Not all income earned by an individual is taxable under Indian tax laws. While salary, business income and most investment gains are subject to taxation, the Income Tax Act provides exemptions for certain types of income, helping taxpayers legally reduce their tax burden.
Many taxpayers focus on deductions and exemptions while filing their income tax return (ITR) but often overlook income sources that are entirely tax-free. Here are five such income sources that every taxpayer should know about.
Gifts received from specified relatives
received of any value from relatives (such as spouse, parents or in-laws) specified in the law is completely exempt from taxation. The same rule applies to gifts or cash received from non-relatives (except employer) only during special occasions like marriage.
However, if you receive a gift in the form of cash, movable property or immovable property from a person who is not a specified relative under the law, and its value exceeds ₹50,000, the entire value of the gift becomes taxable in the hands of the recipient.
Agriculture income
Income earned from agricultural land located in India is fully exempt from income tax under Section 10(1) of the Income Tax Act. This provision covers income from farming activities, the sale of agricultural produce, rent received from farmland and income arising from agricultural operations.
This tax exemption is meant to support sustainable agricultural practices by ensuring that earnings from farming, cultivation, and related activities are excluded from your total taxable income. However, agricultural income derived from land outside India is taxable for Indian residents.
Inheritance
Assets inherited after the death of an individual are not taxable in the hands of the legal heirs. Although involves the transfer of property without any consideration, the Income Tax Act specifically excludes assets received through a will or by inheritance from the provisions governing taxation of gifts.
As a result, property, money or other assets received through inheritance are currently exempt from tax at the time of receipt. However, if the legal heir generates any income from the inherited property (such as by renting a flat received via inheritance), then such income becomes taxable.
Exempt interest income
The income tax law also provides on interest earned from certain savings and investment schemes. So if you earn interest or maturity proceeds from any of these schemes, then you don’t have to pay tax:
- Sukanya Samriddhi Yojana
- Public Provident Fund (PPF) deposits
- Employees’ Provident Fund
- Voluntary Provident Fund (VPF)
However, the maturity proceeds in these schemes only become tax-free if the money is withdrawn post maturity. Premature withdrawal can be subject to taxation and even penalty in some cases.
Life insurance maturity proceeds
Under Section 10(10D) of the Income Tax Act, life insurance maturity proceeds (including bonuses) are tax-free, provided the annual premium paid does not exceed 10% of the sum assured (for policies issued after 1 April 2012), 20% (for policies issued before 1 April 2012) or ₹5 lakh in any previous years .
This rule applies to ULIPs, endowment policies, and traditional life insurance, subject to specific conditions.