17 tax-free incomes for you

[Sukumar]

The following are 17 important items of income, which are fully exempt
from income tax and which a resident individual Indian assessee can
use with profit for the purpose of tax planning.

1. 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:

Illustration

For FY 2008-09 (assessment year 2009-10), a male individual has a
total income from trading in textiles amounting to Rs 1,52,000;
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 150,000 of the 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 per cent:
Rs 200
Income tax on aggregated income of Rs 152,000 + Rs 40,000 = Rs
192,000: Rs 200



2. 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).

3. Share from a partnership firm

Under the provisions of Section 10(2A), in the case of a person being
a partner of a firm which is separately assessed as such, his share in
the total income of the firm is completely exempt from income tax
since AY 1993-94.

For this purpose, the share of a partner in the total income of a firm
separately assessed as such would be an amount which bears to the
total income of the firm the same share as the amount of the share in
the profits of the firm in accordance with the partnership deed bears
to such profits.

4. 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.

5. 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. However, in respect of private sector employees 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).

6. 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
[Get Quote] 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.

7. 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. 3,00,000.

8. 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.

9. Life insurance receipts

Under Section 10(10D), any sum received under a Life Insurance Policy
(LIP), 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 per cent 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.

10. 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.

11. 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:

(i) 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.

(iia) 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);

(iib) 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
per cent or 8.5 per cent or 8 per cent or 7 per cent Relief Bonds);
(iid) Interest on NRI bonds;

(iiia) Interest on securities held by the issue department of the
Central Bank of Ceylon constituted under the Ceylon Monetary Law Act,
1949;

(iiib) 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 [Get Quote] or with any scheduled bank;

(iv) 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.;

(v) Interest on Gold Deposit Bonds;

(vi) Interest on certain deposits are: Bhopal Gas victims;

(vii) Interest on bonds of local authorities as notified,

(viii) Interest on 6.5 per cent Savings Bonds [Exempt] issued by the
RBI, and

(ix) Stipulated new tax free bonds to be notified from time to time.

12. Scholarship and awards, etc

Any kind of scholarship granted to meet the cost of education is
exempt from tax under Section 10(16). Similarly, certain awards and
rewards, etc. are completely exempt from tax under Section 10(17A),
for example, Lakhotia Puraskar of Rs 100,000 awarded to the best
Rajasthani author, every year under Notification No. 199/28/95-IT (A-
I) dated 22-4-1996.

Any daily allowance received by a Member of Parliament or by an MLA or
any member of any Committee of Parliament or State legislature is also
exempt from tax under Section 10(17).

13. Gallantry awards, etc. -- Section 10(18)

The Finance Act, 1999 has, with effect from AY 2000-2001, provided for
complete exemption for the pension and family pension of Gallantry
Award Winners like Paramvir Chakra, Mahavir Chakra, and Vir Chakra and
also other Gallantry Award winners notified by the Central Government.

14. 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.

15. 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 (STT).

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.

16. 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 an individual or an HUF whether in cash or by way of
credit, etc. is being subjected to tax if the same is not received
from a stipulated relative. Section 10(39) provides that the amount
received to the extent of Rs 50,000 will, however, be exempt from the
purview of tax payment.

Similarly, amount received on the occasion of marriage from non-
relatives, etc. would also be exempted. It may be noted that the gift
from relatives, as specified in the section can be received without
any upper limit.

17. 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 Bill, 2008 apply from FY 2007-08
onwards

N.Sukumar
Research Analyst
www.kences1.blogspot.com