Let's begin this explanation with a simple example. Say you bought shares worth Rs 50 lakhs a year ago and have now sold it to for Rs 80 lakhs after one year and two months. Now, this is not far fetched and the way stock markets have risen you would have easily made that kind of money.
Now, if you invested this extra Rs 30 lakhs in fixed income then the next year it could raise suspension from the IT department as to where the Rs 30 lakhs came from.
While in the first instance it may not have been mandatory to declare the profit, if you had to declare the profits it would have been a better proposition. There are many such income that is tax free. These include:
1) Interest earned from PPF
2) Interest earned from Tax Free Bonds
3) Dividend from shares
4) Interest earned from SB Accounts up to a cap of Rs 10,000 per financial year
5) Dividend distributed by mutual funds
Why disclose tax free income in ITR?
As mentioned at the very outset, you need to declare the tax free income as there could be a sudden scrutiny by the authorities in the subsequent years. It's best to tell them if you have sold something at a profit and realised gains, even though they are not liable for tax.
This would also mean that you are creating lesser stress for yourself in the subsequent years declaring tax free income. Please note, that it may not be mandatory as per law, but it is best if declared. Of course, most of the tax free income would not run into several lakhs, especially dividends, but its highly possible to make windfall gains from the sale of shares etc.
Do also remember to keep checking the laws and guidelines which keep changing at frequent intervals. For example, interest income on SB accounts being restricted to Rs 10,000 was changed a few years ago.
It's best to declare tax free income as and when you have the same, especially if it is larger amounts that could come under scrutiny a few years down the line.