Income Tax Act 2025: 5 Tax-Free Claims Nris Must Verify

India’s new tax law keeps five commonly claimed exemptions conditional, rather than making agricultural income, gifts, insurance proceeds, equity gains and retirement payments automatically tax-free. Taxpayers must first identify the governing law, then test the receipt against its definition, threshold, documentation rules and residential-status requirements.

The Income Tax Act, 2025 took effect on April 1, 2026. It applies to income earned from Financial Year 2026-27 onward and introduces the expression “Tax Year.”

Returns filed in 2026 for Assessment Year 2026-27 cover income earned during Financial Year 2025-26. Those returns remain governed by the Income Tax Act, 1961.

That cutoff affects every claim below. A receipt may escape Indian tax but remain taxable in another country, or require separate compliance under foreign-exchange rules.

Farming income must first qualify as agricultural income

Agricultural income remains excluded when it meets the statutory definition. The exemption has no general rupee ceiling merely because the receipt is large.

The income must generally connect to agricultural land in India. Qualifying categories can include farming operations, specified rent or revenue from that land and income from eligible farm buildings.

Location is decisive. Farming income from land outside India does not become exempt Indian agricultural income simply because the activity involves agriculture. Depending on residential status, foreign agricultural income may instead fall under the rules governing foreign income.

A land sale requires a separate analysis. Rural agricultural land may fall outside the capital-asset definition in some circumstances, while urban agricultural land can generate taxable capital gains. Farmhouses, commercial nurseries and tea, coffee or rubber businesses may also follow specialised rules.

The exemption can still affect the rate on other income. Partial integration may apply when agricultural income exceeds ₹5,000 and other income crosses the applicable basic exemption threshold. The farm income itself remains exempt; it enters the prescribed rate calculation for non-agricultural income.

Land records, cultivation evidence, crop-sale invoices, mandi receipts, lease agreements, expense records and bank statements should support the claim.

Family gifts escape one rule, but non-relative transfers face a threshold

India does not impose a separate gift tax on every transfer. Under section 92 of the new law, some receipts without adequate consideration are instead taxed as income from other sources.

Transfers from qualifying relatives generally remain outside that provision, regardless of value. The definition includes a spouse; siblings of the recipient or spouse; siblings of either parent; lineal ascendants and descendants of the recipient or spouse; and spouses of those specified relatives.

A gift received on the individual’s own marriage also qualifies regardless of the donor’s relationship. That exclusion does not automatically cover an anniversary, engagement, a child’s marriage or another family member’s wedding.

Money received under a will, by inheritance, in contemplation of the payer’s death and in certain other prescribed situations may also fall outside taxation.

The ₹50,000 test is aggregate. If money from non-relatives without consideration does not exceed ₹50,000 during the tax year, it is ordinarily not taxed under this provision. Once the total crosses ₹50,000, the entire qualifying amount can become taxable, not only the excess.

Property transfers require different tests. Immovable property, shares, jewellery and other specified assets may be assessed using stamp-duty value, fair-market value and the consideration paid. The cash-gift rule cannot be applied mechanically to property.

Foreign-exchange compliance remains separate. A resident Indian may make a rupee gift to a non-resident Indian or Person of Indian Origin who is a close relative through permitted banking channels, generally into an NRO account and subject to the donor’s Liberalised Remittance Scheme limit.

A gift deed or written declaration, relationship evidence, the donor’s bank trail and proof of the funds’ source can help establish the transaction. An exemption does not validate an unexplained cash deposit or override banking restrictions.

Insurance maturity payouts depend on policy history and premiums

Life-insurance proceeds do not receive one universal exemption. The result can turn on the issue date, whether the policy is a Unit Linked Insurance Policy, annual or aggregate premiums, the relationship between premium and capital sum assured, the type of payment and whether the contract is a Keyman policy.

For specified non-ULIP policies issued on or after April 1, 2023, the exemption can be denied when annual premium for one policy, or aggregate premium across covered policies, exceeds ₹5 lakh. Specified ULIPs have a separate aggregate premium threshold of ₹2.5 lakh, alongside other statutory conditions.

Earlier policies may face different premium-to-sum-assured tests. If a maturity payout becomes taxable, the taxable amount is not necessarily the entire cheque. Eligible premiums not previously claimed as a deduction elsewhere may reduce the amount subject to tax.

Death claims generally receive stronger protection. Amounts paid after the insured’s death ordinarily remain exempt even where high premiums would affect a maturity claim, although Keyman policies and other excluded arrangements need separate treatment.

An overseas tax authority may classify an Indian payout differently or tax the investment return embedded in it. Where India treats the maturity proceeds as taxable, the insurer may also deduct tax before payment.

The policy file should show the issue date, premium history, capital sum assured, surrender or maturity value and the insurer’s tax treatment.

The equity threshold covers selected listed investments only

Section 198 provides concessional treatment for long-term gains from specified listed equity shares, equity-oriented mutual funds and units of business trusts, subject to applicable Securities Transaction Tax conditions.

The combined covered gain is taxed only above ₹1.25 lakh during the tax year. The excess is generally taxed at 12.5%, before any applicable surcharge and health and education cess.

A taxpayer with ₹2 lakh of qualifying gain would therefore have ₹75,000 subject to the 12.5% rate. The basic tax on that amount would be ₹9,375, with cess and any applicable surcharge added separately.

The threshold applies across the taxpayer’s holdings. It is not available separately for each broker, demat account or mutual-fund folio.

Property, unlisted shares, debt-oriented funds, gold, foreign shares and other assets follow their own provisions. They do not automatically qualify because they were held for a long period.

Withholding can create a timing issue for non-resident investors. A broker, custodian or other payer may deduct tax at the transaction stage even when the final return calculation uses the threshold.

Purchase and allotment records, corporate-action statements, demat reports, Securities Transaction Tax evidence, fair-market-value records where grandfathering applies, tax-residency and treaty documents, and proof of Indian tax withheld should be retained. The country of residence may also tax the gain, although a treaty or foreign tax credit can reduce double taxation.

Salary relief changes when employees choose the default regime

Section 202 continues the new tax regime as the default for eligible individuals. Employees may choose the old regime where permitted, but the comparison must use the actual salary package and available deductions.

Several familiar salary exemptions generally operate only under the old regime. HRA relief is the least of actual HRA received, rent paid minus 10% of the prescribed salary figure, and 50% of salary in specified cities or 40% elsewhere.

The 50% category includes Delhi, Mumbai, Kolkata, Chennai, Hyderabad, Pune, Ahmedabad and Bengaluru. The calculation uses a technical salary definition, not automatically the employee’s full cost-to-company figure.

Rent agreements, receipts, payment records and landlord details should be retained. Higher claims may require the landlord’s PAN or other prescribed information.

LTA applies to qualifying travel within India and generally covers eligible fare, not hotel charges, meals, sightseeing or local holiday expenses. The benefit is generally available for two eligible journeys in each prescribed block of four calendar years, subject to transport, family-member and carry-forward rules.

The Income-tax Rules, 2026 set children’s education allowance at ₹3,000 per month per child and hostel expenditure allowance at ₹9,000 per month per child, each limited to two children. These exemptions apply against corresponding employer allowances and are generally unavailable under the default regime.

Retirement ceilings do not replace the statutory calculation

A ₹20 lakh gratuity ceiling and a ₹25 lakh leave-encashment ceiling describe outer limits for certain non-government employees, not automatic exemptions.

Government employees receive separate treatment. For covered non-government employees, gratuity relief is ordinarily the least of the statutory formula, the amount received and the notified ₹20 lakh ceiling.

Retirement leave encashment for eligible non-government employees is subject to the statutory formula, the amount received and the notified ₹25 lakh ceiling. Commuted government pension is generally exempt; for other eligible employees, one-third may be exempt when gratuity is received and one-half when it is not. Periodic uncommuted pension ordinarily remains taxable.

Qualifying voluntary-retirement compensation may receive relief up to ₹5 lakh, subject to conditions and restrictions on overlapping claims. Retrenchment compensation is tested against its formula, the amount received and the notified ceiling.

The five-year continuous-service rule remains important for provident-fund withdrawals. Transfers between recognised funds and specified termination reasons can change the result, while interest linked to high employee contributions may be taxable even when the eventual withdrawal otherwise qualifies.

Residential status can change the result for cross-border taxpayers

An Indian passport, OCI card, work visa, student visa, green card or foreign permanent residence does not by itself establish Indian tax residence. The tax law uses presence in India and other applicable conditions.

Residential status can determine whether India taxes only Indian-source income or also requires reporting of foreign income and assets. The question can arise after a return to India, during a departure year, after foreign salary continues following relocation, or when Indian investments are sold while the holder is non-resident.

It can also affect a family gift routed through an overseas account or an Indian insurance payout collected while living abroad. The transaction date, status for the relevant tax year, income source, treaty and foreign-tax-credit rules must be reviewed together.

Before claiming relief, taxpayers should confirm whether the receipt belongs under the 1961 law or the new framework. They should classify agricultural income, land-sale proceeds, gifts, inheritance, insurance maturity, death benefits, equity gains and retirement payments separately, then preserve evidence for the relevant claim.

This article is for informational purposes only and does not constitute tax advice. Consult a qualified tax professional or CPA about your specific situation.