Difference Between Tax Deduction and Tax Exemption
22 Jun 2022

Difference Between Tax Deduction and Tax Exemption

Know how tax exemption and deduction differs

Key Takeaways

  • The Income Tax Act, 1961 offers tax deductions and exemptions as tax benefits.
  • Tax deductions are amounts of certain schemes that are deducted from your taxable income.
  • Tax exemptions are amounts of certain schemes that do not get added to your taxable income.
  • Schemes under section 80C, such as ELSS, Health Insurance, etc., fall under tax deductions.
  • HRA, LTA and other such allowances are exempt from Income Tax.

The taxes you pay are utilised towards the development of the nation. The Government of India provides tax benefits on several schemes, thereby reducing your tax liabilities. For instance, the government offers benefits like deductions and exemptions under the Income Tax Act of 1961. Here, we talk about the differences between exemption and deduction in Income Tax.

Tax Deduction and Tax Exemption – What it Means

An income tax deduction is when certain investments and expenses are deducted from your taxable income. For instance, under Section 80C of the Income Tax Act, certain schemes are deductible up to INR 1.5 Lakh. You can reduce your total taxable income by up to INR 1.5 Lakh when you invest in such schemes.

Let us say your taxable income for the current year is INR 1 Lakh. If you invest INR 90,000 in a tax-saving scheme, your taxable income would be reduced to INR 10,000.

An income tax exemption is a part of your gross income that is tax-free. For instance, your gross annual income from salary is INR 4 Lakh, out of which your House Rent Allowance (HRA) is INR 1.5 Lakh. Here, your HRA component will not attract any tax.

Tax Deduction Vs Tax Exemption

Tax Deductions

You can claim tax deductions under various Subsections of Section 80.

Section 80C schemes (deductions of INR 1.5 Lakh per annum)

  • Public Provident Funds (PPF)
  • Employee Provident Fund (EPF)
  • Equity-linked Saving Scheme (ELSS)
  • National Saving Certificate (NSC)
  • Home Loan Principal Amount Repayments
  • Property Stamp Duty and Registration Fees

Besides these schemes, all taxpayers qualify for a Standard Deduction of INR 50,000 under Section 80C.

Section 80D

Get annual deductions of INR 25,000 to INR 100,000 towards health Insurance premiums paid for self and family members. The tax deduction depends on the age of the insured.

Section 80TTA

You can claim deductions of INR 10,000 on your Savings Account interest income.

Tax Exemptions

  • LTCG on Equity Funds: When you redeem your Equity Mutual Funds after holding them for a year, the profits are called Long Term Capital Gains (LTCG). LTCG up to INR 1 Lakh is tax-exempt.
  • House Rent Allowance (HRA): Under Section 10-13A of the Income Tax Act, 1961, your HRA from salary is exempt from tax, provided you live in rented accommodation. If you own a house, you will continue to earn HRA, but you will be liable to pay tax.
  • Leave Travel Allowance (LTA): LTA is an allowance employers offer to their employees for travelling purposes. You can claim LTA tax exemption for travel in India only twice in 4 years.

Final Note

While the terms Tax Exemption and Deduction are used interchangeably, they are entirely different. Either way, you can leverage both to your advantage to reduce your tax outgo. Remember to research the various schemes and the returns accrued before investing in schemes offering tax deduction and exemption benefits.

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*Disclaimer: This article is for information purposes only. We recommend you get in touch with your income tax advisor or CA for expert advice.