Taxpayers are always confused between exemption and deduction. Before getting into the list of incomes that are exempted from tax for an individual in India, let us first understand the difference between exemption and deduction in Income tax.
Exemption Vs. Deduction
Tax deductions are specific investments or expenses that an individual has incurred during the financial year which can be deducted from his/her taxable income.
Which means, tax deductions will help you lower your taxable income.
For example, let’s say your taxable income for the financial year 2023-24 (AY 2024-25) is 6,45,000 INR.
In this case, you are liable to pay taxes if you have opted for the old tax regime.
In order to avoid tax during the financial year let’s say you have invested 1,50,000 INR in a public provident fund (PPF). Due to this investment you can claim tax deduction under section 80C of the Income tax act, 1961, by lowering your taxable income to 4,95,000 INR.
After claiming tax rebate under section 87A, you will not be liable to pay taxes on income of 4,95,000 INR. Rs 1,50,000 tax deduction under section 80C has helped you to lower your taxable income below the limit of 5,00,00 to file a nil tax return.
Therefore, tax deduction will lower your taxable income.
An individual can claim tax deduction under following sections if he/she has opted to pay tax under the old tax regime;
We have certain types of income which are tax free in India, meaning they will not be a part of your taxable income. You are not required to spend or invest in any manner to get tax benefits. They are completely tax exempted at their very origin.
Tax exempt refers to income that is free from tax in India. As per income tax act, 1961, following incomes are completely exempted from income tax under section 10, as they do not form part of total or taxable income.
Share of profit from Partnership Firm
Share of profit received by a partner of a partnership firm is not taxable in the hands of the partner. (Section 10(20A) & Circular No.8/2014)
However, interest on capital remuneration received by partners from the partnership firm is chargeable to tax in the hands of the partner.
Compensation on account of any disaster
Any amount received or receivable from the central or state government or a local authority by an individual or his legal heir by way of compensation on account of any disaster shall not be included in the total income.
If any deduction is allowed under the Act on account of any loss or damage caused by disaster, then exemption will not be available to the extent of the amount received or receivable.
Sum received on the death of a person
Buying life insurance not only ensures future financial stability, but you can also avail tax benefits under section 80(C) and 10(10D) of the Income tax act, 1961.
Section 80(C) offered tax deduction of up to Rs. 1,50,000 on life insurance premium paid during a financial year. Under this section you get a deduction every year for the premium payments.
The amount of sum assured and any bonus or policy proceeds that are paid on the death of the insured individual are entirely tax-free for the beneficiary under section 10(10D).
Income from Public Provident Fund (PPF)
The Public Provident Fund gets triple benefits when it comes to income tax. This means, you get income tax deduction at the time of investment and exemption for accrual and withdrawal.
The interest earned on a public provident fund is tax exempted. The accumulated corpus that you get at the time of maturity is also tax exempted.
Income from Sukanya Samriddhi Account
Similar to PPF, any payment including interest accruing on deposits in, and withdrawals for an account opened in accordance with the Sukanya Samriddhi Account Rules shall not be included in the total income of the assessee.
In addition to the above list here are few more exemptions applicable to an individual which is completely tax exempted in India;
- Scholarship granted to meet the cost of education – Section 10(16).
- Allowance received by Members of Parliament and Members of State Legislature – Section 10(17).
- Agricultural income – Section 10(1).
