Difference Between Income Tax Exemption, Deductions, Rebate
Every year, as the financial year nears its end, we all start worrying about tax filing. Many still need help understanding the hooks and crooks of the system and need an expert to help them with it. However, while relying on finance experts for the main processes, you can always be aware of the basics. Everyone likes to sound informed and aware of the tax basics when having a conversation about it with other people. By understanding a few basics, like income tax exemptions, rebates in income tax, and income tax deductions, you can get closer to determining your business's tax liability.
Let us understand what all these terms mean and the difference between them.
Tax Deduction
Tax deduction refers to the way of reducing your taxable income through a range of expenses and investments incurred during a financial year. Income tax deductions reduce your tax liability and act like a tax benefit that helps you prevent some tax income. However, the amount you save is based on your tax benefit claims. You can claim it on the National Pension Scheme, Equity Linked Saving Schemes, and Employee Provident Fund. It is dealt with under section 80 of the Income Tax Act.
Tax Exemption
Underlying some tax exemptions, some revenue, income, and even taxpayers are excluded from paying the tax. For example, when non-profit organizations fulfill specific requirements, they are granted tax-exempt status by the Indian Revenue System, preventing them from paying any tax. In this case, the codes differ for those who profit through market activity and those who receive income through charity. You can avail of tax exemptions for Leave Travel Allowance, Gratuity Income, House Rent Allowance, and more.
Tax Rebate
In layman's terms, a rebate in income tax refers to the refund you receive if your tax amount exceeds your tax liability. For example, if your tax liability is only INR 20,000, but your FD investor paid 30,000 to the government as a TDS, you are eligible for a refund. The detailed provisions of a rebate in income tax are enlisted in Section 237 under the IT Act. It is available for Indian residents, and one must have an aadhar card to avail of it. Section 87A deals with the rebate in income tax. You may also apply for a refund only if your income is up to ₹ 5 lakhs.
Difference Between Exemption, Deduction, and Rebate
Income Tax Exemptions vs. Rebate in Income Tax
While a rebate in income tax refers to the refund that a taxpayer gets when he pays more than what he owes to the government, tax exemption means that the income of a taxpayer from particular sources is not taxable.
A rebate in income tax falls under section 87a, while section 10 of the Income Tax Act deals with income tax exemptions.
In case of income tax exemptions, benefits are provided by not taxing Children's Education Allowance, Leave Travel Allowance, House Rent Allowance, and more. A rebate in income tax is provided as a final reduction in the tax you have already paid.
Income tax exemptions vs. income tax deductions
In their primary meaning, income tax exemptions are relaxations for specific revenue, and income tax deductions mean concessions on the total taxable income.
The objective of income tax exemptions is to boost a particular part of the tax that is wholly exempted for taxpayers, whereas the aim of income tax deductions is to promote investments and savings in the general section of the public.
Section 80 of the Income Tax Act deals with income tax deductions, and section 10 deals with income tax exemptions.
Rebate in Income Tax vs. Income Tax Deductions
You can claim income tax deductions on certain expenditures as they are the concessions provided by the government to promote specific savings and investment methods. However, a rebate in income tax is your right as this is the amount you are refunded as you paid more than you owed to the government.
The tax deduction is made from a taxpayer's gross income, which reduces the taxable income, whereas rebates are claimed from the tax you have paid.
Rebates have no objective other than returning the rightful money to the taxpayer, whereas income tax deductions have the purpose of promoting the value of investments and savings.
List of Important Tax Exemptions
- On interest received from the savings in the post office account.
- The contributions made to an employee's NPS and EPF are capped at INR 7.5 lakhs.
- Gratuity if the employee has worked for over five years in a company. This tax exemption has a specific limit.
- Investment in Samriddhi Yojana.
- Voluntary retirement and maturity amount of the NPS balance.
Conclusion
Understanding the basics of tax planning begins with knowing the difference between income tax exemptions, deductions, and rebates. These three concepts are essential for making informed financial decisions and managing your taxes efficiently. For more insights on personal finance and tax planning, keep exploring our blogs. And if you need expert assistance tailored to your needs, Lawgical India is here to help through our dedicated contact and service support.
FAQs
1. What is the difference between income tax exemption and deduction?
Income tax exemption allows specific types of income to be completely tax-free, such as House Rent Allowance (HRA) or Leave Travel Allowance (LTA).
Income tax deduction, on the other hand, reduces your total taxable income based on eligible expenses or investments like EPF, NPS, or ELSS.
2. What is a tax rebate?
A tax rebate is a refund or reduction in the final tax payable if the amount of tax paid exceeds the actual liability. Under Section 87A, taxpayers with an income up to ₹5 lakhs may claim a rebate of up to ₹12,500.
3. Which section of the Income Tax Act covers deductions?
Section 80 (especially 80C, 80D, 80G, etc.) of the Income Tax Act covers various deductions related to investments, medical insurance, donations, and more.
4. What are common examples of tax exemptions?
Some common exemptions include:
House Rent Allowance (HRA)
Leave Travel Allowance (LTA)
Gratuity (under certain limits)
Income from agriculture
Interest on savings in post office accounts
5. How is a tax rebate different from a deduction?
A deduction is subtracted from your gross total income to arrive at your taxable income.
A rebate is subtracted from your final tax payable, applicable only under certain conditions like income being below ₹5 lakhs.
6. Who is eligible for a tax rebate under Section 87A?
Only resident individuals with total income up to ₹5,00,000 are eligible for a rebate up to ₹12,500 under Section 87A.
7. Can a person claim both exemptions and deductions together?
Yes, a taxpayer can claim both exemptions and deductions in the same financial year if eligible, thereby significantly lowering their tax liability.
8. Is tax rebate applicable for companies or firms?
No, the rebate under Section 87A is available only to individual resident taxpayers, not to companies, firms, or HUFs.
9. What documents are required to claim deductions and exemptions?
You may need:
Rent receipts (for HRA)
Investment proofs (for ELSS, NPS, PPF)
Salary slips (for LTA)
Medical insurance premiums
Donation receipts (for Section 80G)
10. How can Lawgical India help with tax planning?
Lawgical India provides expert financial consultation and helps individuals and businesses maximize savings through correct application of exemptions, deductions, and rebates, ensuring a smooth and stress-free tax filing process.
