Income Tax: While filing income tax returns, you must have heard about tax exemptions and deductions. But do you know their meaning and the difference between the two?
Tax exemptions vs tax deductions: While filing income tax returns or investing in tax-saving instruments, terms like tax exemption and tax deduction are freSecquently mentioned. Generally, tax exemption is called tax which is absolved and deduction is called tax which is deducted. Most taxpayers know that both of these are related to tax relief. But do you know the basic difference between these two? We will discuss this here.
Tax deduction means investments or expenses that you can deduct from your total income. By claiming the benefit of deduction, your taxable income is reduced. The benefit of tax deduction is available under many different sections or sections of the Income Tax Act, examples and a list of which you can see here.
Deduction on investments and expenses: Section 80C
This section of the Income Tax Act (Section 80c) is the most important deduction, which is available on various types of investments like Employees Provident Fund (EPF), Public Provident Fund (PPF), National Savings Certificate (NSC), Equity Linked Savings Scheme (ELSS) and life insurance premium. Under this section, tax deductions can be claimed on investments up to Rs 1.5 lakh in a financial year in the old tax regime.
Deduction on home loan interest: Section 24(b)
If you have taken a home loan to buy a house, then under Section 24(b), you can claim an income tax deduction of up to Rs 2 lakh in a year on the interest paid on this loan.
Medical Insurance Premium: Section 80D
The premium amount you pay for health insurance or medical insurance for yourself and your family members is also eligible for deduction under Section 80D. The amount of deduction that can be claimed under this section in a financial year depends on the age and coverage of the people who have been insured.
Sections providing deduction benefits
There are several sub-sections of Section 80, under which the list of deductions (Section 80 Deduction List) is as follows:
Tax benefits are available on many types of investments under Section 80C.
Tax benefits are available on insurance premiums under section 80CCC.
Tax benefits are available on pension contributions under section 80CCD.
Tax benefits are available on interest on savings accounts under section 80TTA.
Under Section 80GG, people who do not get HRA from their company get tax benefits on house rent.
Tax benefits are available on interest on education loans under section 80E.
Under Section 80EE, first-time homebuyers get tax benefits on home loan interest (apart from Section 24b), subject to certain conditions.
Tax benefits are available on medical insurance under section 80D.
Tax exemption means such income which is not considered as part of your taxable income in terms of income tax. That is, this amount remains outside your taxable income. That is, in deduction, the amount claimed based on any investment or expenditure is reduced from your taxable income, whereas the income under exemption is not added to your taxable income.
Examples of Tax Exemptions
1. House Rent Allowance (HRA): If your salary package includes a house rent allowance (HRA) from the employer, then you can get an exemption on it under section 10(13A). This tax exemption will be available on the amount which is less than the HRA you get, the actual amount of rent and 10% of your salary.
2. Leave Travel Allowance (LTA): If you are granted Leave Travel Allowance (LTA) by your employer for travelling with your family during holidays, it is eligible for tax exemption under section 10(5).
3. Long-Term Capital Gain (LTCG): Long-term capital gains up to Rs 1 lakh in a financial year on investments made in equity are eligible for tax exemption under section 112A. Apart from equity, capital gains from property and some other asset classes are also eligible for tax exemption under various sections including sections 54, 54F, and 54EC, if certain conditions are met.
4. Gifts from relatives, income from farming: In India, there is no income tax on agricultural income. If your main source of income is farming, then you will not have to pay any tax on that income. Apart from this, gifts received during marriage and gifts received from family members included in the exemption list are also not included in taxable income.
Both tax exemption and deduction reduce your tax liability. Therefore, it is important to understand the difference between the two. Broadly speaking, tax exemption is that part of your income which does not come under the purview of tax. On the other hand, tax deductions are such expenses or investments which you can claim for tax exemption by deducting them from your total taxable income. A good understanding of this can be very useful for you while filing income tax returns.