The Key Difference Between Taxable and Non-Taxable Income

Taxable Income vs Non-Taxable Income
Feature	Taxable Income	Non-Taxable Income
Definition	Income that is subject to income tax under the law.	Income that is exempt from tax as per provisions of the law.
Tax Liability	Included in total income and taxed as per applicable slab rates.	Excluded from total income; no tax is payable on it.
Reporting Requirement	Must be declared in the income tax return.	Should be reported for disclosure, but not taxed.
Examples	Salaries, business profits, rental income, capital gains, interest on FDs.	Agricultural income, gifts below limit, scholarships, PPF interest, gratuity (within limits).
Tax Deductions	May be eligible for deductions under sections like 80C, 80D, etc.	No deductions required as it is already tax-exempt.
Nature	Contributes to the taxable base of the taxpayer.	Legally excluded from the taxable base.
Assessment	Assessed by the Income Tax Department for tax purposes.	Not assessed for taxation but may be verified if misreported.
Tax Calculation Role	Used to compute gross total income and net taxable income.	Ignored in computation of taxable income.
Legal Basis	Defined under various heads in the Income Tax Act (Salary, House Property, etc.).	Exemptions granted under specific sections like 10(1), 10(10D), etc.
Examples of Sections	Section 15 to 59 (income from salary, business, house property, etc.).	Section 10(1), 10(10), 10(16), 10(15), etc.
Impact on Tax Bracket	Can push an individual into a higher tax slab.	No impact on tax slab or tax payable.
Exemption Limit	Fully or partially taxed based on total income.	Fully exempt up to prescribed limits or under specific conditions.
Income Proof	Requires proper documentation for audits or queries.	Still may require proof for exemption validation.
Tax Planning	Essential for optimizing tax outgo via deductions and exemptions.	Helpful in reducing overall tax burden legally.
Penalty for Misreporting	Underreporting or misreporting can lead to penalties.	Wrongly claiming non-taxable status can attract scrutiny and fines.
Interest/Dividend Income	Interest on fixed deposits, company dividends (above threshold) are taxable.	Interest from PPF or EPF (within limits), certain tax-free bonds are non-taxable.
Capital Receipts	Capital gains from asset sales are taxable.	Capital receipts like gifts from relatives, inheritance are non-taxable.
Affects Refunds	Higher taxable income may reduce chances of refunds.	Non-taxable income increases refund eligibility by reducing total tax payable.
Applicability	Applies to all individuals, HUFs, firms, companies, etc.	Applicable as per specific exemption criteria or income type.