India Tax Guide | Updated October 2026

Tax-Free Income in India: Exemptions, Deductions and Rules (2026)

Tax-free income and tax-saving deductions are not the same. Certain receipts are excluded from taxable income by law, while other income remains taxable but may qualify for a deduction. This guide explains common exemptions, their eligibility conditions, and important changes affecting savings interest, dividends, equity investments and salary benefits.

Important for 2026: The Income-tax Act, 2025 applies from 1 April 2026. References to Sections 10 and 80 of the Income-tax Act, 1961 explain the established provisions for earlier periods. Check corresponding provisions of the 2025 Act and the rules for the tax year you are filing. Tax treatment can also differ between the old and new regimes.

What is tax-free income?

Exempt income is income excluded from total income by a specific legal provision, subject to any conditions. A deduction reduces otherwise taxable income, and a tax rebate reduces the tax payable. Confusing these categories can lead to incorrect return reporting.

Tax-free income and deductions at a glance

Income or benefit	Tax treatment	Important condition
Agricultural income	Generally exempt	Must qualify as agricultural income; rate integration may apply
PPF interest	Generally exempt	Qualifying PPF account and scheme rules
Scholarships	Generally exempt	Granted to meet the cost of education
Savings bank interest	Taxable; limited deduction may apply	Sections 80TTA/80TTB under applicable old-regime rules
Listed equity long-term gains	Generally taxable subject to applicable threshold and rules	Holding period, STT and asset classification
Company and mutual fund dividends	Generally taxable to recipient	Applicable rates and withholding rules
HRA, LTA and retirement benefits	Conditional exemption	Employment terms, tax regime, statutory ceilings and rules

1. Savings bank interest: Section 80TTA and 80TTB

Interest credited to a savings account is ordinarily taxable under the head Income from other sources. Section 80TTA of the 1961 Act allowed eligible individuals and Hindu undivided families a deduction of up to Rs. 10,000 for qualifying savings-account interest, subject to the applicable regime. It did not exempt the interest itself and did not cover fixed-deposit interest.

Section 80TTB provided a deduction of up to Rs. 50,000 for eligible resident senior citizens in respect of specified interest on deposits. These deductions are generally not permitted under the concessional new tax regime. The applicable tax-year rules must be checked.

2. Listed shares and equity mutual funds: former Section 10(38)

Older guidance describing all long-term capital gains on listed equity shares or equity mutual funds as tax-free is outdated. The broad exemption formerly associated with Section 10(38) was replaced by a taxable capital-gains framework. For transfers covered by Section 112A of the 1961 Act, the post-July 2024 framework generally taxed qualifying long-term gains exceeding Rs. 1,25,000 at 12.5%, subject to applicable law and conditions. Securities transaction tax requirements and transitional rules can matter. Verify the corresponding 2025 Act provisions for later tax years.

Short-term capital gains and gains on debt-oriented mutual funds may follow different rules. Do not assume every investment gain is exempt.

3. Dividend income: former Sections 10(34) and 10(35)

Dividends from domestic companies and distributions from mutual funds are generally taxable in the hands of investors under the post-2020 framework. Earlier references to exemptions under Sections 10(34) and 10(35) should not be relied on for ordinary current dividend income. Reporting, withholding and the applicable tax rate depend on the recipient and circumstances.

4. Agricultural income: Section 10(1)

Qualifying agricultural income was exempt under Section 10(1) of the 1961 Act. It typically concerns income from land situated in India used for agricultural purposes, including qualifying rent or revenue and income from specified agricultural operations. Income merely connected with rural activities is not automatically agricultural income.

For certain individuals and other taxpayers, agricultural income may be included for rate purposes when calculating tax on non-agricultural income under the partial-integration method. Supporting evidence of the land, operations and receipts should be retained.

5. Public Provident Fund: Section 10(11)

Interest earned on a qualifying Public Provident Fund (PPF) account is generally exempt, subject to the governing statutory and scheme conditions. The treatment of contributions, interest and maturity proceeds should be distinguished. A contribution deduction, where permitted, is separate from the exemption of qualifying interest, and deductions depend on the chosen tax regime.

6. Education scholarships: Section 10(16)

A scholarship granted to meet the cost of education was exempt under Section 10(16) of the 1961 Act. The nature and purpose of the award matter: simply labelling a payment a scholarship does not establish eligibility. Preserve the award letter and relevant educational records.

7. Tax-exempt salary and retirement components

House Rent Allowance (HRA): Section 10(13A)

Under the old regime, eligible employees receiving HRA may claim exemption calculated under Rule 2A, generally based on the least of actual HRA, rent paid in excess of 10% of salary, and 40% or 50% of qualifying salary depending on the city. The exemption is generally unavailable under the new regime.

Leave Travel Allowance (LTA/LTC): Section 10(5)

Qualifying travel concession or assistance for travel within India may be exempt under prescribed conditions, including Rule 2B, subject to actual eligible travel expenditure and applicable block rules. It generally does not cover hotel, meals or sightseeing expenses and is generally unavailable under the new regime.

Commuted pension: Section 10(10A)

Exemption depends on the employee category, whether gratuity is received and the portion of pension commuted. Government and non-government employee rules differ.

Leave encashment: Section 10(10AA)

Tax treatment depends on whether payment is received during service or at retirement and on the employment category. For eligible non-government employees, the notified monetary ceiling was increased to Rs. 25 lakh with effect from 1 April 2023, subject to statutory calculation limits and aggregation rules.

Gratuity and other benefits

Retirement gratuity, provident fund withdrawals and certain other benefits may receive full or partial exemption depending on the applicable provision, employee classification, qualifying service and statutory limits. They should not be treated as universally tax-free.

Old regime versus new regime

The default concessional tax regime restricts many exemptions and deductions that may be claimed under the old regime. Before planning an investment or claiming HRA, LTA or a savings-interest deduction, compare the tax outcome under the regimes available for the relevant year. A payment can remain exempt in its own right even where a separate deduction is disallowed; the distinction matters.

Example: savings interest and exempt receipts

Suppose a non-senior individual earns Rs. 14,000 savings-account interest, Rs. 18,000 qualifying PPF interest and receives a qualifying education scholarship. Under applicable old-regime rules, the savings interest remains income, but a deduction of up to Rs. 10,000 may reduce taxable income. The PPF interest and qualifying scholarship may be exempt separately. Under the new regime, the savings-interest deduction is generally unavailable.

How to report exempt income in your tax return

Identify the source of every receipt and distinguish taxable income from exempt income and deductions.
Check the statute, applicable tax regime, limits and conditions for the relevant tax year.
Keep bank statements, scholarship documents, PPF records, rent receipts and employer certificates where relevant.
Report exempt income in the appropriate schedule of the applicable ITR form where required.
Reconcile taxable interest, dividends and capital gains with AIS, Form 26AS and other available records.

Official sources and related reading

Frequently asked questions

Is savings account interest completely tax-free?

No. Under the old tax regime, eligible individuals and HUFs may claim a deduction of up to Rs. 10,000 under Section 80TTA for qualifying savings interest. Eligible senior citizens may claim up to Rs. 50,000 under Section 80TTB for specified deposit interest. These deductions generally are not available under the new regime.

Are dividends from Indian companies tax-free?

No. Dividends are generally taxable in shareholders hands under current rules. The former broad dividend exemption under Section 10(34) no longer applies to ordinary dividends paid after the 2020 change.

Are long-term gains from listed shares exempt?

Not generally. Eligible long-term gains on listed equity and equity-oriented mutual funds are taxable under the applicable capital-gains rules, subject to thresholds, rates and conditions.

Is agricultural income exempt from income tax?

Qualifying agricultural income is generally exempt from central income tax, but can be taken into account for rate calculation in prescribed circumstances.

Is interest earned on PPF tax-free?

Interest on qualifying Public Provident Fund accounts generally remains exempt, subject to the governing tax provisions and scheme rules.

Do HRA and LTA exemptions apply under the new tax regime?

The familiar HRA and leave travel concession exemptions are generally not available under the concessional new tax regime. Eligibility under the old regime remains subject to specific conditions.

This article is general educational information. Confirm the rules, tax year and eligibility with official sources before filing a return.