As investors, we constantly seek the best ways to generate tax-free income. While taxes are necessary for a functioning economy, the government also offers several exemptions and deductions to encourage specific activities or groups. 

Tax-free income refers to any income that is not subject to income tax. In this blog, we will discuss the various kinds of tax-free incomes in India, their legal provisions, and any recent developments in tax laws.

1. Agriculture Income

Agriculture income is the income earned by an individual or a Hindu Undivided Family (HUF) from agricultural land located in India. As per section 10(1), the Constitution of India empowers states to impose taxes on agricultural income, but no state currently imposes any tax on agricultural income. 

Therefore, agriculture income is entirely tax-free in India.

Recent Developments: The government proposed to tax agriculture income above a certain threshold in the 2021 budget, but the proposal was not included in the final budget.

2. Long-term Capital Gains From Listed Securities

Long-term capital gains (LTCG) refer to profits earned on the sale of listed securities, such as stocks, shares, and mutual funds, held for more than one year. Until 2018, LTCG was exempt from tax. However, in 2018, the government reintroduced tax on LTCG from listed securities.

Legal Provisions: Currently, LTCG from listed securities are exempt from tax up to Rs.1 lakh. Any gains above Rs.1 lakh are taxed at a flat rate of 10%.

Recent Developments: In the 2021 budget, the government proposed a new provision that would tax LTCG from listed securities, including those up to Rs.1 lakh, if the securities’ fair market value exceeded the purchase price by more than 10%. However, the proposal was not included in the final budget.

3. Dividend Income

Dividend income is the income earned by individuals or HUFs from their investments in shares of companies. Dividend income was previously taxed at the hands of the company distributing the dividend, but in 2020, the government shifted the tax liability to the recipient of the dividend income.

Legal Provisions: Dividend income up to Rs. 5,000,000 is tax-free for all taxpayers. Any dividend income exceeding Rs.5,000,000 is taxed at a flat rate of 10%.

Recent Developments: No significant changes have been proposed or made to dividend income tax provisions in the 2022 and 2023 budgets.

4. Interest Income on Savings Accounts and Fixed Deposits

Interest income earned on savings accounts and fixed deposits is taxable, but it can be tax-free under certain conditions.

Legal Provisions: Interest income up to Rs.10,000 from savings accounts is tax-free for all taxpayers. For Senior Citizens, interest income up to Rs.50,000 from savings accounts is tax-free. Interest income up to Rs.40,000 earned from fixed deposits (FDs) with banks and post offices is tax-free for all taxpayers. For senior citizens, the interest income limit for tax exemption is Rs.50,000.

Recent Developments: No significant changes have been proposed or made to interest income tax provisions in the 2021 and 2022 budgets.

5. Gifts

Gifts received from specified relatives or on certain occasions are tax-free in India.

Legal Provisions: As per Section 56 (ii) of the Income Tax Act, gifts received from relatives, including parents, siblings, and spouses, are tax-free. Additionally, gifts received on occasions such as marriage or through a will are also tax-free. 

However, gifts received from non-relatives exceeding Rs. 50,000 in value are taxable.

Recent Developments: No significant changes have been proposed or made to gift tax provisions.

Legal Ways to Save Taxes

Although paying taxes is a responsibility that every citizen of India has to fulfill, there are several ways to save taxes legally.

• Invest in Tax-saving Instruments

One of the most effective ways to save taxes is to invest in tax-saving instruments such as Public Provident Funds (PPF), Equity Linked Saving Schemes (ELSS), National Pension System (NPS), and tax-saving fixed deposits (FDs). These investments provide a tax deduction under Section 80C of the Income Tax Act, of 1961.

• Purchase Health Insurance

Purchasing health insurance not only provides coverage for medical emergencies but also provides a tax benefit. Under Section 80D of the Income Tax Act, premiums paid towards health insurance policies for self, spouse, and dependent children can be claimed as a Tax Deduction up to Rs. 25,000. If the policy covers senior citizens, the limit increases to Rs. 50,000.

• Claim HRA Benefits

If you are a salaried individual and live in a rented house, you can claim House Rent Allowance (HRA) benefits. The HRA is exempt from tax up to a certain limit based on the city of residence and the actual rent paid.

• Claim Deductions for Interest on Home Loans

If you have taken a home loan, you can claim deductions on the interest paid on the loan under Section 24 of the Income Tax Act. The deduction limit is up to Rs. 2 lahks for self-occupied properties and is not limited to properties that are rented out.

• Donate to Charity

Donating to charity is not only a noble act but also provides a tax benefit. Under Section 80G of the Income Tax Act, donations made to specified charitable institutions and trusts can be claimed as a tax deduction up to 50% or 100% of the donated amount, depending on the nature of the charitable organization.

• Avail Benefits for Senior Citizens

If you are a senior citizen, you can avail yourself of several tax benefits. Under Section 80DDB, senior citizens can claim a tax deduction for expenses incurred on medical treatment for specified diseases.

 Senior citizens can also avail of higher tax deduction limits for medical insurance premiums, interest income from savings accounts and FDs, and other investment instruments.

About the Author

Sunil Tulsiani is the founder of one of the largest elite real estate investment clubs in Canada, the Private Investment Club which was started with the goal to make 100 real estate millionaires or multi-millionaires.

A former police officer turned real estate investor, he shot to fame after he found success in selling 77 properties in the first year alone and came to be known as “the wealthy cop”. 

Sunil not only spearheads PIC, but is an international speaker, best-selling author, and business coach. Sharing the stage with Tony Robbins, Robin Sharma, Robert Kiyosaki, and Grant Cardone, amongst others. He has been featured on Forbes, USA Today, The Toronto Star, CNBC, and Fox Business News and has been profiled on Breakfast Television (CP24).

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