Tax-Free and Exempt Income in India: Complete Guide for 2026
Which incomes are exempt from income tax in India? This updated guide explains important exemptions and tax-relieved receipts under the Income-tax Act, 2025, including agricultural income, PPF, scholarships, life insurance, Sukanya Samriddhi, NPS and specified salary or retirement benefits.
Updated: 2 September 2026
1. How exempt income works under the Income-tax Act, 2025
For Tax Year 2026-27 onward, section 11 of the Income-tax Act, 2025 works with the relevant Schedules to exclude specified incomes from total income when the prescribed conditions are satisfied. The exemptions are therefore not blanket privileges: eligibility depends on the nature of the receipt, taxpayer category, policy or investment conditions, source, date and other statutory requirements.
2. Agricultural income
Genuine agricultural income continues to be generally exempt under Indian income-tax law. Under the Income-tax Act, 2025, agricultural income forms part of the exemption framework under section 11 read with Schedule II.
However, agricultural income can still affect the rate of tax where the statutory partial-integration rules apply. Taxpayers should therefore disclose and report agricultural income in the return wherever required rather than assuming it may always be omitted.
Useful supporting records include land ownership or lease documents, crop and cultivation details, sale bills, mandi or purchaser receipts, bank records, evidence of agricultural operations and documents establishing that the income is genuinely agricultural.
3. Public Provident Fund (PPF)
PPF remains an important tax-efficient long-term savings product. Eligible interest and qualifying maturity or withdrawal proceeds generally receive favourable exempt treatment, subject to the Public Provident Fund rules and applicable income-tax conditions.
The tax treatment of the contribution itself should be distinguished from exemption of interest or maturity proceeds. A deduction for contribution is available only where the taxpayer is eligible under the chosen tax regime and applicable law.
4. Scholarship received for education
A genuine scholarship granted to meet the cost of education continues to qualify for exemption when the statutory conditions are satisfied. The character and purpose of the payment are important.
Every payment received by a student is not automatically a tax-free scholarship. Salary, professional remuneration, research remuneration, fellowship payments with an employment character or other taxable stipends may require separate examination.
5. Life insurance proceeds
Life-insurance receipts can be exempt, but not every policy maturity amount is automatically tax-free. The exemption depends on statutory conditions relating to the policy, date of issue, premium, sum assured and type of policy.
Special rules apply to high-premium policies, unit-linked insurance policies, Keyman insurance policies and other policies that do not satisfy the exemption conditions. Death benefits receive specific favourable treatment under the applicable provisions.
6. Sukanya Samriddhi Account
Eligible interest and withdrawals from a Sukanya Samriddhi Account continue to receive favourable tax treatment subject to the governing scheme and the applicable exemption provisions. Contributions should be distinguished from the exempt treatment of eligible account earnings or withdrawals.
7. National Pension System (NPS) withdrawals
Certain payments from the National Pension System can qualify for exemption, but the entire NPS corpus should not automatically be described as tax-free. The tax treatment depends on the nature of the withdrawal, percentage withdrawn, method of exit and statutory conditions.
Employer contribution deductions, employee contribution deductions and exemption of eligible withdrawal proceeds are separate tax concepts and should be analysed independently.
8. House Rent Allowance (HRA)
HRA is a conditional salary exemption rather than universally tax-free income. Under the earlier-law framework applicable to AY 2026-27, eligible HRA exemption under section 10(13A) is generally computed with reference to the least of actual HRA received, rent paid minus 10% of relevant salary, and 50% or 40% of relevant salary depending on the prescribed city category.
HRA exemption is generally not available where the employee is taxed under the default new tax regime. Employees wishing to claim HRA must satisfy the applicable regime and documentary requirements.
9. Leave Travel Allowance / Leave Travel Concession
Eligible LTA or LTC can receive exemption subject to the prescribed conditions. The exemption relates to qualifying travel and is not a blanket exemption of every amount received from an employer under the label "LTA". Journey, destination, eligible family members, mode of travel, fare and other statutory requirements should be checked.
10. Gratuity, leave encashment and pension
11. Amount received by a member from an HUF
A member's share in the income of a Hindu Undivided Family can receive exempt treatment because the HUF is a separate taxable person, subject to the applicable exemption provision. This should be distinguished from salary, interest, remuneration or other independent income earned by the member from a separate source.
12. Certain awards and rewards
Specified awards or rewards may be exempt where they meet the statutory conditions, including prescribed awards instituted in the public interest by Government or another approved body. Ordinary prizes, commercial incentives, competition winnings and promotional rewards are not automatically exempt.
13. Income often wrongly described as tax-free
Savings-bank interest
Savings-bank interest is not inherently exempt. Under the earlier-law framework, eligible taxpayers using the old regime may claim deductions such as section 80TTA or, for qualifying senior citizens, section 80TTB, subject to limits and conditions. Those deductions should not be confused with exemption of the interest itself.
Listed equity long-term capital gains
The former blanket exemption under section 10(38) of the Income-tax Act, 1961 is no longer available. For earlier years, section 112A governs specified listed-equity LTCG. Under the Income-tax Act, 2025, section 198 carries the corresponding concessional LTCG framework. Specified gains above the statutory threshold are taxable at the applicable rate subject to the conditions, including relevant securities transaction tax requirements.
Dividend income
Dividend income is generally taxable in the hands of the shareholder or investor. It should not be listed as exempt income merely because dividends were historically exempt under a previous dividend-distribution-tax system.
Mutual-fund distributions and gains
Income distributed to an investor by a mutual fund is generally taxable, and gains on sale or redemption are governed by the applicable capital-gains provisions. The exemption enjoyed by an eligible mutual fund itself does not make the investor's receipts automatically exempt.
14. Quick tax-treatment table
| Income or receipt | General tax treatment |
|---|---|
| Agricultural income | Generally exempt, subject to definition and conditions; may affect rate calculation in specified cases. |
| Educational scholarship | Exempt where genuinely granted to meet the cost of education. |
| PPF interest / eligible withdrawal | Generally exempt subject to scheme and statutory conditions. |
| Sukanya Samriddhi interest / eligible withdrawal | Generally exempt subject to applicable conditions. |
| Eligible NPS withdrawal | Exempt only to the extent and in the circumstances prescribed. |
| Eligible life-insurance death benefit | Generally receives favourable exempt treatment subject to law. |
| Life-insurance maturity proceeds | Exempt only where policy conditions are satisfied. |
| HRA | Conditional exemption; generally unavailable under the default new regime. |
| LTA / LTC | Conditional exemption for qualifying travel. |
| Gratuity | Wholly or partly exempt depending on category and statutory limit. |
| Leave encashment | Wholly or partly exempt depending on employee category and limits. |
| Commuted pension | Wholly or partly exempt depending on circumstances. |
| Savings-bank interest | Taxable; eligible deduction may be available in specified cases. |
| Dividend income | Generally taxable. |
| Mutual-fund distributions | Generally taxable to the investor. |
| Specified equity LTCG | Not fully exempt; concessional threshold/rate framework applies. |
15. How to earn or receive tax-free income legally
Tax planning should rely on lawful exemptions and properly documented tax-efficient investments, not concealment or misclassification of taxable receipts.
- Use eligible long-term savings products such as PPF where suitable to your financial goals.
- Use government-backed schemes such as Sukanya Samriddhi where eligibility and family circumstances permit.
- Claim agricultural income exemption only for genuine agricultural activity supported by records.
- Claim salary exemptions such as eligible HRA or LTA only under the regime and conditions in which they are legally available.
- Plan retirement receipts by separately examining gratuity, leave encashment, pension and NPS treatment.
- For investments, distinguish exempt income from concessional tax rates, threshold relief and deductions.
16. Default new tax regime and exemptions
For persons covered by section 202 of the Income-tax Act, 2025, the new tax regime operates as the default regime unless a valid option for the alternative regime is exercised in the prescribed manner. The availability of deductions and salary exemptions must therefore be tested under the regime actually applicable to the taxpayer.
Many deductions that taxpayers commonly associate with tax saving are unavailable under the default/new regime, while certain deductions specifically preserved by law can continue. This is why "tax-free income", "exemption" and "deduction" should never be used interchangeably.
17. Official Income Tax resources
- Income Tax Department e-Filing Portal
- Income Tax Department - Income Tax Returns and utilities
- Income Tax Department - New vs old tax regime FAQs
- Income Tax Department - Acts, Rules and tax information
- Income-tax Act, 2025 - Section 198: specified long-term capital gains
- Income-tax Act, 2025 - Section 202: new tax regime
18. Conclusion
India continues to provide exemption or favourable tax treatment for several genuine receipts, including agricultural income, educational scholarships, eligible PPF and Sukanya Samriddhi receipts, qualifying life-insurance proceeds, specified NPS withdrawals and certain retirement benefits. These exemptions are conditional and must be applied to the correct tax year.
Taxpayers should also avoid describing dividend income, ordinary mutual-fund distributions, savings-bank interest or specified equity LTCG as completely tax-free. These items are generally taxable or subject to a deduction, threshold or concessional-rate mechanism rather than blanket exemption.