Even though the government has been encouraging taxpayers to shift to the new tax regime, the old tax regime still offers several exemptions and deductions that can significantly reduce a person’s tax liability. However, there are certain earnings that get income tax exemptions for taxpayers irrespective of the tax regime.
It is important to understand that most of the tax exemptions and deductions are available only if a taxpayer opts for the old tax regime. Even then government data suggests that around 88% taxpayers have shifted to the new tax regime, largely because the government has gradually made the regime more attractive by widening tax slabs and lowering tax rates.
Under the revised structure, the top 30% tax slab now starts above Rs 24 lakh, making the regime appealing for many salaried individuals who do not claim multiple deductions.
Up to Rs 2.5 lakh – Nil
Rs 2.5 lakh to Rs 5 lakh – 5%
Rs 5 lakh to Rs 10 lakh – 20%
Above Rs 10 lakh – 30%
In comparison, the new tax regime offers multiple slabs with lower rates and a wider tax bracket structure, which has encouraged many taxpayers to move away from the deduction-heavy old regime.
This story, however, highlights 10 categories of income that remain tax-free in India, regardless of whether you opt for the old or the new tax regime.
According to Dinkar Sharma, Company Secretary and Partner at Jotwani Associates, understanding these exemptions can help taxpayers optimise their financial planning and remain compliant with the provisions of the Income-tax Act.
1. Agricultural income
Income earned from agricultural activities is completely exempt from income tax under Section 10(1) of the Income-tax Act. This includes income from cultivation, sale of agricultural produce, and rent received from agricultural land.
However, if a taxpayer also has other sources of income, agricultural income may be considered for determining the applicable tax rate if it crosses certain limits.
2. Gifts within prescribed limits
Gifts can also be tax-free under certain conditions.
If a person receives monetary gifts up to Rs 50,000 in a financial year from non-relatives, the amount is exempt from tax. However, if the value exceeds Rs 50,000, the entire amount may become taxable.
Gifts from specified relatives—such as parents, spouse, siblings, and lineal ascendants or descendants—are fully exempt regardless of the amount.
In addition, gifts received on the occasion of marriage are completely tax-free.
3. Life insurance policy proceeds
Money received from a life insurance policy, including maturity proceeds and death benefits, is generally tax-free under Section 10(10D).
However, the exemption is subject to conditions related to the premium-to-sum assured ratio. In many cases, the premium paid in a year should not exceed a certain percentage of the sum assured to qualify for tax exemption.
Death benefits received by nominees are fully tax-free.
4. Interest earned on Public Provident Fund (PPF)
The Public Provident Fund (PPF) remains one of the most tax-efficient savings instruments in India.
Interest earned on PPF deposits is completely tax-free under Section 10(11). Not only the interest, but the entire maturity amount is also exempt from tax, making PPF an EEE (Exempt-Exempt-Exempt) category investment.
5. Interest from tax-free bonds
Interest earned from certain government-backed tax-free bonds is exempt from income tax under Section 10(15).
These bonds are typically issued by public sector entities and are popular among investors looking for stable and tax-efficient long-term returns.
6. Scholarships for education
Scholarships granted to meet the cost of education are completely exempt from tax under Section 10(16) of the Income-tax Act.
The exemption applies irrespective of the amount or the institution providing the scholarship, as long as it is meant to support educational expenses.
7. Leave Travel Allowance (LTA)
Employees can claim tax exemption on Leave Travel Allowance (LTA) provided by their employer under Section 10(5).
The exemption is available for travel within India and is generally allowed for two journeys within a block of four years.
However, the exemption applies only to actual travel expenses, such as air, rail or bus fares. Costs related to hotel stay, food, or other expenses are not covered under the exemption.
8. Gratuity received at retirement
Gratuity received upon retirement or resignation is partially or fully tax-free depending on certain conditions.
For employees covered under the Payment of Gratuity Act, 1972, the exemption is available up to Rs 20 lakh. The actual tax-free amount is calculated based on salary and years of service, subject to the prescribed ceiling. For central government employees, this tax-free limit is Rs 25 lakh.
For employees not covered under the Act, the exemption is calculated differently but remains subject to the overall limit.
9. Provident Fund withdrawals after minimum service
Withdrawals from a recognised provident fund, including the Employees’ Provident Fund (EPF), are tax-free if the employee has completed at least five years of continuous service.
If the withdrawal is made before completing five years, the amount may become taxable under certain conditions.
10. Share of profit from a partnership firm
If a person is a partner in a partnership firm or LLP, the share of profit received from the firm is completely tax-free in the hands of the partner under Section 10(2A).
This is because the partnership firm itself pays tax on its income, and taxing the same income again in the hands of partners would lead to double taxation.
As Sharma explains, these exemptions form an important part of the tax framework and can help taxpayers legally reduce their tax burden if used correctly.