7 Tax-Free Income Sources in India: Save Big Legally in 2026
Navigating the Indian tax landscape in 2026 requires a strategic understanding of which income streams the government leaves untouched. Whether you are under the Old Tax Regime or the New Tax Regime, these seven sources are legally exempt from income tax under the Income Tax Act, 1961.
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1. Agricultural Income
Income generated from agricultural land located in India remains 100% tax-exempt. This is one of the most significant exemptions in the Indian tax code.
What’s covered: Rent from agricultural land, income from growing/selling crops (fruits, vegetables, grains), and profits from the sale of rural agricultural land.
The Catch: This does not apply to income from agricultural land located outside India, which is fully taxable.
2. Share of Profit from Partnership/LLP [Section 10(2A)]
If you are a partner in a firm or a Limited Liability Partnership (LLP), the share of profit you receive is tax-free in your hands.
Why? The firm itself pays tax on its total income at a flat rate of 30% (plus surcharge/cess). Taxing it again in the hands of the partner would result in double taxation.
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Important: Any salary or interest received by the partner is still taxable.
3. Public Provident Fund (PPF) – The EEE King
The PPF continues to be the “gold standard” of tax-free savings with its Exempt-Exempt-Exempt (EEE) status.
Current Status (Jan 2026): Interest rate remains at 7.1% per annum.
Benefits: The investment (up to ₹1.5 lakh), the annual interest earned, and the final maturity amount are all completely tax-free.
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4. Sukanya Samriddhi Yojana (SSY)
Designed for the empowerment of the girl child, this scheme offers one of the highest government-backed interest rates.
Current Rate (Q4 FY25-26): 8.2% per annum.
Exemption: Like PPF, SSY follows the EEE model. The interest accrued and the maturity proceeds after 21 years (or marriage after age 18) are tax-exempt.
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5. Educational Scholarships
Any scholarship granted to meet the cost of education is entirely exempt from tax, regardless of the amount.
Inclusions: Tuition fees, hostel charges, and books. This applies to both government and private scholarships, as well as those received for studying abroad.
6. Life Insurance Maturity Proceeds
The sum received upon the maturity of a life insurance policy is tax-free, provided specific premium-to-sum-assured ratios are met.
The 2026 Rule: For non-ULIP policies issued after April 1, 2023, the exemption applies only if the total annual premium is ₹5 lakh or less.
Death Benefits: Any amount received by a nominee upon the death of the policyholder is always 100% tax-free, regardless of the premium amount.
7. Gratuity for Employees
Gratuity is a statutory benefit paid to employees who have completed at least five years of continuous service.
Government Employees: The entire gratuity amount is 100% tax-free.
Private Sector: The tax-free limit is currently capped at ₹20 lakh. Any amount received above this threshold is taxable.
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