Know how tax exemption and deduction differs
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.
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.
You can claim tax deductions under various Subsections of Section 80.
Section 80C schemes (deductions of INR 1.5 Lakh per annum)
Besides these schemes, all taxpayers qualify for a Standard Deduction of INR 50,000 under Section 80C.
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.
You can claim deductions of INR 10,000 on your Savings Account interest income.
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.
Download digibank by DBS on your smartphone, register and choose any tax-saving options from the menu.
*Disclaimer: This article is for information purposes only. We recommend you get in touch with your income tax advisor or CA for expert advice.