Tax-Free Income Ideas in India

Tax-Free Income Ideas in India

We had spoken about the Tax Savings idea here but what if I showed you some Tax-Free Income Ideas in India? You would love it, right? So here I am listing the best options for getting Tax-Free Income in India.

1. Interest earned on Tax-Free Bonds.

I am a big fan of Tax-Free Bonds especially if you can get them at the IPO time. As the name itself suggests, interest earned from these bonds are exempt from tax. So it doesn’t matter which income slab you are in, all interest earned is completely tax-free. These bonds are usually issued by public sector undertakings such as NHAI, PFC, IRFC, HUDCO, REC & NTPC. Tenure of the bonds is 10 / 15 or 20 years. They get listed on stock exchanges – NSE and BSE to offer an exit route to investors. Interest income earned on these bonds is exempt from tax under Section 10 (15) (iv) (h) of the Income Tax Act, 1961. But do note that unlike PPF, ELSS, etc There is no tax benefit on the amount of investment made in such bonds under section 80C. 

Also please do not confuse Tax-Free Bonds from Tax Savings Bonds. Tax-Free Bonds are the Bonds which do not attract tax on interest earned are termed tax-free bonds. But they are not eligible for deduction under Sec 80C of the Income Tax Act. Tax Saving Bonds attract taxes but the investment is eligible for tax deductions. Provision for deduction under Section 80CCF is provided. And this deduction is over and above the Rs 1.5 lakh provided under Section 80C of the Act. Interest earned on Tax saving bonds is taxable by the government.

You can also read here to learn how you can buy the tax-free bonds on the secondary market.

2. Maturity or Claim Amount received from Life Insurer

As per Section 10(10D) of the Income Tax Act, 1961 the amount you get from life insurance companies on maturity, claim or surrender is tax-free for the receiver. This amount is the sum assured plus any bonus (i.e. the policy proceeds) paid on maturity or surrender of policy or on the death of the insured. However, it is subject to certain conditions.As per section 10(10D) in a case of a life insurance policy issued after April 1st, 2003 but on or before March 31st, 2012, The premium paid should not exceed 20% of the sum assured. For example, if the annual premium is Rs 20,000, then to qualify for the exemption, the minimum sum assured under the policy will be Rs 100,000.For policies issued on or after April 1st, 2012, the above-mentioned limit of 20% has been changed to 10%. This was done to increase the insurance coverage amount, i.e., the sum assured threshold was increased from a minimum of five times of annual premium to 10 times. For policies taken on the life of a disabled person or person suffering from certain ailments, the limit was relaxed to 15% of the sum assured with effect from April 1st, 2013.

3. Interest on Saving Bank Account Interest – Rs 10,000 a year.

Under section 80TTA, the interest earned on your savings bank account up to Rs 10,000 is non-taxable. Example – For a given financial year, if the interest earned on your saving bank is rupees twenty thousand then Rs 10,000 is completely exempted and you should pay tax only the remaining Rs 10,000. For a person in 30% tax bracket, this means savings of rupees three thousand every year. Also, it is a relief for tax payers, as they don’t have to find out the saving bank interest from all the accounts, then add them up and pay income tax. People used to get notices from income tax department for these reasons. Now that worry is eliminated!3. 

4. Share of Profits paid to partners in firm

Under the Income-Tax Act 1961, the share of a partner in the total income of a partnership firm is not taxable in the hands of the partner. This is true even if the income is exempt in the hands of the partnership firm. Let’s assume that there are two Partners in a firm – Mr. X and Mr. Y. So if both X and Y get Rs 5 lacs in a year as the share in the profits earned by the firm, then it will be tax-free in their hands. However, it is important to note that if they are receiving any salary from the firm, then it’s taxable in their hands.

5. Money under VRS scheme

As per Section 10 (10C) If a person receives any compensation upon voluntary retirement or separation is non-tax upon meeting the following conditions:

  • The amount is received towards voluntary retirement or separation.
  • Max compensation received is Rs 5,00,000.
  • If the exemption is allowed for an assessment year, then same will not be allowed for any other assessment year.
  • The recipient is an employee of an authority established under the central or state act, local authority, university, IIT, state government or central government, notified institute of management, or a notified Institute with importance throughout India or any state, PSU, company or a co-operative society.

    Also look at this article which gives additional details on taxability of money received under VRS scheme.

6. Corpus from your EPF account after 5 Yrs of service

If any person opts for withdrawal after Five Years of continuous service or above, then there will be no tax on that amount. However, if withdrawal is made before the completion of five years, then the amount withdrawn will be fully taxable. A lot of times people change their jobs in three to four years and withdraw their EPF money immediately. Only, later on, they realize that they could have timed their withdrawal in a better manner and save 30% of their (assuming they are in 30% tax bracket).

TDS on EPF Withdrawal: Just a quick note on TDS since we are on the topic.

According to new EPF rules announced by the government in the Fiscal year 2015-16, EPF withdrawal (taxable) will attract TDS at the rate of 10% (if your PAN is registered) or up to a maximum of 30% (in cases of unregistered PAN). However, no TDS will be deducted if the amount is under Rs.30,000. Also, note that you can submit form 15G during the time of withdrawal if your income is less than the basic exemption limit after the addition of the provident fund withdrawal amount. If salaried people want to avoid TDS, then they can submit the form no. 15H (senior citizens) or 15G for an amount up to Rs.3 lakh and Rs.2.5 lakh respectively (both the said forms are declaration forms which can be used by employees whose income is less than the taxable amount). 

7. Profits from shares or equity mutual funds after a year

Any profits that you earn from investing in shares or equity mutual funds provided that you held them at least for 1 year. It is known as Long term Capital gains, and its 100% tax exempt as per current rules.

For example, if you invest Rs 5 lakhs in shares of company Abc & after 18 months its worth is now Rs 7 lakhs. When you sell your shares of this company, then you do not have to pay any income tax on your profit of Rs 2 lakhs as it will be considered as long term capital gains. Please note that as per the rules, you only get this exemption if Security Transaction Tax (STT) has been paid (which is paid by you when you buy on recognized stock exchange such as BSE or NSE). 

8. Dividends from your shares or equity mutual funds

When you receive any dividends from your investment in shares or equity mutual funds (dividend option). That dividend money is completely tax-free in your hand. The company does pay the dividend distribution tax (DDT) before giving these dividends to its shareholders.

9. Amount received through WILL or Inheritance

There is no inheritance tax in India at present. Hence anything you receive in inheritance by way of WILL is not taxable in your hands. It becomes your possessions and hence whenever you invest that capital, just the interest portion earned on that capital will be taxed.

10. Interest earned by NRI’s in NRE account.

Any interest you earn on your NRE account is 100% Tax-free in India. This applies to both FD interest and interest in saving bank account. Both are tax-free for NRIs. NRE deposits are a great way to earn a decent interest on the savings done by NRI. Some people even borrow from the residence country they are working in like Dubai / Singapore because the interest rate is only 2-3% there and then reinvest that amount in NRE deposits here in India where they earn around 7%. NO TDS is applicable to these NRE account deposits. Also, money in the NRE accounts is repatriable, meaning that if you are in the US and you invest money in India in NRE Fixed deposits, then both the principal and interest money can be transferred back to US in US Dollar at the exchnage rate prevailing at the time of repatriation. You can read more about it here.

There are much more ways which are little more convoluted and they apply to a certain section of investors. You can contact us and we will be more than happy you. 

Do you know about some income which is tax-free and not mentioned here? Then please write to us about it.