Should you disclose Tax Free Income / Exempted Income in your ITR?

Should you disclose tax free income exempt income in ITRShould you disclose Tax Free Income / Exempted Income in your ITR?

You might be getting tax free income / Exempted Income from various investments in the financial year. However, many of us would not disclose / indicate them in income tax return. What are tax free investments and what are the tax implications for not disclosing tax free income / exempted income from such investments in your ITR? Are there any benefits of indicating exempted income in your ITR?

What are tax free investments in India?

Tax free investments are those where the returns or income from such investment options are not taxable. There are several tax free investments like tax free bonds, long term capital gains from stocks and equity mutual funds, etc., Income received from such investments are tax free. Hence we generally does not worry that this should be disclosed in income tax returns (ITR).

Also Read: What are the Best Tax Free Investment Options in Inda?

What are various tax free incomes / exempted incomes in India?

Some of the major tax free incomes are indicated below.

  • Income received from tax free bonds.
  • Long term capital gains from selling stocks and equity mutual funds are tax free (after 1 year).
  • Dividends received from stocks.
  • Dividends from MIP mutual funds.
  • Interest from Public Provident Fund, EPF, VPF is tax free at maturity
  • Maturity amount of insurance plans is tax free.
  • Gift tax upto specific amount.
  • Etc…

What are various other incomes where you might not have to pay tax?

  • Capital gains received through the sale of property and during computation of indexation, you might not get any capital gains and need not pay tax.
  • Capital gains received from debt mutual funds and while the computation of indexation, you might not get any gains and need not pay income tax.
  • …. So on.

Should you disclose tax free income or exempted income in your income tax return (ITR)?

Yes, you should disclose them in tax free income or exempted income in respective column (s) in your income tax return (ITR). There is no tax liability / penalty for not disclosing tax free income in your ITR. However there are several benefits of disclosing them in ITR.

  • You should be disclosing them in your ITR and this would indicate a pure white money from a legal point of view.
  • Large amount of deposits in your bank account would create a suspicious transaction in the eyes of Income Tax (IT) Department. They would call you for detailed scrutiny of all your accounts and transactions if they find any such large deposits.
  • Disclosing tax free income would help you be tension free in the future as you are disclosing them up front from where you are getting such large amounts of income. You can use such large amounts later on without any worry.

Example No.1 – Sale of stocks which you brought several years back

You are selling some stocks which you bought several years back and deposited/ transferred Rs 1 Crore in your bank account. Since these are long term capital gains, they are tax free. Later on, assume that you are investing in mutual funds or buying a residential property. From your eyes, these are pure white money. However, you should indicate such large sums received through the sale of stocks in ITR which is tax free. This way, you are ensuring that you are recording transactions legally and in the future, you may not have issued from income tax department.

You may also like: Can you file income tax return (ITR) in India if you have missed the deadline?

Example No.2 – Sale of debt mutual funds which you brought 3+ years back

You brought debt mutual funds more than 3 years back. You have sold them now. You have computed indexation benefit and found that you need not pay tax now. You can disclose such tax free income (selling proceeds minus investments made) in your ITR. Note that I am talking about income and not deposit here. If you have invested Rs 1 Lakh and get Rs 1.2 Lakhs, Rs 20,000 should be diclosed in tax free income (if exempted from tax) and not Rs 1.2 Lakhs. 

Conclusion: Disclosing tax free income / exempted income in ITR would help you to be tension free. Any large deposits in your account should be properly recorded and indicated in your ITR to avoid any issues in the  future.

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Should you disclose tax free income in your income tax return (ITR)


  • Krishan

    Hi Suresh,

    I have bough say X amount of money as a personal loan from bank and investing those money in share market and gaining, So i guess those gain i have to declare as my income and will be taxed for that, but what about the interest i am paying to the bank, how can i address this situation. Please suggest

  • Deepak Singh

    Sir, I’m a student and earn some money from my Flipkart affiliate ads on my blog. I see that every time a payment is made to me 10% TDS is charged. I have never filed any Income tax or any form . Can you please answer some of my queries :
    1. What type of taxes does one need to pay for
    a) Selling digital goods eg : ebooks
    b) Affiliate ads – like Flipkart
    c) Blog Advertisement – Like Google adsense
    2. Can I claim back the 10% money that is deducted from my flipkart commissions as TDS, if yes, then what is the complete procedure ( I’m a novice and have not filled any Income tax forms before )

  • Chethan

    Hi Suresh,

    I had a doubt. Can you please clarify it?

    I understand that Dividends received from stocks are already taxed at source something like 10%. If I am in 20% tax bracket, when i declare this dividend should i pay another 10% tax on it or i can just declare and not pay additional tax.

    Thanks in advance

  • Krishna

    Hi Suresh,

    I went to USA for an assignment and back to India. I need some clarification regarding the salary savings transferred from USA to India.

    During my stay over there I did savings and transferred money to my Indian Bank account . So this account shows the source of money as White money.

    I did not showed this money in ITR since it is Tax free and the money transferred to India ( After paying TAX in USA ) is Tax free ?

    If it is Tax free , as per your article it is better to show in ITR for future purposes? If I did not show in the past can i show now with bank account proofs and amend in past returns without penalty?

    Can you Please give some more clarity on this? This helps to many of software engineers to take better decision.


  • bhupendar

    i have a question that i am working in private company and also working ,as part time woolen broker and property cosultant as well. i am working in the feild for about 18 years and i have opened many saving accounts in diffrent banks and branches,because many payments and transcations from diffrent parts of country, and also i have some investments done many insurance policy,some mutual funds,fixed deposits and post office recuring schemes etc. but i am my itr filling of 2 lacs yearly

    now i have stop my part time woolen and property deal due to week or recession in business .but i have around 40 lac amount in various accounts. but have not valid evidence of amounts come.

    please suggest where to invest what to do or show in itr returs without any loss or minimum tax.

    • Difficult to comment. Since you have not paid IT for earlier years income, pls approach tax consultant to convert this to white money by paying income tax atleast in this year. 

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