Tax-free income in India broadly falls into two categories: income that is legally exempt from tax, and income that becomes effectively tax-free through rebates or deductions.
For Financial Year 2025–26 (Assessment Year 2026–27), individuals can take advantage of several tax-saving provisions.
Under the new tax regime, income up to ₹12 lakh may become tax-free after applying the rebate under Section 87A. For salaried individuals, the inclusion of the standard deduction can make income of up to approximately ₹12.75 lakh effectively tax-free.
Naturally Tax-Exempt Income
Certain income sources are fully exempt under Indian tax laws:
- Agricultural income is completely tax-free, although it may be considered for rate calculation if total income exceeds the basic exemption limit.
- Gifts from close relatives—including parents, spouse, and siblings—are fully tax-free without any upper limit. Gifts from non-relatives are exempt up to ₹50,000 per financial year.
- Scholarships received for education are fully exempt.
- Inheritance through a will is not taxed. However, any income earned from inherited assets may be taxable.
- Life insurance maturity proceeds and death benefits are generally tax-free, subject to prescribed premium conditions.
Investment and Retirement-Related Exemptions
Several long-term savings and retirement benefits also qualify for tax exemption:
- Returns from the Public Provident Fund (PPF) and Employees’ Provident Fund (EPF) are tax-free under the Exempt-Exempt-Exempt (EEE) framework, provided contribution limits are adhered to.
- Gratuity is fully exempt for government employees. For private-sector employees, gratuity exemption is available up to ₹20 lakh, subject to applicable rules.
- Long-term capital gains from equity investments are tax-free up to ₹1.25 lakh per year.
- Interest earned from certain tax-free bonds issued by government-backed entities is exempt from tax.
Allowances and Other Exemptions
Under the old tax regime, certain allowances may be partially or fully exempt, depending on eligibility:
- House Rent Allowance (HRA)
- Leave Travel Allowance (LTA)
- Children’s education allowance, within prescribed limits
- Specific structured salary components as permitted under tax rules
Important Points to Note
Since April 2020, dividend income is taxable in the hands of the recipient.
Tax laws are subject to amendments through Finance Acts and budget announcements. Individuals should verify the latest provisions with official sources or consult a tax professional before making financial decisions.
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