- Date : 20/09/2020
- Read: 5 mins
Have a look at six income sources on which an individual doesn’t need to pay income tax.
Collection from income tax is arguably the most important source of revenue for the Indian government. The money collected is used to spend on developmental activities as well as paying salaries of central and state government employees. It is the moral and legal obligation of Indian citizens to pay taxes on their income. However, in certain cases, the income that they earn would be exempt from tax.
Related: How advance tax can help you stay on track with tax payments
Here are some of those incomes on which individuals don’t need to pay tax:
Shares from a partnership firm
Are you a partner in a partnership firm? Then any share you may have in the total income of the firm is exempt from income tax. As per Section 10(2) of the IT Act, any partner or partners are not liable to pay tax on income which is exempt in the hands of any partnership firm. However, any other funds such as remuneration or interest received by a partner of a partnership firm or LLP apart from a share of profits would be taxed.
Long-term capital gains
Long-term capital gains are earned by selling a property or by selling equity shares/units of equity-oriented funds.
In the case of the former, assessees can receive an exemption by investing in long-term capital gains from the sale of house property in up to two house properties. Earlier one had to invest the gains in single house property. But exemption can be claimed only if capital gains received on sale of house property doesn’t exceed Rs 2 crore.
In case of the latter, according to Budget 2018, the long-term capital gains made by selling equity shares or units of equity-oriented funds will be exempt from Income tax up to Rs 1 lakh per annum. This will happen if gains are realised after 31st March 2018.
10% tax will be levied only on LTCG made by selling shares or units of equity-oriented funds that exceed Rs 1 lakh in a financial year without the benefit of indexation.
Related: How to minimise the effect of taxation on long-term capital gains
Income from gratuity
Gratuity is paid by an employer to an employee as gratitude to the latter’s meritorious and loyal service. Gratuity received by a government employee is completely tax free.
Related: The new gratuity amendment and what it means to you
Agricultural Income
India’s services sector has been primarily responsible for India’s spectacular GDP growth over the last few years. It contributed 72.5% of the gross value added (GVA) in 2017-18 as per the Economic Survey 2017-18. Yet, India could be classified as an agrarian economy as 70% of the country's population is engaged in agriculture.
Agriculture income is defined by the IT Act as income from:
- Rent or revenue received from agricultural land located in India
- Income from agricultural land derived from basic (cultivating of land, tilling of land, sowing of seeds, planting and other activities involving human skill and effort directly on the land) and subsequent operations (carried out for growth and preservation of produce like weeding, digging soil etc). Income also can be derived through the performance of a process by the cultivator or the receiver of rent in kind that results in the agricultural produce being fit to be taken to the market and sale of agricultural produce.
- Income derived from farm building required for operations related to agriculture.
More often than not, agrarian income turns out to be the only source of income for India’s rural population. Therefore, agriculture income has been fully exempt from tax under Section 10(1) of the Income Tax Act 1961. However, in certain cases, agriculture income has been taxed indirectly by integrating agricultural income with non-agricultural income. This integration is only done if:
- The assessee has both agricultural and non agricultural sources of income
- Integration can only be done for Individuals, Hindu Undivided Families (HUF), Association of Persons, Bodies of Individuals and Artificial Juridical Person
- If non-agricultural income of all persons mentioned above exceeds the exempted limit. Exempted limits are Rs.2,50,000 for an Individual, Rs.3,00,000 for Senior Citizens and Rs.5,00,000 for Super Senior Citizen.
- Another point to be noted is that integration is done only if the net income for agriculture of all entities mentioned in the above point exceeds Rs.5,000 in the previous year.
Related: Types of ITR Forms that every taxpayer should know about
Amount received under voluntary retirement
VRS or Voluntary Retirement Scheme has become popular among employers. It enables organisations to gently trim their staff. It is effective for reducing surplus labour and optimising workforce strength. Labour laws in India do not allow direct retrenchment of an employee who is a part of a union. VRS is applicable to employees who have completed atleast ten years of service or are above the age of 40. The amount received by an employee of an organisation where scheme of voluntary retirement has been framed as per rule 2BA of the IT Act is exempt up to a level of Rs 5 lakh.
Scholarships
You may be a parent of a child who received a handsome amount as scholarship. Or you had applied for a scholarship for further studies and received the same. In either case, you don’t need to pay tax for the received amount. Any kind of scholarship or award granted to a deserving student is exempted from income tax under Section 10 16) of the Income Tax Act, 1961.
Thus the taxation system ensures that there is no unnecessary burden on honest taxpayers by providing such provisions. Exemption provided on these income sources highlights flexibility offered by the Indian tax system. Do you know how is taxable income calculated? Read this.
Collection from income tax is arguably the most important source of revenue for the Indian government. The money collected is used to spend on developmental activities as well as paying salaries of central and state government employees. It is the moral and legal obligation of Indian citizens to pay taxes on their income. However, in certain cases, the income that they earn would be exempt from tax.
Related: How advance tax can help you stay on track with tax payments
Here are some of those incomes on which individuals don’t need to pay tax:
Shares from a partnership firm
Are you a partner in a partnership firm? Then any share you may have in the total income of the firm is exempt from income tax. As per Section 10(2) of the IT Act, any partner or partners are not liable to pay tax on income which is exempt in the hands of any partnership firm. However, any other funds such as remuneration or interest received by a partner of a partnership firm or LLP apart from a share of profits would be taxed.
Long-term capital gains
Long-term capital gains are earned by selling a property or by selling equity shares/units of equity-oriented funds.
In the case of the former, assessees can receive an exemption by investing in long-term capital gains from the sale of house property in up to two house properties. Earlier one had to invest the gains in single house property. But exemption can be claimed only if capital gains received on sale of house property doesn’t exceed Rs 2 crore.
In case of the latter, according to Budget 2018, the long-term capital gains made by selling equity shares or units of equity-oriented funds will be exempt from Income tax up to Rs 1 lakh per annum. This will happen if gains are realised after 31st March 2018.
10% tax will be levied only on LTCG made by selling shares or units of equity-oriented funds that exceed Rs 1 lakh in a financial year without the benefit of indexation.
Related: How to minimise the effect of taxation on long-term capital gains
Income from gratuity
Gratuity is paid by an employer to an employee as gratitude to the latter’s meritorious and loyal service. Gratuity received by a government employee is completely tax free.
Related: The new gratuity amendment and what it means to you
Agricultural Income
India’s services sector has been primarily responsible for India’s spectacular GDP growth over the last few years. It contributed 72.5% of the gross value added (GVA) in 2017-18 as per the Economic Survey 2017-18. Yet, India could be classified as an agrarian economy as 70% of the country's population is engaged in agriculture.
Agriculture income is defined by the IT Act as income from:
- Rent or revenue received from agricultural land located in India
- Income from agricultural land derived from basic (cultivating of land, tilling of land, sowing of seeds, planting and other activities involving human skill and effort directly on the land) and subsequent operations (carried out for growth and preservation of produce like weeding, digging soil etc). Income also can be derived through the performance of a process by the cultivator or the receiver of rent in kind that results in the agricultural produce being fit to be taken to the market and sale of agricultural produce.
- Income derived from farm building required for operations related to agriculture.
More often than not, agrarian income turns out to be the only source of income for India’s rural population. Therefore, agriculture income has been fully exempt from tax under Section 10(1) of the Income Tax Act 1961. However, in certain cases, agriculture income has been taxed indirectly by integrating agricultural income with non-agricultural income. This integration is only done if:
- The assessee has both agricultural and non agricultural sources of income
- Integration can only be done for Individuals, Hindu Undivided Families (HUF), Association of Persons, Bodies of Individuals and Artificial Juridical Person
- If non-agricultural income of all persons mentioned above exceeds the exempted limit. Exempted limits are Rs.2,50,000 for an Individual, Rs.3,00,000 for Senior Citizens and Rs.5,00,000 for Super Senior Citizen.
- Another point to be noted is that integration is done only if the net income for agriculture of all entities mentioned in the above point exceeds Rs.5,000 in the previous year.
Related: Types of ITR Forms that every taxpayer should know about
Amount received under voluntary retirement
VRS or Voluntary Retirement Scheme has become popular among employers. It enables organisations to gently trim their staff. It is effective for reducing surplus labour and optimising workforce strength. Labour laws in India do not allow direct retrenchment of an employee who is a part of a union. VRS is applicable to employees who have completed atleast ten years of service or are above the age of 40. The amount received by an employee of an organisation where scheme of voluntary retirement has been framed as per rule 2BA of the IT Act is exempt up to a level of Rs 5 lakh.
Scholarships
You may be a parent of a child who received a handsome amount as scholarship. Or you had applied for a scholarship for further studies and received the same. In either case, you don’t need to pay tax for the received amount. Any kind of scholarship or award granted to a deserving student is exempted from income tax under Section 10 16) of the Income Tax Act, 1961.
Thus the taxation system ensures that there is no unnecessary burden on honest taxpayers by providing such provisions. Exemption provided on these income sources highlights flexibility offered by the Indian tax system. Do you know how is taxable income calculated? Read this.
