life Insurance Policies:
  2. a)U/s 10(10D), any sum received under a Life Insurance Policy (LIP), including the sum allocated by way of bonus on such policy [other than u/s 8ODDA or under a Keyman Insurance Policy, or under an insurance policy issued on or after 1.4.2012 in respect of which the premium payable for any of the years during the term of the policy exceeds 10% (5% from 1.4.03 to 31.3.12) of the actual capital sum assured) is fully exempt from tax.
  3. b)Entire amounts received on death of the insured are fully exempt from tax. In general, all money received from LIC or other private insurance companies are exempt from income tax.
  4. c)In the case of Unit Linked Insurance Plan (ULIP), the amount will not be exempt in respect of all policies issued after 01/02/2021 if the premium is more than Rs 2.50 lakh per annum. In such cases, it will be subject to Long Term Capital Gains Tax @ 10% if the gains exceed Rs 1 lakh in a year. [Such ULIP will have the definition of equity-oriented fund in section 112A so as to provide the same treatment as a unit of equity-oriented fund]
  1. Payment received from Provident Funds:

Any payment from a Government or recognized provident fund (PF or approved superannuation fund, or PPF is exempt from income tax u/s 10(11), (12) and (13) of the Income Tax Act-1961.

  1. Interest Income:

(a) There are certain types of interest incomes which are fully exempt from income tax u/s 10(15). It includes Interest on NRI bonds, Interest on Gold Deposit Bonds (not Gold Sovereign Bond), Interest on bonds of local authorities as notified, certain new Tax Free Bonds, Tax Free Infrastructure Bonds to be notified from time to time.

(b) Interest on Saving Bank Account, Post Office A/c is eligible for tax benefit up to Rs. 10,000/- p.a. There are certain banks which offer saving bank interest almost at par with FD Interest. Taxpayers may explore such options for saving tax through this route. For senior citizens, deduction admissible is Rs. 50,000/- and it is stretched so as to include the FDR interest also. 

(c) Interest from Sukanya Samriddhi Yojna is exempt from tax u/s 10(11A).

  1. Scholarship, Awards etc:

Any kind of scholarship granted to meet the cost of education is exempt from tax under Section 10(16). Similarly, certain awards and rewards, etc. are completely exempt from tax under Section 10(17A). For example, Lakhotia Puraskar of Rs. 1 Lakh awarded to the best Rajasthani author every year under Notification No. 199/28/95-IT (A-I) dated 22-4-1996.

  1. LTCG on shares & Equity Mutual Fund up to Rs. 1 Lakh:

Long Term Capital Gain arising transfer of listed shares & Equity oriented Mutual Fund is not liable for taxation to the extent of Rs. 1 Lakh. [Taxpayers may note that dividend income was earlier exempt but now it has been made taxable]

  1. Allowances / Benefit for salaried Assessee:

Subject to stipulated terms & conditions, there are various allowances like LTC, gratuity, Allowance for Foreign Service, numerous retirement benefits, Leave salary etc which are exempt from tax in the hands of the Salaried taxpayers.

  1. Family pension received by family members of armed forces including para military forces:
    Family pension received by the widow or children or nominated heirs, as the case may be, of a member of the armed forces (including paramilitary forces) of the Union, where the death of such member has occurred in the course of operational duties, in such circumstances and subject to such conditions, as may be prescribed shall be fully exempted

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