Are you confused between income tax deduction, exemption and rebate? These terms are used to describe different benefits that a tax payer or assessee gets under Income Tax Act 1961. Let use try to understand the difference between deduction, exemption and rebate.
Assessee has to pay tax based on the income that he or she generates. Based on it’s type that he or she has generated, department has provided certain amount out of it as exemption.
If a portion of your income has been exempted then the balance amount will be taken into account for tax calculation.
Exemption means, your income is actually taxable but as per the present scenario, government has given a potion of it as exemption i.e. not subject to tax. If such exemption benefit has been withdrawn by government then the entire income will be taxable in India.
Exemption can be provided as a special benefit or because of growth prospects in one area or some other reason.
For example; an individual getting his salary from employer is eligible for house rent allowance exemption.
This means, the house rent allowance that he is getting is taxable but a potion of it will be deducted because of the exemption available to him or her. Like house rent allowance exemption, an individual can also claim other exemptions like; LTA exemption, exemption for Special allowances, House property exemption from capital gain etc.
- What is Basic Exemption in Income Tax Act 1961
- HRA Exemption On You Salary
- HRA Exemption can be claimed on rent paid to wife
Like in the case of exemption, deduction also reduces your taxable income. But it’s not specific to any income in particular. It is based on certain criteria that the person has to fulfill to get it. The best example of Income Tax deduction is section 80C where you claim deduction for your investment in LIC, PPF, FD and Mutual Fund etc. To get this deduction you have to specifically fulfill the criteria that are in section 80C irrespective of your type of income.
Another major difference between exemption and deduction is, while exemptions are deducted from their respective source as mentioned in Income Tax Act 1961, deductions are deducted from GTI i.e. after taking all taxable incomes together.
However if any deductions are specifically provided for a set of head then it has to be provided after taking income under that head. For example section 24 deductions are specifically available to house property not from GTI.
- Section 80C – Tax Deduction for investment in LIC, PPF, FD, Mutual Fund etc
- Section 80DD – Tax Deduction for Medical Treatment of Handicapped Dependent
- Section 80DDB – Tax Deduction for Specified Diseases
- Section 80E – Tax Deduction for Education Loan
- Section 80G – Tax Deduction for your donations
- Section 80TTA – Tax Deduction for interest on saving account
After finding out total tax liability, you can claim rebate out of it.
Rebate is a specific amount as specified in the act which will be provided by deducting it out of your net tax liability.
For this assessment year 2014-2015 (financial year 2013-2014) IT act specified Rs. 2000 as rebate if your income is less than Rs.5, 00,000. To claim this rebate you have to first calculate your net tax liability and then deduct Rs.2, 000 out of it to find out your tax liability that needs to be paid to government.