Tax-Free Income in India: Complete List of Incomes Exempt from Income Tax (AY 2026-27)

Not everything you earn is taxable. The Income Tax Act provides a long list of incomes that are partially or fully exempt — scattered across Section 10, Section 54, and various other provisions. Many taxpayers either miss claiming these exemptions or fail to report exempt income that should still appear in their ITR.

This guide covers every major category of tax-free income for AY 2026-27 (FY 2025-26), with the conditions and limits that apply.

Salary-Related Exempt Income

Gratuity (Section 10(10))

Gratuity received on retirement, resignation, or death is exempt up to specified limits:

Example: After 20 years at a private company, Kavita receives ₹18,00,000 as gratuity. Her last drawn salary (basic + DA) was ₹80,000/month. Her exempt amount is the least of ₹25,00,000, ₹18,00,000 (actual), or ₹80,000 × 15/26 × 20 = ₹9,23,077. She pays tax only on ₹18,00,000 − ₹9,23,077 = ₹8,76,923.

Leave Encashment on Retirement (Section 10(10AA))

Unused earned leave encashed at the time of retirement or superannuation:

• Government employees: Fully exempt
• Non-government employees: Exempt up to ₹25,00,000 (raised from ₹3 lakh by Budget 2023). The actual exempt amount is the least of four calculations — actual amount received, 10 months' average salary, cash equivalent of leave balance (max 30 days per year of service), or ₹25,00,000.

Leave encashment while still employed (such as annual leave surrender) is fully taxable — only retirement-time encashment qualifies.

Voluntary Retirement / VRS (Section 10(10C))

Compensation received under a voluntary retirement scheme is exempt up to ₹5,00,000, provided the scheme meets prescribed conditions under Rule 2BA. This applies to employees of public sector companies, local authorities, state-owned corporations, and similar entities.

If you claim this exemption, you cannot also claim relief under Section 89 on the same amount.

Commuted Pension (Section 10(10A))

When you opt to receive a lump-sum commuted value of your pension instead of monthly payments:

• Government employees: Fully exempt
• Non-government employees receiving gratuity: One-third of the full commuted value is exempt
• Non-government employees not receiving gratuity: One-half of the full commuted value is exempt

The uncommuted (monthly) pension you receive remains taxable as salary income.

Employer Contributions to Recognised Funds

Employer contributions to EPF, superannuation fund, and NPS are exempt up to ₹7,50,000 per year in aggregate. Contributions exceeding this limit are taxable as a perquisite. Interest earned on the excess contribution is also taxable.

Provident Fund and Retirement Savings

PPF Interest and Maturity

The Public Provident Fund enjoys EEE (Exempt-Exempt-Exempt) status — contributions qualify for Section 80C deduction, the interest earned annually is tax-free, and the maturity amount is fully exempt. There is no upper limit on the exemption of maturity proceeds.

EPF Withdrawal After 5 Years (Section 10(12))

EPF accumulated balance (including employer's contribution and interest) withdrawn after 5 continuous years of service is fully exempt. If you withdraw before 5 years, the entire amount is taxable — the employer's contribution and interest are taxed as salary, and your own contribution's interest is taxed under "Income from Other Sources."

One nuance: interest earned on employee contributions exceeding ₹2,50,000 per year is taxable even during accumulation, affecting employees with a monthly basic salary above approximately ₹1,73,000.

Sukanya Samriddhi Yojana

Like PPF, the Sukanya Samriddhi Account for a girl child has full EEE status. Contributions (up to ₹1,50,000/year) get 80C deduction, annual interest is exempt, and the maturity amount on the girl turning 21 is fully tax-free.

NPS Partial Withdrawal (Section 10(12B))

Partial withdrawal from NPS Tier-I (up to 25% of your own contributions) for specified purposes like children's higher education, marriage, home purchase, or treatment of critical illness is tax-free. This benefit is available after 3 years of NPS membership, with a maximum of 3 withdrawals during the account's lifetime.

Investment and Interest Income

Long-Term Capital Gains up to ₹1.25 Lakh (Section 112A)

LTCG from listed equity shares and equity-oriented mutual funds is exempt up to ₹1,25,000 per financial year. Only gains exceeding this threshold are taxed at 12.5%. This exemption applies per individual — a married couple can effectively shelter ₹2,50,000 in combined LTCG if both have independent investments.

Even though this income is exempt, you must still report it in your ITR if you file ITR-2. Use the tax-loss harvesting strategy to stay within this exempt limit each year.

Interest on Certain Government Bonds and Securities

Interest on specific tax-free bonds issued by entities like NHAI, IRFC, HUDCO, REC, and PFC is fully exempt from income tax. These bonds were issued in various tranches between 2011 and 2016 and trade on stock exchanges. If you hold them, the interest is exempt — but you must still report it as exempt income in your ITR.

Property and Agriculture

Agricultural Income (Section 10(1))

Income from agricultural operations — cultivation, harvesting, and sale of produce — on agricultural land in India is fully exempt from income tax. This includes income from dairy farming, poultry farming on agricultural land, and growing flowers, fruits, or vegetables.

However, if your total income excluding agricultural income exceeds the basic exemption limit, agricultural income is used for rate purposes — it determines the slab rate applicable to your non-agricultural income. Report agricultural income in your ITR even though it is exempt.

Exemption on Capital Gains from Property Sale

When you sell a residential property and reinvest in another house or in specified bonds, you can claim full or partial exemption:

These exemptions can eliminate the entire capital gains tax liability on a property sale if planned correctly. If you haven't identified the new property by the ITR filing date, deposit the gains in a Capital Gains Account Scheme with an authorized bank.

Gifts and Inheritance

Gifts from Relatives (Section 56(2)(x))

Money or property received as a gift from specified relatives is fully exempt regardless of amount. Specified relatives include:

• Spouse
• Brother or sister (including spouse's siblings)
• Parents and grandparents (of both spouses)
• Children and their spouses
• Lineal ascendants and descendants

Example: If your parents gift you ₹20,00,000 for a house down payment, it is entirely tax-free in your hands.

Gifts on Specified Occasions

Gifts received on the occasion of marriage are exempt without any limit, regardless of who gives them. Gifts from non-relatives on other occasions are exempt up to ₹50,000 in aggregate per year. Beyond ₹50,000, the entire amount (not just the excess) becomes taxable.

Read the detailed rules in our gift taxation guide.

Inherited Money and Property

There is no inheritance tax in India. Money, property, shares, or any other assets received through inheritance or will are completely tax-free. However, any income generated from inherited assets (rent, interest, dividends) is taxable in your hands, and capital gains arise when you eventually sell inherited assets — with the original owner's cost of acquisition as your base cost.

Insurance Proceeds

Life Insurance Maturity (Section 10(10D))

The maturity or death claim proceeds from a life insurance policy are exempt if:

• For policies issued after 1 April 2012: The annual premium does not exceed 10% of the sum assured (15% for policies on disabled persons or those with specified diseases)
• For policies issued after 1 April 2023: The aggregate annual premium across all policies does not exceed ₹5,00,000

Death claims are exempt regardless of premium-to-sum-assured ratio.

ULIPs with annual premium above ₹2,50,000 (for policies issued after 1 February 2021) are treated as capital assets, and gains on maturity are taxed as capital gains — not exempt under 10(10D).

Education and Scholarships

Scholarships (Section 10(16))

Scholarships granted to meet the cost of education are fully exempt from income tax. This includes scholarships from:

• Government institutions
• Universities (Indian or foreign)
• Trusts, foundations, and private organisations
• Employer-sponsored education programmes

There is no upper limit specified for the exemption. However, stipends paid for services rendered (such as a teaching assistantship) may be treated as salary and taxed accordingly.

Miscellaneous Exempt Incomes

Share of Profit from a Partnership Firm (Section 10(2A))

If you are a partner in a firm, your share of profit from the firm is fully exempt from tax in your hands — because the firm has already paid tax on it. This does not include salary, interest, or remuneration received from the firm, which are taxable.

Income from a Hindu Undivided Family (Section 10(2))

Any income received by an individual as a member of an HUF — your share from the HUF's income — is exempt. The HUF is taxed as a separate entity, so taxing the same income again in the member's hands would be double taxation.

Compensation for Natural Disasters

Any amount received from the government or a local authority as relief for natural disasters is exempt from tax.

How to Report Exempt Income in Your ITR

Even though exempt income is not taxed, you are required to report it in your income tax return. In ITR-1 and ITR-2:

• Agricultural income has a dedicated field
• Exempt income under Section 10 is reported in Schedule EI (Exempt Income)
• LTCG up to ₹1.25 lakh should be reported in Schedule CG
• Gifts and inheritance should be disclosed if they contributed to your assets

Failing to report exempt income can trigger a mismatch with your Annual Information Statement (AIS), leading to a notice under Section 143(1). Always cross-check your AIS and Form 26AS before filing.

49Tax's AI automatically identifies exempt income entries from your uploaded documents and classifies them correctly in your ITR, ensuring you claim every exemption you're entitled to without accidentally omitting reportable items.

Key Takeaway

The Income Tax Act exempts dozens of income types — from PPF maturity to agricultural income to gifts from relatives. The trap most taxpayers fall into is not the missing exemption but the missing disclosure: receiving exempt income without reporting it looks like concealment to the tax department's automated systems. Report everything, claim every legitimate exemption, and keep your documentation ready. If you are unsure whether a particular receipt is taxable, the safest approach is to report it and let the applicable exemption provision handle the rest.