What you need to know about income sources exempt from income tax
Given the income tax rules prevalent in India, if your annual income is over Rs. 2.5 lakh, you're required to file income tax returns. Regardless of your source of income — whether it be the revenue from your business or your salaried job — it is mandatory.
That said, income from salary and business are taxed according to their respective tax slabs. But it's important for you to know that there are a few income sources that are completely income tax-exempt, no matter the amount.
With that in mind, we take a low at some tax-exempt income sources that students and young professionals are particularly likely to find useful:
Wedding gifts that a newlywed couple receives from any immediate family members are exempt from tax. That includes everyone from their parents, siblings, as well as the siblings' spouses and parents' siblings. Also, the exemption applies irrespective of the gift's value.
Marriage gifts exempt from tax include jewellery, cash, vehicles, stocks, electronic items, and artefacts, among others. Even immovable gifts, such as property or land, are tax-exempt under Section 56 of the Income Tax Act, 1961.
Profit share in a partnership firm
From the total income of a firm, the share of profit a partner of the firm receives is exempt from tax in the hands of the partner. This is because the partner's share is derived after accounting for all applicable expenses and income tax. That said, when the partner receives any interest on capital as well as any remuneration received is taxable.
In most countries, when one passes on and their property and assets get passed down to their legal heirs, the heir has to pay Inheritance Tax on such assets.
However, in India, there exists no concept of levying tax on inheritance. As a matter of fact, Inheritance Tax (also called Estate Tax) was done away with, in 1985.
However, note that the inherited property could be a source of income, such as by way of sale or rent. So you have to declare this income and pay taxes on it.
In India, provident funds are mandatory for every employee working in any company registered under The Companies Act, 1956. Post-retirement, the respective Provident Fund (PF) money which a person earns is tax-exempt.
Note that the Employee Provident Fund offers you tax-free returns if the EPFO has received an active contribution on your behalf for five-plus years. And even if you change your job during this period, it remains unaffected.
Gratuity is a fund that some employers provide to their employees. It is a kind of gift that is paid as extra, under the following conditions of superannuation (retirement age), resignation, or sudden death, physical loss or health hazard. An employee can claim a rebate on a gratuity of no more than Rs. 30 lakhs.
This one is particularly useful to know if you're a student. As per Section 10 (16) of the Income Tax Act 1961, when you are granted a scholarship to meet your education costs, it is exempt from income tax.
Do note, however, that the income from the scholarship has to go towards meeting your education expenses only.
Income from a foreign government
When an Indian citizen receives remuneration from a foreign government with regards to any sponsored cooperative technical assistance programme, the amount is entirely tax-free.
It's certainly worth knowing about these tax exemptions, especially with the constantly rising costs of living making every little bit you can save here and there, that much more important.
After all, a young professional in the nascent stages of his or her professional career can feel the pinch of a cash crunch every now and then.
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