Income and tax go hand in hand, and as a person’s income goes up so does his or her tax liability. However, not all incomes are taxed. Sometimes, you can have your cake and eat it too.
Let’s look at some incomes which are exempted from the purview of taxation in India :
- Long-term capital gains on equity investment
Equity investments provide the possibility of high returns along with great tax-efficiency. Long-term capital gains from the sale of equities or equity Mutual Funds are exempted from tax if securities transaction taxes are paid.
You can invest in equities through the stock market, IPOs, Mutual Funds and Equity Linked Saving Schemes (ELSS). In case of equity shares and equity Mutual Funds, income earned on redemption after a year is considered long-term gain. With ELSS, there is a three-year lock-in period associated, following which the income on redemption is considered long-term capital gain.
- Benefits received from Life Insurance plan
A Life Insurance policy doesn’t just provide financial protection during emergencies. It also gives the policyholder benefits which are tax-free in nature.
The maturity benefit (paid when the plan tenure expires), the death benefit (paid on death of the life insured), money-back benefit (in case of money-back plans) etc, that are availed during the plan tenure are tax-free under Section 10(10D) of the Income Tax Act. Moreover, there is no tax-free limit on the benefits received. However, there are a few payouts are not tax-free. These are:
(1) income from annuity or pension plans
(2) proceeds from a key man insurance policy
(3) if the annual premium is not more than 10% of the sum assured for life policies issued on or after April 1, 2012 or 20% for policies issued on or after April 1, 2003, and if any other benefits have been paid apart from death benefits on policies issued on or after April 1, 2003.
(4) Life insurance bought for those suffering from disabilities as defined under section 80 DDB and bought on or after April 1 2013, with premiums more than 15% of the sum assured.
- Returns from Provident Funds
There are two kinds of Provident Funds – The Employee Provident Fund (EPF), which is meant for salaried employees, and Public Provident Fund (PPF), which is open to all.
Returns generated from an EPF is tax free on redemption after five years and returns earned from a PPF account is exempted from tax after the completion of 15 years.
- Interest earned on Savings Account
Interest earned on savings accounts are tax-free under Section 80TTA. However, there is an upper limit to this tax-free income. Interest earned up to Rs.10, 000 qualifies for tax exemption. The aggregate of interest generated across all saving accounts needs to be under Rs. 10,000 in order getting tax benefits.
For NRIs, the interest earned on the NRE account is completely tax-free without any upper limit. Moreover, an NRE account would consist of both a savings account and a deposit account.
- Dividends declared on equity investment
Dividends paid on equity shares are tax-free up to a limit of Rs. 10 lakh, and so are the dividends paid on equity Mutual Funds.
With the arrival of the new financial year, make the best of these options to lighten your tax burden.
by Adhil Shetty