Tax Deduction vs. Exemption vs. Tax Rebate: What's the Difference?

Tax Deduction vs. Exemption vs. Tax Rebate: What's the Difference?

Are you worried about the intricacies of taxation in India? How much tax deduction can you get in the current financial year? Do you need clarification on the difference between a tax rebate and a tax exemption? Are pension, gratuity, LTA, HRA, and tax exempted? Learn about tax deduction vs. exemption vs. tax rebate in detail to calculate your yearly return and deduction. Explore the comparative analysis in the next few sections.

Why Learn the Differences between Tax Rebates and Tax Exemption?

Most of us need a clearer understanding of the process involved in income tax filing. People hire tax experts or chartered accountants for income tax filings.

When filing taxes, you'll come across various sections where you must declare your net income, investments, and expenditures. Once you fill them up, your tax liability for the financial year becomes clear.

If you know the differences between tax exemptions, rebates, and deductions, you can lower your tax outgo to a large extent. So, let's compare tax deductions with tax exemption and tax rebates.

Tax Deduction vs. Exemption vs. Tax Rebate: A Detailed Comparison

Tax Exemption

At the time of tax filing, you can reduce your overall taxable income by declaring certain specified investments, income, and expenditures. This helps you lower your tax liability to a large extent.

The most common items on which you can get tax exemption are HRA (House Rent Allowance) and LTA (Leave Travel Allowance). You are entitled to exemption if you receive pension, VRS, or gratuity in an assessment year.

Have you received money for perquisites (also called perks) such as laptops and phones? If yes, you can get tax exemption on it. Any capital gains you make under 54, 54CE, and 54F sections are tax exempted. Both agricultural income and company accommodation come under tax exemption.

You can claim tax exemptions only from a specific income source. It can’t be done from the total income.

Example: If you are claiming tax exemption under the salary head, you can’t claim exemption from any other head.

Tax Deduction

You can claim tax deductions only if you have the following:

• Incurred a specified expenditure
• Made any investment that is tax deductible

When a tax reduction is made, it is made from gross income. One of the primary objectives of tax deduction is reducing taxable income. You may check this video to learn Dr. Arvind Panagariya’s views on ending tax exemptions and thereby simplifying the personal income tax system in Budget 2023

Here is a list of tax deductions that you can claim as a taxpayer under different sections of the Income Tax Act for making certain types of investments:

Section 80C: You can claim deductions for investing in:

• Equity Linked Savings Scheme (ELSS) mutual fund
• National Savings Certificate (NSC)
• Public Provident Fund (PPF)
• Provident Fund (PF), and many more

Section 80D: You can claim deductions for paying:

• Medical insurance premium

Section 80E: You can claim deductions for repaying:

• Education Loan interest

Section 80G: You can claim deductions for making:

• Donations

Section 80TTA: You can claim deductions for:

• Interest on your Savings Account.

The tax deductions vary under the different sections of the IT Act. You can utilise tax deductions to reduce your total taxable income. Explore your investment options in 2023.

Tax Rebate

This is a refund that the tax department issues when your tax liability is lower than the paid taxes. Tax rebate is the refund you receive for the taxes (mainly TDS or Tax Deducted at Source) you paid in the previous year.

As per current provisions (before Budget 2023), you can get a tax rebate on your total income under Section 87A of the IT Act if your total income (after tax deduction) is below ₹ 5 lakhs. The maximum limit of the tax rebate you can get is ₹ 12,500.

Takeaway

Both tax deductions and exemptions help you lower your taxable income. However, the tax rebate helps you get back the excess money you have paid as TDS or deducted at the source. You can take advantage of these legit ways of paying fewer taxes and saving more money.

You can check this infographic for more information on the differences between tax exemption, tax deduction, and tax rebate.