Income and Taxes
14 tax-free incomes for FY 2009-10
The taxing season is going to start in next couple of months and following are few items of income which are fully exempt from Income tax.
1. Dividends on shares and units - Section 10(34) & (35)
With effect from the Assessment Year 2004-05, the dividend income and income of units of
mutual funds received by the assessee completely exempt from income tax.
2. Long-term capital gains of transfer of securities - Section 10(38)
With effect from FY 2004-05, any income arising to a taxpayer on account of sale of long-term
capital asset being securities is completely outside the purview of tax liability especially when
the transaction has been subjected to Securities Transaction Tax.
Thus, if the shares of any company listed in the stock exchange are sold after holding it for a
minimum period of one year then there will be no liability to payment of capital gains.
This provision would even apply for the old shares which are held by an assessee and are sold
after the Finance (No.2) Act, 2004 came into force.
3. Agricultural income
Under the provisions of Section 10(1) of the Income Tax Act, agricultural income is fully exempt
from income tax.
However, for individuals or HUFs when agricultural income is in excess of Rs 5,000, 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 but an increased income tax on the
other income.
Agricultural income which fulfils the above conditions is completely exempt from tax. The
manner of calculating tax on total income and agricultural income, is explained in the following
illustration:
For the assessment year 2010-2011 a male individual has a total income from trading in cloth
amounting to Rs 162,000 besides, he has earned Rs 40,000 as income from agriculture.
The income tax payable by him will be computed as under:
On the first Rs 1,60,000 of taxable non-agricultural income - Nil
On the next Rs 40,000 of agricultural income (falling under 10% slab) - Nil
On the next Rs 2,000 of taxable non-agricultural income @ 10% - Rs 200
IT on aggregated income of Rs 202,000 (Rs 162,000 + Rs 40,000) - Rs 200
(updated - 24 Nov 2009)
6. Gratuities
Under the provisions of Section 10(10) of the IT Act, any death-cum-retirement gratuity of a
government servant is completely exempt from income tax.
In respect of private sector employees, however, gratuity received on retirement or on becoming
incapacitated or on termination or any gratuity received by his widow, children or dependants
on his death is exempt subject to certain conditions.
The maximum amount of exemption is Rs 3,50,000. Of course, this is further subject to certain
other limits like the one half-month's salary for each year of completed service, calculated on
the basis of average salary for the 10 months immediately preceding the year in which the
gratuity is paid or 20 months' salary as calculated. Thus, the least of these items is exempt
from income tax under Section 10(10).
7. Commutation of pension
The entire amount of any payment in commutation of pension by a government servant or any
payment in commutation of pension from LIC pension fund is exempt from income tax under
Section 10(10A) of IT Act.
However, in respect of private sector employees, only the following amount of commuted
pension is exempt, namely -
(a) Where the employee received any gratuity, the commuted value of one-third of the pension
which he is normally entitled to receive; and
(b) In any other case, the commuted value of half of such pension.
It may be noted here that the monthly pension receivable by a pensioner is liable to full income
tax like any other item of salary or income and no standard deduction is now available in
respect of pension received by a tax payer.
8. Leave salary of central government employees
Under Section 10(10AA) the maximum amount receivable by the employees of central
government as cash equivalent 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
be Rs 300,000.
9. Voluntary retirement or separation payment
Under the provisions of Section 10(10C), any amount received by an employee of a public
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 IIM at the time of his voluntary retirement (VR) or
voluntary separation in accordance with any scheme or schemes of VR as per Rule 2BA, is
completely exempt from tax.
The maximum amount of money received at such VR which is so exempt is Rs 500,000. As
per Finance (No. 2) Act, 2009 an assessee cannot enjoy both the exemption in respect of VRS
upto Rs 500,000 and also a deduction under Section 89.
4. Receipts from Hindu undivided family (HUF)
Any sum received by an individual as a member of a Hindu undivided family, where the said sum has been paid out of the
income of the family, or, in the case of an impartible estate, where such sum has been paid out of the income of the estate
belonging to the family, is completely exempt from income tax in the hands of an individual member of the family under Section
10(2).
5. Allowance for foreign service
Any allowances or perquisites paid or allowed as such outside India by the Government to a citizen of India, rendering service
outside India, are completely exempt from tax under Section 10(7).
This provision can be taken advantage of by the citizens of India who are in government service so that they can accumulate tax-free
perquisites and allowances received outside India.
12. Certain types of interest payment
There are certain types of interest payments which are fully exempt from income tax u/s 10 (15).
These are described below -
(1) Income by way of interest, premium on redemption or other payment on such securities,
bonds, annuity certificates, savings certificates, other certificates issued by the Central
Government and deposits as the Central Government may, by notification in the Official
Gazette, specify in this behalf.
(2a) In the case of an individual or a Hindu Undivided Family, interest on such capital
investment bonds as the Central Government may, by notification in the Official Gazette,
specify in this behalf (i.e. 7% Capital Investment Bonds);
(2b) In the case of an individual or a Hindu Undivided Family, interest on such Relief Bonds as
the Central Government may, by notification in the Official Gazette, specify in this behalf
(i.e.,9% or 8.5% or 8% or 7% Relief Bonds); (iid) Interest on NRI bonds;
(3a) Interest on securities held by the issue department of the Central Bank of Ceylon
constituted under the Ceylon Monetary Law Act, 1949;
(3b) Interest payable to any bank incorporated in a country outside India and authorised to
perform central banking functions in that country on any deposits made by it, with the
approval of the Reserve Bank of India or with any scheduled bank;
(4) Certain interest payable by Government or a local authority on moneys borrowed by it,
including hedging charges on currency fluctuation (from the AY 2000-2001), etc.;
(5) Interest on Gold Deposit Bonds;
(6) Interest on certain deposits are: Bhopal Gas victims;
(7) Interest on bonds of local authorities as notified, and
(8) Interest on 6.5% Savings Bonds [Exempt] issued by RBI
(9) Stipulated new tax free bonds to be notified from time to time.
13. Amount received by way of gift, etc - Section 10(39)
As per the Finance (No.2) Act, 2004, gift, etc. received after 1-9-2004 by individual or HUF in
cash or by way of credit, etc. is being subjected to tax if the same is not received from relative,
etc. However, Section 56(2) provides that the amount received to the extent of Rs 50,000 will,
however, be exempt from the purview of income tax.
Similarly, amount received on the occasion of marriage from a non-relative, etc. would also be
exempted. It may be noted that the gift from relatives. as mentioned in the Section can be
received without any upper limit.
14. Tax exemption regarding reverse mortgage scheme - sections 2(47) and 47(x)
Any transfer of a capital asset in a transaction of reverse mortgage for senior citizens under a
scheme made and notified by the Central Government would not be regarded as a transfer and
therefore would not attract capital gains tax. The loan amount would also be exempt from tax.
These amendments by the Finance Act, 2008 apply from FY 2007-08 onwards.
10. Life insurance receipts
Under Section 10(10D), any sum received under a Life Insurance Policy, including the sum allocated by way of bonus on such
policy, other than u/s 80DDA or under a Keyman Insurance Policy, or under an insurance policy issued on or after 1.4.2003 in
respect of which the premium payable for any of the years during the term of the policy exceeds 20% of the actual capital sum
assured, is fully exempt from tax.
However, all moneys received on death of the insured are fully exempt from tax Thus, generally moneys received from life insurance
policies whether from the Life Insurance Corporation or any other private insurance company would be exempt from income tax.
11. Payment received from provident funds
Under the provisions of Sections 10(11), (12) and (13) any payment from a government or recognised provident fund (PF) or approved
superannuation fund, or PPF is exempt from income tax.
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