Difference Between Tax Exemption, Tax Deduction And Tax Rebate

Tax planning is a crucial part of a successful financial journey. With the changing tax laws, it is important to stay tax compliant to avoid penalties. Income tax may seem be a complicated concept to understand for many people. Hence, many people rely on experts when it comes to tax planning and income tax filing. However, it is important to be aware of some basic income tax terms and their importance in managing your tax outgo. While understanding your tax liability, you might have often heard about income tax exemption, tax deductions, and rebates. Let’s understand these basic concepts of income tax.

Difference Between Tax Exemption and Tax Deduction

1. Tax Exemption

Under the provisions of the Income Tax Act, 1961 (the Act), there are certain incomes that form a part of your total income but are exempted from income tax. That means you do not need to pay income tax on such specified income. These exempt incomes are first deducted from your total income while calculating the taxable income. For example, agricultural income, Income from life insurance policy satisfying Section 10(10D) conditions and house rent allowance for salaried employees (as per the applicable tax rules), etc.

2. Tax Deduction

Once you deduct the exempt income from the total income, you get the gross total income. You can then apply tax deductions available under the provisions of Income Tax Act, 1961, from the gross total income. Certain investments and certain expenses that you incur qualify for tax deductions under various sections of the Income Tax Act, 1961. For example, if you are a salaried individual, you can claim a standard deduction of INR 50,000 from your gross salary. Deduction of up to INR 1,50,000 can be claimed under Section 80C of the Income Tax Act, 1961 for investments like equity-linked savings schemes, life insurance, unit-linked investment plans, tax-saving fixed deposits, among others.

Tax Rebate and TDS

Unlike income tax exemption and tax deduction, a tax rebate is not deducted from the income. Tax rebate is claimed from the total amount of tax payable. For example, the resident individual with a taxable income of up to INR 3,50,000, gets an INR 5,000 tax rebate under Section 87A of the Income Tax Act,1961.

TDS is a tax deducted at the source. When the payment exceeds the mentioned threshold limit, a company or the person liable to make payment is required to deduct TDS on the payment made and remit the same into the account of the Central Government as per the Act at the rate prescribed by the Income Tax Department. TDS is deducted from the commission payment, salary, professional fees, and interest income from deposits, etc.

Tax Benefits under Sections 80C, 80D, 87A, 10 and 24¹

Tax benefit refers to a tax credit or tax deductions that are given under various sections of the Income Tax Act, 1961 that reduces your tax outgo. Let’s take a look at the tax deductions, exemptions, and tax rebates given under Sections 80C, 80D, 87A, 10, and 24 of the Income Tax Act, of 1961.

Section 80C

Section 80C of the Act is one of the popular sections that provides for tax deduction of up to INR 1,50,000 for the financial year. Both individuals and HUFs can avail of the tax benefit under this section. Under section 80C, deduction list includes investments like Public Provident Fund, life insurance premium, Home loan principal amount repayment, Employee Provident Fund, Equity Linked Savings Scheme, Senior Citizen Savings Scheme, Unit Linked Investment Plan, Infrastructure bonds, and tax saving fixed deposits, etc.

Section 80D

Section 80D of the Act allows you to claim a deduction for the health insurance premium paid (for self, spouse, children, and parents) and also for the preventive healthcare expenses incurred. Here are the details of the tax deduction allowed for health insurance:

Section 10

Section 10 of the Act provides many exemptions. For example, Section 10 (1) provides an exemption for agricultural income. Section 10 (5) provides exemption on leave travel concession, and Section 10 (10D) exempts tax on life insurance maturity proceeds.

Section 87A

Section 87A provides a maximum tax rebate of Rs. 12,500/- for taxable income upto Rs. 5 lakhs

Section 24

Section 24 takes into consideration the interest part of the home loan for a deduction while calculating income from house property. If house property is self-occupied, one can claim set-off of interest paid on home loan of maximum upto Rs. 2 lacs for given financial year.

Understanding the basic terminologies of income tax and knowing these basic concepts like income tax exemption, tax deduction, and tax rebate help you plan your taxes in a better way and helps you reduce your tax outgo.

Ref

¹Tax Laws & Rules > Acts > Income-tax Act, 1961 (incometaxindia.gov.in)

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