Tax planning is an important part of financial planning. As a layman we are often confused between the different terms related to taxes. Income Tax Rebate, Tax Deduction and Tax exemption, all sound the same, but these terms have subtle differences. Moreover, while filing our Income tax return, we also have to keep a note of these terms. All these terms are actually helpful to reduce our tax burden, but the treatment is different in each case.
To use Income tax exemption, tax deduction and tax rebate, we first need to understand the meaning of these terms as well as how income tax is calculated. While calculating the tax liability, it is the exemptions that first get reduced from your salary or other income. Next, income tax deductions are claimed by making investments in specified products or by making expenses under different income tax sections. Finally tax rebate is claimed from the total tax payable. Read on to know more about these important financial terms that can actually help you in your tax planning and filing your income tax.
Income Tax Exemptions
Income tax exemptions means the income that is not subjected to tax. In other words, these incomes are excluded from payment of taxes. There are certain sources of income that are exempt from taxes. You do not require to pay taxes arising from those specific sources. While calculating the income tax liability, income tax exemptions are the first component to get reduced from the salary or other income.
Do remember, that income tax exemptions are allowed to be claimed for a specific source and not from the gross total income. For example, house rent allowance (HRA) is tax-exempt depending on certain rules. So if you avail HRA, you can claim income tax exemption under HRA provided you fulfill the criteria.
You can claim income tax exemptions from the following
- House Rent Allowance
- Gratuity Limit upto INR 20 Lakhs
- Agricultural income
- Dividend income upto INR 10 Lakh
- Section 54 of the IT Act: Long Term Capital Gain exemption on sale of property.
Income Tax deductions
After you deduct the income tax exemption from your salary (income) or combined income from all the five sources, you will get the gross total income. Further deduction in this income is possible by way of Income Tax deductions. Deductions can be claimed if you have incurred some specific expenditure or have made some specific investments under the various sections of the Income Tax Act.
Remember, that income tax deductions can be claimed from the total income under each head as well as from the gross total income.
You can claim Income Tax deductions under the following:
- You can claim a deduction up to INR 1.5 lakhs under Section 80C for the investment made in PPF, Life Insurance Plans, Equity-linked savings schemes(ELSS), NSC and a few other instruments. Also, you can claim tax deduction on expenses such as children education fee, stamp duty paid on residential house registration, under this section. From FY 2018-19, you can claim a standard deduction of INR 40,000 from your salary income.
- Health insurance premium u/s 80D
- Tax benefit or relief on home loan repayment of interest u/s 24 of IT Act.
- Deductions u/s 80E for repayment of interest on education loan
- Deductions u/s 80G for specified donations.
Limits of tax deduction and avenues differ for each of the sections.
Income Tax Rebate
After the deductions are made, you get the taxable income or the income on which taxes are to be paid. You calculate the income tax on this amount. Income tax rebates are allowed to be claimed from the total tax payable.
Do understand that income tax exemptions and income tax deduction are allowed or claimed from the income while the rebate is to be claimed from the income tax payable.
For example, the rebate under section 87A can be upto INR 12,500 for FY 2019-20.
There is also a tax rebate allowed on u/s 89 on receipt of arrears of salary.
Hope you got an idea about the difference between Income Tax exemption, Tax Deduction and Tax Rebate. If you have any questions in mind, do ask us by commenting below. And for more tips and updates on personal finance and motivation, subscribe to our mailing list.