Tax-free incomes in India: EPF, PPF, gratuity, bonds & more explained

From EPF to scholarships, here is how certain incomes remain completely outside the tax net under current rules

Not all income is taxable. Under Chapter III of the Income Tax Act, 1961, which deals with “incomes which do not form part of total income,” several receipts(incomes) are either fully exempt or exempt subject to conditions. These provisions are codified in different clauses of Section 10 and related schedules, as notified by the Income Tax Department and the Central Board of Direct Taxes (CBDT).

 

Here is a breakdown of key tax-free incomes Indian taxpayers should know.

 

1. Agricultural income — no upper limit

 

Under Section 10(1), income from agricultural operations, including rent or revenue from agricultural land in India, is fully exempt from tax. There is no ceiling.

 

However, if you have other taxable income, agricultural income must be disclosed for rate calculation purposes.

 

2. Public Provident Fund (PPF) — EEE benefit

 

According to Section 10(11), interest earned and maturity proceeds from PPF are fully tax-free.

 

The scheme follows the Exempt-Exempt-Exempt (EEE) model:

 

·  Investment qualifies for deduction under Section 80C (up to Rs 1.5 lakh).

 

·  Interest is tax-free.

 

·  Maturity amount is tax-free.

 

3. Employees’ Provident Fund (EPF) withdrawal

 

Under Section 10(12) read with Rule 8 of Part A of the Fourth Schedule, EPF withdrawals are exempt if the employee has completed five years of continuous service.

 

Exemption also applies in cases such as ill health or business closure. Interest is exempt subject to notified contribution limits.

 

4. Gratuity

 

According to Section 10(10):

 

·  Government employees: Fully exempt.

 

·  Other employees: Exempt up to Rs 20 lakh (lifetime limit), subject to conditions.

 

This applies on retirement, superannuation, death or termination after qualifying service.

 

5. Interest on notified tax-free bonds

 

Under Section 10(15), interest on certain government-notified bonds and securities is fully exempt. These bonds are typically issued by government-backed entities for infrastructure or other approved purposes.

 

6. Sukanya Samriddhi Yojana (SSY)

 

Interest and maturity proceeds under the Sukanya Samriddhi scheme are tax-free under the notified framework read with Section 10 provisions. Contributions qualify for deduction under Section 80C, and the scheme enjoys EEE status.

 

7. Life insurance maturity proceeds

 

Under Section 10(10D), amounts received from a life insurance policy — including bonus — are tax-free, subject to premium conditions.

 

For most policies issued after April 1, 2012, the premium must not exceed 10 per cent of the sum assured. Additional conditions apply to high-value policies after recent amendments.

 

8. Leave encashment

 

According to Section 10(10AA):

 

·  Government employees: Fully exempt.

 

·  Other employees: Exempt up to the lower of 10 months’ average salary or Rs 25 lakh, according to current limits.

 

9. Scholarships

 

Under Section 10(16), any scholarship granted to meet the cost of education is fully exempt. There is no specified monetary ceiling in the provision.

 

10. Commuted pension

 

Under Section 10(10A):

 

·  Government employees: Fully exempt.

 

·  Non-government employees: Exempt up to one-third or one-half of the commuted value, depending on gratuity eligibility.

 

What taxpayers should remember?

 

·  These exemptions are governed by specific clauses of Section 10 and related schedules of the Income Tax Act, 1961.

 

·  Certain exempt incomes may still need to be disclosed in the income tax return.

 

·  Conditions, limits and thresholds are subject to amendments through Finance Acts and CBDT notifications.

 

Taxpayers should verify the latest provisions on the official Income Tax Department portal or consult a qualified tax professional before filing returns.