Income Tax Deductions vs Exemptions vs Rebate
Income tax of India requires income to be classified into five different heads viz: Income from Salary, Income from House Property, Income from Business & Profession, Income from Capital Gain and Income from Other Sources. These incomes are clubbed together to form Gross Total Income but only after allowing all the exemptions under section 10. Deductions under section 80C to 80U are then reduced from Gross Total Income (GTI) along with other relief (section 89) to form Net Taxable Income. Finally, the tax rate according to the slab is applied on Net Taxable Income and tax payable is calculated but this is again reduced by the rebate claimed.
Tax exemptions are generally available to all & unconditional. But Tax deductions are allowed only to certain specified persons & are conditional.
Before diving into the meaning and difference between exemption, deduction, and rebate, let us first see where each of the words stood in the tax calculation:
Income Tax Exemptions
The literal meaning of Exemption is Exclusion i.e. not to be counted. In the case of Income Tax, Exemption means income on which no tax is payable at all thus you are free from the obligation of paying taxes on these incomes.
Exemptions under Income tax are given with a motto to boost up the thrust areas of the Government for example Agriculture etc. Also, exemptions are given for the sources of income that are majorly earned by the weaker segment of the society.
Remember Exemptions are always from the specific income head and not from the gross total income. For e.g., Exemptions allowed under salary head cannot be claimed from any other income head.
- Exemption under Leave Travel Allowance
- Exemption under HRA
- Exemption under Leave Encashment
- Exemption under Pension Income
Similarly, exemptions under section 54 allowed to be claimed only from Capital Gains, not from any other head.
- Exemption under Section 54
- Exemption under Section 54F
- Exemption under Section 54EC
- Exemption under Section 54G
Income Tax Deductions
Income Tax Deduction is allowed to be claimed specific head of income as well as from the gross total income. Deductions are given to enhance savings for social welfare as well as other activities with which the country will be able to get strength in the desired field.
- Deduction under Section 80C
- Deduction under Section 80D, 80DD, 80DDB
- Deduction under Section 80U
- Deduction under Section 80E
- Deduction under Section 80TTA
Rebate is a percentage amount reduced from total income tax payable. For e.g. Relief is given when double taxation is there i.e. when the same income is taxed in a foreign country as well as in India. This is given to mitigate the undue hardship faced by the taxpayer.