Tax free income is the Income that is not subjected to taxation. The individual or corporate deriving the income may be a tax assesse and tax payee. However, there are certain legitimate incomes received by the tax payer which are not subject to income tax. Such amount is exempted from payment of income tax and is termed tax free income. Please remember that the rules are subject to changes and the details furnished are based on rules applicable for FY 2017-18 ( AY 2018-19).
What are the major tax free incomes?
The following are major incomes that are considered tax free income. Incomes from these sources are completely exempted from income tax.
1. Interest on PPF/GPF/EPF.
2. Long term capital gain (LTCG) on sale of shares and equity mutual funds if the security transaction tax is paid/imposed on such transactions.(As per the budget announcement for the FY 2018-19 (AY 2019-20), LTCG of 10% has been proposed on LTCG on income above Rs. 1,00,000/- from shares/mutual fund units)
3. Interest on GOI/other approved tax free bonds.
4. Dividends on Shares and on Mutual Funds.
5. Any sum received under a life insurance policy (including the sum allocated by way of bonus on such policy) either on the death of the insured or on the maturity of life insurance plan. For life insurance policies issued after March 31, 2004, exemption on maturity payment u/s 10(10D) is available only if the premium paid in any year does not exceed 20% of the sum assured. This provision has been further amended from the current financial year and now maturity proceeds from Life Insurance Plan will be exempt from Income Tax only when the annual premium paid is not higher than 10% of sum assured. This is applicable to policies issued on or after 1st April 2012.
6. Interest on savings bank account in a post office.(Exempt up to Rs 3,500 in an individual account and Rs 7,000 in a joint account under section 10 (15) (i) )
Is Dividend Income tax free?
Dividend income from companies /equity-oriented Mutual Funds is completely exempt in the hands of investors. The Dividend is also tax-free in the hands of investors in case of debt-oriented Mutual Fund schemes.
To what extend is income received as gift exempted?
Gift tax has undergone lot of amendments during recent years. Gift tax was abolished with effect from October 1, 1998.
However, subsequent to amendment, with effect from September 1, 2004, any gift received by an individual or HUF will be included in taxable income, provided the amount of gift exceeds Rs 50,000. Even then, gifts received from any of the following will continue to remain tax free:
2. Brother or sister
3. Brother or sister of the spouse
4. Brother or sister of either of the parents of the individual
5. Any lineal ascendant or descendant of the individual
6. Any lineal ascendant or descendant of the spouse of the individual
7. Spouse of the person referred to in (2) or (6)
Apart from the above, gifts received on the occasion of marriage or under a will by way of inheritance are also tax free.