If you think tax exemption, tax deduction and tax rebate are more or less the same, you’ll be surprised to know they mean completely different things. Find out more right here!
While filing your income tax returns, you might have come across various sections under which you need to declare your income, investments and expenditure. This determines how much of your income that will fall under the tax bracket every year.
Some of these investments or expenditures might see you qualify for a tax exemption or a tax deduction. For example, a Fixed Deposit can be used for tax exemption. But, to understand what kind of investments or incomes qualify for a tax deduction or a tax rebate, you need to know what each of these terms means.
Additional Reading: 6 Infuriating Tax Queries Answered
Tax exemptions:
Tax exemption refers to income, expenditure or investment on which no tax is levied, thus reducing the overall taxable income. One can claim income tax exemptions from a specific source of income and not from the gross total income.
For instance, tax exemptions allowed under the head “salary” are not to be claimed under any other head. Some examples of tax-exempt items are:
- House Rent Allowance (HRA)
- Leave Travel Allowance (LTA)
- Any Gratuity/VRS/Pension received in the year of assessment.
- Money received for perquisites, like mobile phones and laptops.
- Company accommodation
Some exemptions which can be claimed under the head Income from Capital Gains are as follows:
- Exemption on the purchase of a new house within a period of one year before or two years after the sale of a house property.
- Exemption on investment in long-term specified bonds, as notified by the government, for a minimum period of three years after the sale of a house property, which results in a long-term capital gain.
Please note: All “exempt” items of income claimed by an employee must be informed to his or her employer before the tax filing season. The employer then computes tax on the balance income and deducts tax at source (TDS) based on the specific income slab of each employee.
Additional reading: Document Checklist To Help You File Your Taxes On Your Own
Tax deductions:
This is a reduction from a taxpayer’s gross income as a result of expenses like transportation charges, medical expenses, tuition fees etc. The aim is to reduce the amount of one’s income on which tax will be levied.
Deductions are allowed to be claimed in case the taxpayer has incurred some specific expenditure or made some specific investments. The final tax payable would then be calculated as per a person’s relevant slab on their balance “taxable income”. Some of these are deductions for investments under the following sections of the Income Tax Act:
- Deduction under Section 80C for specific types of investments like Provident Fund, Public Provident Fund, National Savings Certificate, Equity-Linked Savings Scheme etc.
- Deduction under Section 80D for payment of medical insurance premium.
- Deduction under Section 80E for repayment of interest on Education Loan.
- Deduction under Section 80G for donations.
- Deduction under Section 80TTA for interest on Savings Account.
Additional reading: How To Score Maximum Tax Deductions On Charitable Donations
Tax rebates:
A tax rebate is a refund on taxes when an individual has lower tax liability than the tax he or she has paid. A tax rebate helps to reduce the tax burden on individuals in the low-income bracket. It includes items that are allowed to be claimed from the total tax payable.
Herein lies the difference between “tax exemptions”, “tax deductions” and “tax rebates”. While you can claim tax exemptions and tax deductions from the income, you can claim a tax rebate, on the other hand, from the tax payable. Income tax rebates apply to the following individuals:
- Those who have an annual income under Rs. 5 lakhs.
- The individual is eligible for a rebate of their entire tax payable or Rs. 2,500, whichever is less.
The amount that you can claim from the IT Department when taxes paid at source by your employer amounts to more than the computed tax liability at the time of filing is known as a tax refund.
We hope this article has helped clear the air on these closely related terms that play a significant role in determining the quantum of tax you end up paying at the end of every year.
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