Tax is payable on all incomes earned in India by an Indian resident. However, there are some exceptions to this rule and some incomes have been specifically exempted from tax. Such income is referred to as Tax Free Income and in this post, we would be highlighting the 7 most popular means of earning tax free income.
Popular means of earning Tax Free Income
1. Interest on Savings Bank Account
A deduction of Rs. 10,000 is allowed for Interest earned under Section 80TTA. This new deduction was introduced by the Finance Minister in Budget 2012 and this is applicable from 1st April 2012.
Although, the Interest earned on Fixed Deposit is higher than Interest earned on Savings Account, but Tax is levied and TDS is deducted on Interest on Fixed Deposit whereas no TDS is deducted on Interest on Savings Account and a deduction of Rs. 10,000 is also allowed from such incomes.
2. Long Term Capital Gain on sale of Shares/ Mutual Funds
The Long Term Capital Gain earned on the sale of Shares/ Mutual Funds is wholly exempted from the levy of tax under Section 10(38). As the Long Term Capital Gain earned on sale of shares/mutual funds is fully exempt from the levy of tax, this is the most popular means of earning tax free income.
- Recommended Read: Computation of Long Term and Short Term Capital Gains Tax
3. Interest on PPF/PF
Interest or any other payment received from the Provident Fund (PF) or Public Provident Fund (PPF) is fully exempted from the levy of tax. Such interest income is tax free income in the hands of the receiver.
- Recommended Read: Benefits of Investing in PPF Account
4. Dividends from Shares/ Mutual Funds
Any dividend received from any domestic company is tax free as it is exempted under Section 10(34). Any income received in respect of mutual funds is also tax free and exempted under Section 10(35)
5. Certain components of Salary are also exempted to a specified limit
Many employers give various types of perks and other benefits to their employees over and above the basic pay. Such other benefits may include House Rent Allowance, Rent Free Accommodation, Leave Travel Allowance, Pension, Gratuity etc.
Such other benefits are also a form of tax free income which is exempted from the levy of income tax but only up to a certain limit.
- House Rent Allowance Exemption
- Leave Travel Allowance Exemption
- Pension Amount exempted
- Leave Encashment: Amount Exempted
6. Educational Scholarships
Any amount received as Scholarship to meet the cost of education is also tax-free in the hands of the person who receives the same u/s 10(16). Moreover, in order to avail this exemption, it is not necessary that the government should finance such scholarship.
7. Tax Free Bonds & Certificates
The interest earned on a specified category of investments is exempted from the levy of tax under Section 10(15)(iv)(h). This category mainly includes tax free certificates/ capital investment bonds/ National Defence Gold Bonds etc. The whole list of investments included in this category have been mentioned in this link.
- Recommended Read: Tax Free Bonds: Should you be investing in them?
8. Agricultural Income
Any Income derived from any Land situated in India and used for agricultural purposes is exempted from the levy of tax and is thus tax free income. Agricultural Income includes the following:-
- Any Rent or Revenue derived from Land
- Any income derived from such land by agriculture or processing of agricultural produce
- Any income from Farm Building