Exempt Income in Indian Income Tax for AY 2025-26: Complete Guide

ITAI Blogger

March 15, 2026

Understanding exempt income in Indian income tax is critical if you want to legally reduce your tax liability. Many Indian taxpayers incorrectly assume that exemptions disappear under the new tax regime. That is not true. Even in AY 2025-26, several incomes remain fully or partially tax free under Section 10 of the Income Tax Act, 1961. This guide explains the latest list of exempt income in India, with clear examples, limits, and practical insights for FY 2024-25.

Whether you are a salaried employee, investor, farmer, or retiree, knowing tax free income sources in India 2025 can significantly improve your tax planning.

What Is Exempt Income Under Indian Income Tax?

Exempt income refers to income that is not included in total taxable income under the Income Tax Act. Section 10 of the Act lists incomes that are fully or partially exempt, subject to conditions.

Bottom line:
If income is exempt, you do not pay tax on it, but in some cases, you still need to report it in your Income Tax Return (ITR).

Authoritative reference: Income Tax Act, Section 10 – Income Tax Department

Exempt Income in New Tax Regime India (AY 2025-26)

A common reader question is:
“Is exempt income allowed in the new tax regime?”

Yes. While deductions under Chapter VI-A are mostly disallowed, Section 10 exempt income continues in the new tax regime unless specifically restricted.

List of Exempt Income in New Tax Regime India

The following remain exempt even if you opt for the new tax regime under Section 115BAC:

Agricultural income under Section 10(1)
Life insurance maturity proceeds under Section 10(10D)
Interest on tax-free bonds
PPF interest and maturity amount
Employer contribution to EPF up to ₹7,50,000
Interest on Sukanya Samriddhi Account
Leave encashment at retirement (subject to limits)

CBDT clarification: New Tax Regime FAQs – Income Tax Department

Section 10 Exempt Income Examples India

Agricultural Income Tax Exemption India

Section 10(1) provides full exemption for agricultural income earned in India.

What qualifies as agricultural income?

Income from cultivation of land
Rent or revenue from agricultural land
Income from farm buildings used for agriculture

Practical example:

If you earn ₹3,50,000 from wheat cultivation, the entire amount is exempt. However, if your non-agricultural income exceeds basic exemption limits, partial integration applies for rate calculation.

Official reference: Agricultural Income – Income Tax Department

Life Insurance Maturity Amount Tax Exemption India

Section 10(10D) exempts maturity proceeds and bonuses from life insurance policies.

Conditions for exemption:

Premium should not exceed:
- 10 percent of sum assured for policies issued after 1 April 2012
- 20 percent for policies issued before 1 April 2012
For ULIPs issued after 1 February 2021, exemption applies only if total premium does not exceed ₹2,50,000 per year

Example:

You receive ₹12,00,000 on maturity of a compliant policy. The full amount is tax free.

CBDT clarification: Taxation of Life Insurance Policies – CBDT

PF Interest Exempt Income Limit ₹2,50,000 India

A major change introduced earlier continues in AY 2025-26.

EPF interest rules:

Employee contribution interest is tax free up to ₹2,50,000 per year
Interest on employee contribution above ₹2,50,000 is taxable
Employer contribution interest remains exempt within overall limits

Example:

If your EPF contribution is ₹3,00,000, interest on ₹50,000 becomes taxable under “Income from Other Sources”.

Official source: EPF Interest Taxation – Income Tax Department

Dividend Income Exemption Rules India (Updated)

Many readers search for dividend income exemption rules India, but the rules have changed.

Is dividend income exempt in AY 2025-26?

No. Dividend income is fully taxable in the hands of the shareholder since abolition of Dividend Distribution Tax.

Key points:

Taxed under “Income from Other Sources”
TDS applicable if dividend exceeds ₹5,000
Deduction allowed for interest expense up to 20 percent of dividend income

Exception:

Dividends from agricultural companies may still qualify for exemption under specific conditions

Reference: Taxation of Dividend Income – Income Tax Department

Tax Free Income Sources in India 2025

Here is a consolidated list of tax free income sources in India 2025 that taxpayers frequently ask about.

Fully Exempt Income

Agricultural income
PPF interest and maturity
Sukanya Samriddhi interest and maturity
Interest on tax-free bonds
Life insurance maturity (Section 10(10D))
Scholarship income under Section 10(16)

Partially Exempt Income

EPF interest above ₹2,50,000
Leave encashment (₹25,00,000 lifetime limit for non-government employees)
Gratuity (subject to statutory limits)

Reference: Exempt Income List – Income Tax Department

Reporting Exempt Income in ITR: Common Mistakes

Even though exempt income is not taxable, reporting is mandatory in most ITR forms.

Common errors to avoid:

Not disclosing agricultural income
Ignoring exempt EPF interest reporting
Misreporting life insurance maturity proceeds
Assuming dividend income is exempt

Failure to report may trigger notices under Section 143(1).

Exempt Income vs Deduction: Key Difference

Many taxpayers confuse exemptions with deductions.

Exempt income is excluded before calculating total income
Deductions reduce taxable income after computation

Example: PPF interest is exempt income. PPF contribution deduction under Section 80C is a deduction.

Strategic Tax Planning Using Exempt Income

Smart taxpayers legally increase tax free income by:

Investing in PPF and Sukanya Samriddhi
Maintaining compliant life insurance policies
Structuring salary to optimize EPF contributions
Leveraging agricultural income where applicable

These strategies work in both old and new tax regimes when applied correctly.

Summary: Exempt Income in Indian Income Tax

To conclude, exempt income under income tax act India continues to play a vital role in tax planning for AY 2025-26. From agricultural income tax exemption India to PF interest exempt income limit ₹2,50,000 India, understanding Section 10 exemptions helps you stay compliant and tax efficient. Even under the new tax regime, a well-planned mix of tax free income sources in India 2025 can substantially reduce your tax burden. Stay updated, report exempt income correctly, and use these provisions to your advantage.

This content is AI Generated, use for reference only.