Difference Between Exemption, Deduction and Rebate in Income Tax

When you read about income tax, you will come across various related technical terms. Some of these terms are income tax exemption, tax deduction, tax benefit, tax relief, and so on. These terms may be used interchangeably and incorrectly. Therefore, it is important for you to learn these terms as soon as you start dealing with income tax.

Income Tax Exemption V/S Tax Deduction

Income tax exemptions are provided on particular sources of income and not on the total income. It can also mean that you do not have to pay any tax for income coming from that source. For example, income from agriculture is exempted under tax. In addition, long-term capital gains arising from the sale of a property can be reinvested in a real estate property or specified bonds within a certain time period to get tax exemption. Salaried individuals get house rent allowance (HRA) as a component of their salary. This component can be used to claim tax exemption under certain conditions.

In contrast, income tax deductions can be claimed on the gross total income. Certain specified investments and expenditure are considered to claim deductions. For example, investment in specified mutual funds, interest repayment of education loan, and premium payment for medical insurance can be considered for deductions. Also, Salaried taxpayers can claim a standard deduction of Rs. 50,000 from the gross salary. This reduces their total taxable income and, in turn, reduces the tax payable.

Tax Rebate and TDS

Unlike tax exemptions and tax deductions, income tax rebates are supposed to be claimed from the total tax payable. For example, a tax rebate of Rs.12,500 is available for taxpayers with an annual income of up to Rs.5 lakh as applicable for the financial year 2023-24 and onwards for taxpayers who opt the old tax regime.

However, under the new tax regime, the rebate limit is Rs.25,000 for the taxpayers with an annual income up to Rs.7 lakh for FY 2023-24 and onwards.

TDS stands for tax deducted at source. As per the Income Tax act, any company or person making a payment is required to deduct tax at source if the payment exceeds certain threshold limits. TDS has to be deducted at the rates prescribed by the tax department.

The types of payments on which TDS is applicable are:

• Salaries
• Interest income from financial institutions
• Commission payment
• Rent payment
• Professional fees
• Consultation fees

Tax Relief

Tax relief is any provision that reduces the tax owed by a taxpayer, may it be an individual or a business entity. Similarly, the tax benefit is a deduction or a tax credit that reduces the tax liability of a taxpayer. There are many sections under the Income Tax Act, 1961 that provides tax benefits such as Section 80C, 80D, 87A, 10, and 24.

You can claim a tax deduction of up to Rs.1.5 lakh under Section 80C for investments and expenses made under the eligible categories. The eligible categories are LIC premium paid, investment in Sukanya Samriddhi Yojana, PPF, equity-linked saving scheme (ELSS), five-year fixed deposits, Senior Citizens Saving Scheme (SCSS), National Savings Certificate (NSC); stamp duty and registration charges; and home loan principal repayment.

Section 80D provides you to claim deductions of up to Rs.25,000 for medical insurance premium paid during the financial year. This is also to encourage taxpayers to purchase medical insurance and secure their health. Deductions can be claimed for self, spouse, and dependent children. Additional deductions of up to Rs.25,0000 can be claimed for parents aged within 60 years. For those who are aged above 60 years, a deduction of up to Rs.50,000 is available.

There are many exemptions that come under Section 10 such as leave travel allowance, agriculture income, life insurance premium, gratuity under voluntary retirement, pension, provident fund, HRA, education and hostel allowance for children, and more. Section 24 deals with providing deductions of up to Rs.2 lakh on home loan repayments, in case of a self-occupied property. For rented property, you can claim the whole amount of interest paid on housing loan under section 24. However, total loss from house property in a financial year cannot exceed Rs. 2 lakhs in the financial year.