What’s the difference between tax exemption, tax deduction and tax rebate?
Most people find it difficult to handle tax-related compliance and take help of tax experts or chartered accountants. However, it’s best to have clarity about basic concepts such as tax exemptions, tax deductions and tax rebates. All three help bring down your tax outgo, but are different from each other.
There are certain sources of income which are exempt from tax. In other words, you don’t need to pay tax on any income arising from such source. While calculating tax liability, exempt incomes are the first components that get reduced from your salary or other income. For instance, house rent allowance (HRA) is tax-exempt depending on certain rules. So if you avail that allowance, you can claim tax exemption on the component.
Also, if you have long-term capital gains from the sale of a residential property, you can claim exemption if you reinvest the amount in a residential property or notified bonds within the stipulated time.
Besides, as per Section 10(1) of the Income Tax Act, 1961, agricultural income earned by taxpayers in India is exempt from tax.
Once you deduct exempt income from your salary or combined income from all the five sources, you get a gross total income. You can further reduce this gross total income by way of deductions. You can claim a deduction by making investments in specified products or by incurring certain expenses under different income tax sections.
For instance, from the current financial year, you can claim a standard deduction of ₹40,000 from your gross salary, if you are a salaried individual. Similarly, you can claim deduction of up to ₹1.5 lakh under Section 80C for investments made in equity-linked savings schemes (ELSS), Public Provident Fund (PPF), National Savings Certificates (NSC) and a few other instruments. Also, expenses such as children education fee, stamp duty paid on residential house registration also qualify for deduction under the same section.
There are various other sections such us 80D, 80E and 80G which offer deduction to tax payers. Limits and avenues differ under each section.
After exemptions and deduction, what remains is the total income on which you pay the tax. Once you calculate the tax, a rebate offers relief in the amount of income tax you need to pay. It is the amount of tax that an assessee is not liable to pay.
For instance, rebate under Section 87A of the Act. As per this Section, if you have total income of below ₹3.5 lakh in a financial year, you are allowed to claim rebate of up to ₹2,500 from tax.
So, let’s say, someone earns ₹5 lakh and has eligible HRA of ₹50,000, the gross total income would come to ₹4.5 lakh after the exemption. Then, assuming a deduction of ₹1.5 lakh is availed, the total income will come down to ₹3 lakh on which the person needs to pay tax. The tax liability at a slab rate of 5% will come to ₹2,500. Given the rebate of ₹2,500, the person will not be liable to pay any tax.
All these tax exemptions, deductions and rebates are provided and allowed by the income tax department to bring down the tax liability of an individual. Take full advantage of the benefits to enhance your savings.