Every year individuals end up paying a considerable portion of their earnings as income tax to the nodal authorities. Only a few delve into the technicalities of it. Mostly tax is considered just as a liability and not a responsibility. If the tax structure in India is studied in detail, you will come across many terminologies which you might have heard of but know little of its intricacies. Some of these are tax deduction, tax exemption, and tax rebate. All of them are tax-saving options, yet have different implications.
Income tax refund, on the other hand, is the difference between the tax paid and owed by a citizen. A taxpayer receives such a refund when he/she has paid excess tax for a particular financial year. Having too many tax refund records suggests that the individual needs better tax planning.
Difference between a tax deduction and tax exemption
Each and every working individual has to file income tax returns on time, mentioning the various deductions and exemption claims he is eligible to avail. Often these two terms (tax deductions and tax exemptions) are used interchangeably. There are, however, plenty of differences between the two. Here is how they are different from each other –
- Income tax deductions
Tax deductions are applicable on the gross taxable income of an individual. It aims at reducing the overall tax liability of an individual. It is allowed only on certain specific investments made by a taxpayer. This includes-
- Medical expenses
- Transportation costs
- Public Provident Fund (PPF)
- National Pension Scheme (NPS)
- Equity Linked Savings Scheme (ELSS)
These deductions aim at promoting saving and investment habits among the mass. Investments and other financial commitments like home loans are also taken into consideration under tax deductions. There is a range of tax-saving opportunities offered on home loans today. Sections between 80C and 80U deal with all kinds of deductions applicable to income tax. There are limits specified on each deduction source.
- Income tax exemption
The IT department considers specific sources of an individual’s income as an exemption from tax. This means a taxpayer need not pay tax on those particular forms of income. Exempted income sources are deducted while calculating the total taxable income of an individual. All the exemptions are listed under Section 10 of the Income Tax Act.
Certain income sources related to agricultural activities are entirely exempt from taxation. There are also some income forms that are partially exempt from tax. These include the following –
- House Rent Allowance (HRA.)
- Travel allowance.
- Entertainment allowance.
- Special allowances provided to meet personal expenses.
- Long-term capital gains on equity funds.
A significant difference between tax exemption and tax deduction is that it applies to all taxpayers in the country while tax deduction applies only to individuals who meet certain eligibility criteria.
Certain conditions and eligibility criteria also work when individuals claim tax deductions on a home loan. Papers and documents have to be updated and submitted on time to claim these deductions.
In this respect, eligible consumers can also avail tax benefits on under-construction properties. This helps save tax, especially for individuals who are short of funds. The income tax calculator is a great online tool which assists borrowers to estimate their tax liabilities on loan.
It is important to be responsible as well as an informed taxpayer and keep track of how much of your income is being spent on tax liabilities. Given that, being familiar with terms like income tax deductions and exemptions is a must.