Reviewed by Sep 30, 2020| Updated on
Exemption implies being not liable to do something, given as a relief. It could refer to an act or an obligation and is found to have several references across subject domains, mostly judicial. It holds a popular reference and impact under the taxation laws.
An exemption refers to the deduction allowed by the law to reduce the amount of income that would otherwise be taxed. It is a legal deduction from the income that would otherwise be taxed for a qualifying reason. Under the income tax law, exemptions refer to income that do not form a part of total income taxable under the law. Similarly, exemptions are provided with an object of the public good under GST. It keeps such transaction of goods and services or taxable persons out of the scope of supply under GST.
Under income tax law, the persons or transactions specified by law shall be eligible for exemption. The deductions and exemptions are clearly outlined and can be differed. Deductions would be from the total income, whereas exemptions would not form part of the total income in the first place.
It can so happen where the tax is paid by one person and the other party involved in the transaction is exempt from tax on such income. But generally, it is the person who earns the particular income that is usually exempt.
The taxpayers or tax assessees are responsible for the exemptions that they claim and must report such claims in the form and manner required by law.
There is a method of claiming an exemption under the Income Tax Act. The assessee must report the amount of exemption under the right head of income while filing the income tax return. For example, the capital gains exempted such as the capital gain on compulsory acquisition of agricultural land within the specified urban limits should be reduced from total capital gains computed under section 45 of the Income Tax Act, 1961. In case the assessee fails to report the exempt income, he shall not be eligible to claim such income later without revising the Income-tax returns. Another example of reporting exemptions would be income from dividends referred to section 115-O of the Income-tax Act, 1961.
Under GST, the monthly summary return of GSTR-3B requires the taxpayers to report the value of GST exempt supplies made during that month.