What Is The Difference Between Tax Exemption, Tax Deduction, and Tax Rebate?

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When you sit down to file your IT returns every year; there are so many sections and heads under which you have to declare your expenditure, investments, and income. This segregation helps in determining the exact percentage of your income that falls within the tax bracket every financial year. This is a mind-boggling task for a layman; hence most individuals consult a CA, tax expert, or financial advisor to save on taxes. Despite seeking outside help from which we might be misled by certain fraudsters due to our ignorance it is best to have clarity on it. The three important terms that every taxpayer should clearly understand are - tax deduction, tax exemption, and tax rebate. Many of our investments are eligible for a tax deduction, or they come under the income tax rebate. Let’s take the example of our bank fixed deposits, which come under tax exemption. So we need to get a thorough understanding of these three terminologies for making higher savings and paying less tax.

Tax Exemptions

There are a few sources of income that do not attract any tax or are tax exempt. While calculating your tax liability, exempted income sources are the primary components that get deducted from your gross salary. Taking the example of HRA (house rent allowance), which is tax-exempt based on certain criterion. Hence if you claim HRA allowance, you are bound to get tax exemption on this particular salary component. For salaried class, HRA is calculated as per section 10 (13A) of the IT Act in agreement with rule 2A.

Other tax-exempt provisions include LTA (Leave Travel Allowance), and any pension/gratuity/VRS received in the assessment year. Any cash given for the purchase of perquisites, such as laptops and mobile phones is also tax-exempted. Company accommodation provided in case of official travel is also considered exempt from tax.

Few exemptions, which may be claimed under the ‘Income from Capital Gains’ head, include the following:

  • The exemption is given on the purchase of a brand new house within one year prior or two years post the sale of a property.
  • The exemption is given on investment in specified long-term bonds, approved by the government, for at least a duration of 3 years post the sale of a house /property, that leads to long term capital gain.

Therefore, you must inform all “exempted” components of your income to your employer before filing income tax. Further, the employer computes tax on your remaining income and deducts TDS (tax at source) depending on your income tax slab.

There is also a provision for getting tax exemption for start-ups in India from 2016. Those companies which began operation from 1st April 2016, and have a yearly turnover of INR25 crores can avail a three-year tax holiday for seven years. The Indian government also provides INR 10,000 crore fund as venture capital for start-up companies. They can also benefit from availing best and fast patent filing facilities at 80% fewer costs. Better R&D facilities in the form of 7 new research parks have also been provided. The Indian government also organizes start-up meets at both national and international levels to encourage and widespread the market reach and an array of marketing opportunities.

Tax deductions

On deducting exempt income from your total salary, total gross income is derived. This gross income can further be reduced by means of deductions.  These deductions can occur in the form of medical expenses, transportation charges, tuition fees, and others. The basic aim is the reduction of taxable income and saving a larger amount.

You can make investments in certain products or make payments that can be claimed as deductions under the Income Tax Act. The final taxable amount will be on the balance amount falling under the relevant income slab. Few deductions, which can be claimed on your investments, are discussed below:

  • Deductions allowed under Section 80C of IT act, for specific types of investments like Employee Provident Fund, Public Provident Fund, Equity-Linked Savings Scheme, National Savings Certificate, etc.
  • Deductions permitted under Section 80D of IT act, for premium payment of medical insurance policies.
  • The deduction allowed under Section 80E for interest repayment on child’s education loan.
  • Deductions are applicable under Section 80G of IT Act for donations.
  • Deduction applicable under Section 80TTA for interest earned on your savings account.

How Do Charitable Donations Ensure More Tax Deductions?

In the modern materialistic world, where monetary gains and benefits rule everything, we hardly find people who donate for the welfare of poor and needy. If you think that donating for NGOs and charitable organizations will only offer you inner happiness and satisfaction or maybe good wishes of the downtrodden; then you’re probably wrong. The charity will reap hefty tax benefits for you. According to the Income tax act, Section 80G, allows organizations or individuals who contribute towards charity to claim tax deductions. You can make donations towards relief funds, NGOs, charitable trusts, or organizations involved in some social cause. You can donate educating underprivileged kids, meeting the needs of the elderly, or taking care of stray animals. You can donate for any of such institutions but ensure that they figure among Non-profit groups as per Section 25 of The Companies Act.

Under Section 80GGA, an individual can reap tax benefits by making contributions towards institutes that aid rural development and scientific research.

Under Section 80GGC, an individual can claim a tax deduction by donating to any political party mentioned under Section 29A of ‘Representation of the People Act', the year 1951 or is an electoral trust.

To claim complete 100 percent deduction, you can donate in few organizations including certain relief funds, defense funds, sports funds, children’s welfare fund, treatment of multiple disabilities, etc. Any contribution in the national cultural fund, technology development, and application fund also account for 100 percent deduction. You can also claim a 100% deduction for any payment to Army welfare fund, earthquake relief fund, clean Ganga fund, and fund for drug abuse control.

Certain contributions allow you to claim only 50 percent deduction.

How to Get Deduction on Housing Loan?

Both the principal as well as interest components of your housing loan are qualified for tax deduction under section 24 and 80C of the Indian IT Act. A home loan borrower can claim a tax deduction of INR1.5 lakh on repayment of principal amount and up to INR2 lakh on repayment of interest. You must keep in mind that the tax benefit as per Section 80C get reversed if the owner (taxpayer) sells the property within five years of purchase.

Tax Rebate

The income tax rebate is a tax refund to an individual who has lesser tax liability compared to the amount of tax he/she has originally paid. With the help of tax rebate, individuals who fall in can lower their tax burden

An income tax rebate helps to reduce the tax burden of individuals in the low-income category. It incorporates components that are permitted to be claimed from the total amount of tax.

Here you can spot the difference between tax deductions, tax exemptions, and tax rebates. You can claim tax deductions and tax exemptions from your income. However, tax rebate can only be claimed from the amount of tax payable. The income tax rebate applies only to the below-mentioned individuals:

  • Individuals are having an annual income below INR 5 lakhs.
  • An individual is either entitled for a rebate on total tax payable or INR 2,500, the one which is less.

If the taxes deducted at source by your employer are more than the tax liability computed while filing the income tax return, you can claim the excess amount from the IT office. This due amount which the IT department should pay back to you is called ‘tax refund.’

You are entitled to obtain income tax refund only if the tax paid by you to the government is greater than your real tax liability. Such a situation usually arises when the self-assessment tax, advance tax paid, or TDS deducted from the taxpayer’s income is higher than the taxpayer’s entire tax liability. According to the IT Act, a person should file his/her income tax return within the applicable assessment year by 31st July to claim any tax refund. Once you are done filling up the complete ITR form relevant to you, next click on the ‘validate’ tab on the sheet reading 'Taxes paid and Verification'. The system will then auto calculate the tax refund due for you. Post-filing and verification of your IT return, the income tax department will validate the authenticity of your claim and initiate the process of refund.

Final Words

As this piece of information helps you in differentiating between all three terms – tax exemption, tax rebate, and tax deduction, It’s always better to “look before you leap” when it comes to investing your hard earned money.

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