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 tax deduction, exemption and rebate.
Tax Exemption
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, government 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 If such exemption benefit has been withdrawn by the government, then the entire income will be taxable in India.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.
Also Read: What is Basic Exemption in Income Tax Act 1961
Tax Deduction
Like in the case of exemption, tax 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 of the Income tax act, 1961, where you claim tax deduction for your investment in life insurance, Public provident fund, fixed deposits and Mutual Fund etc. To get this tax 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 the Gross total income i.e. the amount of income arrived after taking all taxable incomes together.
However if any tax 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.
Also read: Section 80C – Tax Deduction for investment in LIC, PPF, FD, Mutual Fund etc
Tax Rebate
After finding out total tax liability, you can claim tax rebate under section 87A out of it.
Tax Rebate is a specific amount as specified in the Income Tax Act, 1961, which will be provided by deducting it out of your net tax liability.
For this assessment year 2023-2024 (financial year 2022-2023) tax rebate as specified in the Income tax act, 1961, is Rs. 12,500 if your taxable 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 12,500 or the amount of tax, whichever is lower out of it to find out your tax liability that needs to be paid to the government.
