Tax Free Incomes

The following are 17 important items of income, which are fully exempt from income tax and which a resident
individual Indian assessee can use with profit for the purpose of tax planning.
1. Agricultural income
Under the provisions of Section 101! of the Income Tax "ct, agricultural income is fully exempt from income tax.
#owever, for individuals or #U$s when agricultural income is in excess of %s &,000, it is aggregated with the total
income for the purposes of computing tax on the total income in a manner which results into 'no' tax on agricultural
income (ut an increased income tax on the other income.
"gricultural income which fulfils the a(ove conditions is completely exempt from tax. The manner of calculating tax on
total income and agricultural income, is explained in the following illustration)
Illustration
$or $* +00,-0. assessment year +00.-10!, a male individual
has a total income from trading in textiles amounting to %s
1,&+,000/ (esides, he has earned %s 00,000 as income from
agriculture.
The income tax paya(le (y him will (e computed as under)
1n the first %s 1&0,000 of the taxa(le non-agricultural
income) Nil
1n the next %s 00,000 of agricultural income falling
under 102 sla(!) Nil
1n the next %s +,000 of taxa(le non-agricultural
income 3 10 per cent) Rs 200
Income tax on aggregated income of %s 1&+,000 4
%s 00,000 5 %s 1.+,000) Rs 200
2. Receipts from Hindu Undivided Family (HUF)
"ny sum received (y an individual as a mem(er of a #indu Undivided $amily, where the said sum has (een paid out
of the income of the family, or, in the case of an imparti(le estate, where such sum has (een paid out of the income
of the estate (elonging to the family, is completely exempt from income tax in the hands of an individual mem(er of
the family under Section 10+!.
. !"are from a partners"ip firm
Under the provisions of Section 10+"!, in the case of a person (eing a partner of a firm which is separately assessed
as such, his share in the total income of the firm is completely exempt from income tax since "* 1..6-.0.
$or this purpose, the share of a partner in the total income of a firm separately assessed as such would (e an
amount which (ears to the total income of the firm the same share as the amount of the share in the profits of the firm
in accordance with the partnership deed (ears to such profits.
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#. Allo$ance for foreign service
"ny allowances or per7uisites paid or allowed as such outside India (y the 8overnment to a citi9en of India,
rendering service outside India, are completely exempt from tax under Section 107!. This provision can (e ta:en
advantage of (y the citi9ens of India who are in government service so that they can accumulate tax-free per7uisites
and allowances received outside India.
%. &ratuities
Under the provisions of Section 1010! of the IT "ct, any death-cum-retirement gratuity of a government servant is
completely exempt from income tax. #owever, in respect of private sector employees gratuity received on retirement
or on (ecoming incapacitated or on termination or any gratuity received (y his widow, children or dependants on his
death is exempt su(;ect to certain conditions.
The maximum amount of exemption is %s. 6,&0,000/. 1f course, this is further su(;ect to certain other limits li:e the
one half-month<s salary for each year of completed service, calculated on the (asis of average salary for the 10
months immediately preceding the year in which the gratuity is paid or +0 months< salary as calculated. Thus, the
least of these items is exempt from income tax under Section 1010!.
'. (ommutation of pension
The entire amount of any payment in commutation of pension (y a government servant or any payment in
commutation of pension from =I> pension fund is exempt from income tax under Section 1010"! of IT "ct.
#owever, in respect of private sector employees, only the following amount of commuted pension is exempt, namely)
a! ?here the employee received any gratuity, the commuted value of one-third of the pension which he is normally
entitled to receive/ and (! In any other case, the commuted value of half of such pension.
It may (e noted here that the monthly pension receiva(le (y a pensioner is lia(le to full income tax li:e any other item
of salary or income and no standard deduction is now availa(le in respect of pension received (y a tax payer.
). *eave salary of central government employees
Under Section 1010""! the maximum amount receiva(le (y the employees of central government as cash
e7uivalent to the leave salary in respect of earned leave at their credit upto 10 months< leave at the time of their
retirement, whether on superannuation or otherwise, would (e %s. 6,00,000.
+. ,oluntary retirement or separation payment
Under the provisions of Section 1010>!, any amount received (y an employee of a pu(lic sector company or of any
other company or of a local authority or a statutory authority or a cooperative society or university or IIT or II@ at the
time of his voluntary retirement A%! or voluntary separation in accordance with any scheme or schemes of A% as per
%ule +B", is completely exempt from tax. The maximum amount of money received at such A% which is so exempt is
%s. &00,000.
-. *ife insurance receipts
Under Section 1010C!, any sum received under a =ife Insurance Dolicy =ID!, including the sum allocated (y way of
(onus on such policy, other than uEs ,0CC" or under a Feyman Insurance Dolicy, or under an insurance policy
issued on or after 1.0.+006 in respect of which the premium paya(le for any of the years during the term of the policy
exceeds +0 per cent of the actual capital sum assured, is fully exempt from tax.
#owever, all moneys received on death of the insured are fully exempt from tax Thus, generally moneys received
from life insurance policies whether from the =ife Insurance >orporation or any other private insurance company
would (e exempt from income tax.
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10. .ayment received from provident funds
Under the provisions of Sections 1011!, 1+! and 16! any payment from a government or recognised provident fund
D$! or approved superannuation fund, or DD$ is exempt from income tax.
11. (ertain types of interest payment
There are certain types of interest payments which are fully exempt from income tax uEs 10 1&!. These are descri(ed
(elow)
(i) Income (y way of interest, premium on redemption or other payment on such securities, (onds, annuity
certificates, savings certificates, other certificates issued (y the >entral 8overnment and deposits as the >entral
8overnment may, (y notification in the 1fficial 8a9ette, specify in this (ehalf.
(iia) In the case of an individual or a #indu Undivided $amily, interest on such capital investment (onds as the
>entral 8overnment may, (y notification in the 1fficial 8a9ette, specify in this (ehalf i.e. 7 >apital Investment
Bonds!/
(ii/) In the case of an individual or a #indu Undivided $amily, interest on such %elief Bonds as the >entral
8overnment may, (y notification in the 1fficial 8a9ette, specify in this (ehalf i.e., . per cent or ,.& per cent or , per
cent or 7 per cent %elief Bonds!/ iid! Interest on G%I (onds/
(iiia) Interest on securities held (y the issue department of the >entral Ban: of >eylon constituted under the >eylon
@onetary =aw "ct, 1.0./
(iii/) Interest paya(le to any (an: incorporated in a country outside India and authorised to perform central (an:ing
functions in that country on any deposits made (y it, with the approval of the %eserve Ban: of India [8et Huote] or with
any scheduled (an:/
(iv) >ertain interest paya(le (y 8overnment or a local authority on moneys (orrowed (y it, including hedging charges
on currency fluctuation from the "* +000-+001!, etc./
(v) Interest on 8old Ceposit Bonds/
(vi) Interest on certain deposits are) Bhopal 8as victims/
(vii) Interest on (onds of local authorities as notified,
(viii) Interest on I.& per cent Savings Bonds JKxemptL issued (y the %BI, and
(i0) Stipulated new tax free (onds to (e notified from time to time.
12. !c"olars"ip and a$ards1 etc
"ny :ind of scholarship granted to meet the cost of education is exempt from tax under Section 101I!. Similarly,
certain awards and rewards, etc. are completely exempt from tax under Section 1017"!, for example, =a:hotia
Duras:ar of %s 100,000 awarded to the (est %a;asthani author, every year under Gotification Go. 1..E+,E.&-IT "-I!
dated ++-0-1..I.
"ny daily allowance received (y a @em(er of Darliament or (y an @=" or any mem(er of any >ommittee of
Darliament or State legislature is also exempt from tax under Section 1017!.
1. &allantry a$ards1 etc. 22 !ection 10(1+)
The $inance "ct, 1... has, with effect from "* +000-+001, provided for complete exemption for the pension and
family pension of 8allantry "ward ?inners li:e Daramvir >ha:ra, @ahavir >ha:ra, and Air >ha:ra and also other
8allantry "ward winners notified (y the >entral 8overnment.
1#. 3ividends on s"ares and units 22 !ection 10(#) 4 (%)
?ith effect from the "ssessment *ear +000-0&, the dividend income and income of units of mutual funds received (y
the assessee completely exempt from income tax.
1%. *ong2term capital gains of transfer of securities 22 !ection 10(+)
?ith effect from $* +000-0&, any income arising to a taxpayer on account of sale of long-term capital asset (eing
securities is completely outside the purview of tax lia(ility especially when the transaction has (een su(;ected to
Securities Transaction Tax STT!.
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Thus, if the shares of any company listed in the stoc: exchange are sold after holding it for a minimum period of one
year then there will (e no lia(ility to payment of capital gains. This provision would even apply for the old shares
which are held (y an assessee and are sold after the $inance Go.+! "ct, +000 came into force.
1'. Amount received /y $ay of gift1 etc 22 !ection 10(-)
"s per the $inance Go. +! "ct, +000, gift, etc. received after 1-.-+000 (y an individual or an #U$ whether in cash or
(y way of credit, etc. is (eing su(;ected to tax if the same is not received from a stipulated relative. Section 106.!
provides that the amount received to the extent of %s &0,000 will, however, (e exempt from the purview of tax
payment.
Similarly, amount received on the occasion of marriage from non-relatives, etc. would also (e exempted. It may (e
noted that the gift from relatives, as specified in the section can (e received without any upper limit.
1). 5a0 e0emption regarding reverse mortgage sc"eme 22 sections 2(#)) and #)(0)
"ny transfer of a capital asset in a transaction of reverse mortgage for senior citi9ens under a scheme made and
notified (y the >entral 8overnment would not (e regarded as a transfer and therefore would not attract capital gains
tax. The loan amount would also (e exempt from tax. These amendments (y the $inance Bill, +00, apply from $*
+007-0, onwards.
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