Tax planning is an important part of a financial plan. Whether you are a salaried individual, a professional or a businessman, you can save taxes to certain extent through proper tax planning.
The Indian Income Tax act allows for certain Tax Deductions and Tax Exemptions which can be claimed to save tax. You can subtract tax deductions from your Gross Income and your taxable income gets reduced to that extent.
We often notice that terms like Income Tax Exemption, Tax Deduction and Income Tax Rebate are used interchangeably. Are they all same? What are the key differences between Income Tax Exemption Vs Tax Deduction Vs Tax Rebate?
Income Tax Exemption Vs Tax Deduction Vs Tax Rebate
All these three help bring down your tax outgo, but are different from each other. Let’s discuss…
What are Income Tax Exemptions?
Exemption means ‘exclusion’. Income Tax Exemption simply means the the income which is not subject to tax. Tax exemptions can also be those items which are allowed to be claimed from a specific source (Head) of income and not from your total income.
Different Sources of Income can be – Salary income, Business Income, Income from your House Property, Capital Gains etc.,
So, a tax exemption can be claimed from a particular income category only. Examples are;
- House Rent Allowance – You can claim tax exemption of HRA from your Salary income.
- Gratuity limit of up to Rs 20 lakh.
- Agricultural income is a tax-exempt income.
- Dividend income of up to Rs 10 lakh is a tax-exempt income.
- Section 54 of the IT Act : Long Term Capital Gain exemption on sale of Property. (Related article : ‘How to save Capital Gain Taxes on sale of Property?‘)
What are Income Tax Deductions?
Deduction means ‘subtraction’ i.e. an amount that is eligible to reduce taxable income. Tax deductions are the ones which lowers person’s tax liability by lowering his/her taxable income.
Income Tax Deductions are allowed to be claimed under each Head and also from Gross Total Income. The taxpayer can claim deductions in case he/she incurs specified expenditure or make specified investments under various sections of the IT Act. Examples are ;
- Investments in ELSS Tax saving mutual fund units, PPF, Life insurance plans, EPF etc., u/s 80c .
- Health Insurance premium u/s 80D.
- Standard Deduction of up to Rs 40,000 (for FY 218-19) from your Salary Income.
- Tax Benefit/relief on Home Loan for payment of Interest is allowed as a deduction under Section 24of the IncomeTaxAct.
What is Income Tax Rebate?
Income Tax Rebate is allowed to be claimed from the total tax payable. The exemptions and deductions are first allowed to be claimed from your Income and Rebate is then deducted from the tax payable. Examples are;
- Individuals having total taxable income of up to Rs 5 lakh are eligible fortax rebate under section 87Aof up to Rs 12,500, thereby making zero tax payable in the Old and New Tax regimes.
- Individuals having taxable income of up to Rs 7 lakh are eligible fortax rebate under section 87Aof up to Rs 25,000, thereby making zero tax payable in theNew Tax regimeonly.
- (It is generally provided to reduce the tax burden of the individuals who fall under lower income bracket.)
- Similarly, there is rebate allowed under Section 89 on receipts of arrears of SALARY.
Most people confuse income tax rebatewith income taxrelief. The difference between the two is : a tax reliefis deduction from the total income to derive your chargeable income, whereas taxrebateis deducted from the actual taxed amount.
While calculating tax liability, exempt incomes are the first components that get reduced from your salary or other income. You can claim tax deductions by making investments in specified products or by incurring certain expenses under different income tax sections.
What is TDS (Tax Deducted at Source)?
TDS or tax deducted at source is a process of collecting Income Tax at source by the GOI (Government of India). It is a deduction of tax from the original source of income. It is essentially an indirect method of collecting tax which combines the concepts of “pay as you earn” and “collect as it is being earned.” Examples are;
- TDS @ 10% on Interest income from Bank Deposits.
- TDS on EPF withdrawals.
Continue reading :
- Latest TDS Rates AY 2024-25 | TDS Rate Table for FY 2023-24
- Treatment of Standard Deduction Rs 50000 under the New Tax Regime (FY 2020-21 / AY 2021-22)
(Post first published on : 12-March-2019) (Post last updated on : 23-Sep-2023)
