Sources beyond PF, PPF, NPS that are tax exempted

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Every Indian with an annual income of Rs 2.5 lakh and above is liable to pay an income tax to the government. However, one is often looking for ways to avail possible tax deductions as permitted under section 80C to 80U of the Income Tax Act 1961.

There are some traditional sources of investment that provide tax exemption like the Provident Fund (PF), Employees Provident Fund (EPF), Public Provident Fund (PPF) or National Pension System (NPS). But there are various other sources of income that are tax-free.

Agricultural income

India is primarily an agrarian country and the economy depends heavily on the yearly produce. Thus, to encourage agricultural practices, the government provides a rebate on agricultural income.

“Income from any kind of farming is tax-free such as processing and selling of crops from agriculture land. But this land should be rural agricultural land as per the Income Tax Act definition,” Gauri Chadha, tax expert, said.

Agricultural income, as per the Act, includes production, processing and sale of agricultural crops, rental income from agricultural land or building and profits made from the sale or purchase of agricultural land.

Profit from partnership firm

A partnership firm means any joint organisation formed due to a collaboration between 2 or more people. Tax is imposed on the overall income of the firm. From the remaining income, each partner receives an individual share of profit that is tax-free.

Gifts from relatives

Gifts received and loans (with or without interest) from relatives in the form of money, jewellery, property, vehicle, etc. are tax-free.

“But gifts above Rs 50,000 from a non-relative that is anyone who falls outside the definition of ‘family’ under the Income Tax Act becomes taxable for that financial year,” Chadha said.

As per the IT Act, your spouse, brother or sister, spouse’s brother or sister, brother or sister of either of the parents, your spouse’s or your lineal descendent and ascendant, and brother’s or sister’s spouse come under ‘family’. Gifts received from then are not considered part of extended income.

Ancestral property

Inheriting ancestral property (residential and commercial), jewellery, cash and bank balance as part of a will is not accounted for additional tax.

“If the beneficiary wants to sell these assets, cost from the previous owner will be taken as cost of acquisition,” Chadha asserted.

Government rewards

Rewards granted by the central/state government for any extraordinary achievement in the field of arts, academics, science, social service, sports, cinema, etc. are tax-free. Even money received as part of any relief fund initiated by the government is non-taxable. For example, any amount of money received as part of the recent Covid-relief program that is sponsored by the Prime Minister’s National Relief Fund is tax-free.

Gratuity

Your gratuity income up to Rs 20 lakh is 100% income tax exempted.

“A person is eligible to receive gratuity if he has completed 5 years of services or in case of death or any disability ” Chadha said.

To calculate your gratuity, (15 * Your last drawn salary * the working tenure) / 30