Tax-free income in India generally falls into two categories – income that is exempt by law and income that effectively becomes tax-free due to rebates or deductions.
For the financial year FY 2025-26 (AY 2026-27), individuals can benefit from multiple tax-saving provisions.
Under the new tax regime, income up to ₹12 lakh may become tax-free after rebate benefits under Section 87A, while salaried individuals may effectively pay no tax up to around ₹12.75 lakh when standard deduction is included.
Naturally tax-free income sources
Agricultural income is fully tax-free under Indian tax law, though it may be considered for rate calculation if total income crosses the exemption threshold.
Gifts from close relatives such as parents, spouse, and siblings are tax-free without any limit. Gifts from non-relatives are exempt up to ₹50,000 per year.
Scholarships received for education purposes are fully exempt from tax. Inheritance received through a will is also not taxed, although income generated from inherited assets may be taxable.
Life insurance maturity proceeds and death benefits are generally tax-free if premium conditions are met.
Investment and retirement tax-free benefits
Returns from schemes like Public Provident Fund (PPF) and Employees’ Provident Fund (EPF) are tax-free under the Exempt-Exempt-Exempt (EEE) model if contribution limits are followed.
Gratuity payments are fully exempt for government employees. Private-sector employees can receive gratuity exemption up to ₹20 lakh as per labour and tax rules.
Long-term capital gains from equity investments are tax-free up to ₹1.25 lakh annually.
Tax-free bonds issued by government-backed entities generate income that is not subject to tax.
Allowances and other exemptions
House Rent Allowance (HRA) and Leave Travel Allowance (LTA) can be partially or fully exempt under the old tax regime, depending on eligibility.
Children’s education allowance and certain salary components may also qualify for exemption under prescribed limits.
Important note
Since April 2020, dividend income is generally taxable in the hands of the recipient.
Tax rules may change with new finance legislation, and individuals should verify details with official sources before financial planning.