Difference Between Tax Exemption, Tax Rebate and Deduction
Updated On Feb 27, 2023
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In India, it is mandatory for earning individuals to file income tax returns every year. However, while doing so, there are numerous sections through which we share information regarding our expenditures, investments, and income with the Government of India. Through this division, an individual gets to know about the percentage of income that comes under the particular tax slab every fiscal year. As a result, the process may get tedious for normal taxpayers, and therefore, they consult financial advisors such as chartered accountants and tax associates.
Numerous investments made by individuals either fall under the income tax rebate or are eligible for a tax deduction. Some of the schemes and investments for which an individual can claim tax deductions include public provident funds, life insurance, the National Pension System, and many others. Regardless of expert advice, a lack of understanding of various tax-related terms, such as tax deduction, tax exemption, and tax rebate, can lead to misleading and fraudulent activities. Read on to understand the meaning and difference between tax exemption, tax rebate, and tax deduction.
What Is the Meaning of Tax Exemption?
There are different sources through which an individual can earn income, including investments, rental properties, salaries, and others. However, in India, some income sources are tax-free, which means an individual does not have to pay any tax on those earnings. When the tax liability is calculated, these exemptions are deducted from the gross salary of an employee. For instance, house rent allowance (HRA) is exempt from income tax if the necessary criteria are met. Therefore, according to Section 10 (13A) of the Income Tax Act and in accordance with Rule 2A, the HRA of a salaried employee is calculated.
In addition to the above, another provision that is eligible for tax exemption is the leave travel allowance (LTA) and any pension or gratuity received. Aside from this, the outflow of cash that happened during the purchase of accessories such as laptops and mobile phones is also exempt from the tax. And the accommodation provided by the company for intrastate and international trips is also eligible for tax exemption.
Some of the exemptions that are listed below can be claimed under "Income from the capital gains head."
- When the property is bought within one year before and two years after the sale of the existing property.
- When an individual has invested in particular long-term bonds that are authorized by the government for a minimum of three years after the sale of the property.
Therefore, you must tell your employer about all the income exemptions before e-filing your income tax return so that they deduct TDS on the basis of your income tax slab and calculate the remaining income accordingly.
If you aim to start your own business, then it is a win-win situation for you as, since 2016, tax exemptions are also provided to start-ups in India. However, the condition is that you must have incorporated your business operations by April 1, 2016, and have a yearly turnover of Rs. 25 crores.
What Is the Meaning of a Tax Deduction?
Total gross income is calculated after deducting exempt income from the total salary. Further, this gross income can be reduced by some deductions, which can happen in the form of medical expenses, transportation charges, tuition fees, and others. The main objective is to reduce taxable income and save a larger amount of income. Henceforth, you can invest in some products that can be claimed as tax deductions. The income tax slab under which your balance amount falls will calculate your final taxable income. Listed below are some income tax deductions you can claim on your investments.
- Under Section 80C of the IT Act, particular investment types such as Employee Provident Funds, Public Provident Funds, Equity-Linked Savings Schemes, National Savings Certificate, and others.
- Under Section 80D of the IT Act, deductions are allowed for paying medical insurance premiums.
- Under Section 80E for interest repayment, the deduction is allowed on the education loan of children.
- Under Section 80G of the Income Tax Act, charitable donations are eligible for deduction.
- Interest earned on your savings account is applicable for deduction under Section 80TTA.
What Is the Meaning of a Tax Rebate?
An income tax rebate is a tax benefit that an individual is eligible for if the amount of tax they are paying is less. The tax rebates help low-income individuals pay fewer taxes by reducing their taxable income. Moreover, the amount that can be deducted from the total tax due will also be included in this. An individual can claim an exemption on their earnings. However, you can only claim the tax on the tax payable amount in the case of a tax rebate. Listed below are the types of taxpayers who are eligible for the income tax rebate.
- Individuals earning less than 5 lakhs in annual income.
- Individuals can claim rebates on total tax payable or Rs. 2,500, whichever is lower.
For instance, you can claim the surplus from the Income Tax Department if the TDS is deducted by your employer or if the TDS is greater than the tax liability. You can easily calculate your tax liability at the time of filing an income tax return. According to the Income Tax Act of 1961, an individual taxpayer may only request a tax refund if they submit their income tax returns by the deadline specified by the government.
In conclusion, those who have hired third-party sources to file an ITR must understand tax exemptions, tax rebates, and tax deductions. Aside from this, any individual who has just started earning an income must know about the difference between all these income tax-related terms. You can e-file your own income tax returns. All you need to do is visit the official website of the Income Tax Department and complete the necessary steps, such as filling out the form, submitting necessary documents, making payment, etc., to electronically file an income tax return.