Any income that an individual acquires or earns during the course of a financial year that is deemed to be non-taxable is referred to as ‘Exempted Income’. As per the Income Tax Act, there are specific kinds of income that are exempt from tax as long as these types of income fulfill the guidelines and provisions outlined in the Act. Following exempted incomes you cannot afford to miss:
- Income earned through agricultural means: India is primarily an agriculture-based economy. To boost the agricultural sector as a whole, the Indian Income Tax Act of 1961 exempts any income one generates through agriculture from tax liability. However, agriculture income is included while computation, for the limited purpose of determining the tax rate, in computing the income tax liability if the net agricultural income exceeds ₹5,000 and total income, excluding net agricultural income, exceeds applicable basic income exemption of ₹2,50,000. Currently, the basic income exemption for an individual of age between 60 and 80 years is ₹3 lakhs for FY15 and the basic exemption for an individual above 80 years of age is ₹5 lakhs.
- Any amount received by an individual through a co-parcener from an HUF: If you receive or inherit money as a member of a Hindu Undivided Family (HUF), it is exempted from any income tax obligation. This exemption comes under Section 10(2) of the Income Tax Act, which states that amount received out of family income, or in case of impartible estate, amount received out of income of family estate by any member of such HUF is exempt from tax.
- Income received by partners of a firm, as shared between them: If you are a partner of any partnership firm, any share you may have in the total income of the firm is also exempt from income tax liability. As per section 10(2), any partner or partners are not liable to pay tax on income which is exempt in the hands of any partnership firm. Any other funds received by the partner of a partnership firm or LLP other than the share of profits, such as any remuneration or interests, remain taxable.
- Any interest that has been paid to a person who is not a resident Indian: As per section 10(4), in the case of a non-resident any income by way of interest on certain notified securities or bonds (including income by way of premium on the redemption of such bonds) and any income by way of interest on money standing to his credit in a Non-Resident (External) Account in any bank in India in accordance with the Foreign Exchange Management Act, 1999, and the rules made thereunder is also exempt from tax.
- Gratuity: Gratuity is paid by the employer as part of gratitude for acknowledging the employee’s long-standing meritorious service. Gratuity received by any government employee is fully exempted from income tax. For non-government employees covered by the payment of Gratuity Act of 1972, the least of the three is exempted from income tax:
- 15 days salary based on the last drawn salary for each year of service.
- Total gratuity received.
The gratuity received by an employee is not taxable if it is received on his retirement, his becoming incapacitated prior to such retirement, termination of employment or if such gratuity is received by his widow, children or dependants on his death.
In case any such gratuities are received by an employee from more than one employer in the same financial year, the aggregate amount so exempt should not exceed the overall exemption limit. Similarly, if gratuities were received in one or more financial years, the exempt amount claimed earlier has to be taken into account while computing the exemption at present.
- Any amount earned via encashment of leave at the time of retirement: As per terms of employment, generally, an employee is granted certain period of leave(s) on yearly basis. Such leave(s) may be casual leaves, medical leaves, and privileged leaves or earned leaves.
In some cases, an employee can even encash his accumulated privileged/earned leaves and can get salary for the said period of leave. Such receipt of salary by an employee from his employer in lieu of his accumulated leaves is called “Leave Encashment”.
If Leave encashment is received by any employee while in employment then it is fully taxable in the hands of employee. While if leave encashment is received in case of retirement or after leaving job, then exemption is available up to the following limits:
In case of Central government or State government employee (excluding employees of a local authority or statutory corporation) – Fully Exempt
In case of any other employee –
Least of the following is exempt:
- Actual amount received
- 10 months average salary
- Average salary * leaves at the credit of an employee (leaves cannot exceed 30 days for every completed year of service, fraction of a year is to be ignored)
Salary includes basic pay, dearness allowance (if it forms part of the retirement benefits) and percentage wise fixed commission on turnover
Average Salary = Average of salary drawn in the last 10 months immediately preceding the date of retirement.
If leave encashment is received by an employee from more than one employer in the same previous year or in different previous years the aggregate maximum amount exempt from tax on account of leave encashment cannot exceed ₹3,00,000.
Leave salary paid to the legal heirs of the assessee, who dies during the employment will not be taxable.
- Any amount acquired via a life insurance policy: As per section 10(10D), any amount received under a life insurance policy, including bonus is exempt from tax if following conditions are satisfied:
- Exemption is available only in respect of amount received from life insurance policy.
- It is unconditionally available in respect of sum received for a policy which is issued on or before March 31, 2003. However, in respect of policies issued on or after April 1st, 2003, the exemption is available only if the amount of premium paid on such policy in any financial year does not exceed 20% (10% in respect of policy taken on or after 1st April 2012) of the actual capital sum assured. With effect from 1-4-2013, in respect of policy taken in the name of a person suffering from diseases specified under section 80DDB or in the name of a person suffering from disability specified under section 80U, the limit will be increased to 15% of capital sum assured.
- Value of premium agreed to be returned or of any benefit by way of bonus (or otherwise), over and above the sum actually assured, which is received under the policy by any person, shall not be taken into account while calculating the actual capital sum assured.
- Amount received on death of the person will continue to be exempt without any condition. No exemption would be available in case any sum is received under Keyman insurance policy.
- Any payment received via the Statutory Provident Fund: Employers’ contribution towards Statutory Provident Fund, is tax-free in the hands of the employee along with the interest credited and the Lump sum amount received from such fund, at the time of termination of service.
- Any payment received via a recognised or authorised fund: It is tax-free if the following conditions are satisfied:
- The employee has rendered 5 years’ continuous service.
- Though he has not rendered 5 years’ continuous service but the service has come to an end because of reasons beyond his control.
In case an employee leaves service of his own accord before the expiry of 5 years, the amount on which tax has not been paid earlier is taxable under the head salary. As such taxable amount will be:
- Employer’s contribution to RPF-up to 12% of employee’s salary; and
- Interest credited on RPF balance-up to 9.5% p.a.
However, if the accumulated balance standing in the name of the employee is transferred from one recognised provident fund to another similar type of fund, such balance will not be added in the total income of the assessee. The period of five years will be counted by adding the period for which the fund remained with previous employer to the period for which the fund remains with the present employer from whom he is getting refund.
- House Rent Allowance: Any amount received by a salaried employee as House Rent Allowance is also exempt from taxation, limited to lower of the following:
- 50% of salary, when residential house is situated in Mumbai, Kolkata, Delhi or Chennai and 40% of salary where residential house is situated at any other place.
- HRA actually received by the employee in respect of the period during which rental accommodation is occupied by the employee during the previous year.
- Rent paid in excess of 10% of salary.
Salary will include basic salary, dearness allowance forming part of salary while computing all retirement benefits and commission based on fixed percentage of turnover achieved by the employee. Apart from this, salary for this purpose does not include any other allowances/perquisites.
Salary for this purpose shall be computed on due basis in respect of the period during which the accommodation is occupied by the employee in the previous year. Hence, any payments not pertaining to the previous year or not pertaining to the period of occupation of the accommodation shall be excluded.
- Income earned via Mutual Funds: Any income from following mutual funds is exempt from tax:
- A mutual fund registered with the Securities and Exchange Board of India Act or regulation made thereunder.
- A mutual fund set-up by a public-sector bank, or a public financial institution or authorised by RBI (subject to conditions notified by the Central Government).
- Income earned in the form of dividends through an Indian firm: Any dividend received from an Indian company does not attract any tax because it is already tax deducted when received.
- Income received on the sale of shares under specific conditions: Long-term capital gains (LTCG) from the sale of equity shares and equity oriented mutual funds through recognised stock exchange in India is exempt from any kind of tax.
- Any long-term capital gains made from share and security transfers after the payment of Security Transaction Tax: Long-term capital gains (LTCG) from the sale of equity shares and equity oriented mutual funds on which Securities Transaction Tax (STT) has been charged on sell transaction are completely exempted from tax, which means that any gains from sale of equity shares held for more than a year are not subject to any kind of tax.