Tax rebate vs deduction vs exemption: What every taxpayer should know

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When filing an Income Tax Return (ITR), taxpayers are generally perplexed among exemptions, deductions, and rebates. Though all three reduce your tax outgo, they operate distinctively under the Income-tax Act, 1961. Misjudging them results in errors in your ITR or loss of tax saving. Understanding the differences entails proper filing and maximum benefits.

What is a tax exemption?

Exemption is earnings that are fully or partially exempt from taxation. What this signifies is that the income per se is not taxable. Common examples are farming income under Section 10(1) or allowances like house rent allowance (HRA) or leave travel allowance (LTA), which are partly exempted. Exemptions reduce the amount of your income that ends up going into your taxable amount.

What is a tax deduction?

A deduction is something which can be deducted from the total of your gross income before tax is calculated. Deductions are generally allowed for some expenses or investments, such as life insurance premium, PF contribution, ELSS mutual fund, or fees paid for education of children. These fall under sections such as 80C, 80D, or 80G. Deductions encourage savings, investment, and social welfare spending by reducing taxable income.

What is a tax rebate?

A rebate is an alleviation provided directly on the final tax payable, not on the income. The most well-liked one is Section 87A, which provides that those with taxable income of up to ₹7 lakh under the new regime can avail rebate of up to ₹25,000, i.e., their tax payable will become nil. Unlike exemptions or deductions, a rebate decreases the tax payable directly, hence the final step of relief in tax computation.

How they differ in usage

Exemptions work on the income level by excluding some categories from taxation. Deductions follow by reducing gross income on qualifying expenses or investments. Rebates are the last to work by actually reducing your final tax due. For example, if the salary you earn includes HRA, that portion can be exempted. If you incur spending in PPF, that is deductible. And if your income after making all such corrections falls within the rebate limit, your payable tax can be reduced to zero.

Why clarity is crucial while filing ITR

Being aware if a benefit comes under exemption, deduction, or rebate helps you claim it rightly on your ITR form. Mixing them up might under-assess your taxable income or lead you to pay more tax than you should. It also helps you submit the right proofs and documents since each of them has different reporting obligations. For an investor, it can help in better tax planning too.

FAQs

Q: Can I claim both exemptions and deductions in one financial year?

Yes. Let's say you claim HRA as an exemption and also invest in ELSS mutual funds for claiming a deduction under Section 80C. These benefits exist in isolation and can be claimed together.

Q: Is the deduction under Section 87A available in old and new tax regimes?

The rebate is available in both the regimes, but with varying income slabs. Under the new regime, the rebate is available on taxable incomes up to ₹7 lakh and under the old regime up to ₹5 lakh.

Q: Is there a deduction under the new tax regime?

Most deductions like 80C and 80D are not available under the new regime. However, certain exemptions like NPS employer contribution and standard deduction for salaried taxpayers have been retained.