While filing income tax returns (ITRs), it is important to know about various sections of the Income Tax (I-T) Act under which you must declare your income, expenditure, and investments. As a taxpayer, you would come across terms such as tax exemption, tax deduction, rebate, tax benefits, etc. These terms are often used interchangeably. However, there is a difference between tax exemption, tax deduction and rebate, which will be discussed in this article.
See also: AMT in income tax: Basics, applicability, exemptions, and credit of Alternate Minimum Tax
Tax exemptions
Tax exemptions are applicable on certain sources of income, expenditure, or investments. That is, there are a few income sources, expenditures, or investments on which no tax is applicable and help reduce one’s taxable income. Some examples of tax exemptions include HRA (house rent allowance), LTA (Leave Travel Allowance), any Gratuity/ VRS/ Pension received in the assessment year. For example, for salaried class, HRA is computed as per section 10 (13A) of the I-T Act in agreement with rule 2A.
Company accommodation provided in case of official travel, and any cash provided for the purchase of perquisites, such as mobile phones and laptops, are tax exempted.
Further, a taxpayer can claim tax exemptions under ‘income from capital gains’, which include:
- Exemption on buying a new house within one year prior or two years post the sale of a property.
- Exemption on investment in specified long-term bonds, approved by the government, for a minimum period of three years post the sale of a house/property, which leads to long-term capital gain.
All the ‘exempt’ components of one’s income must be informed to the employer before income tax filing. The employer would compute tax on the balance income and deduct TDS (tax deducted at source) as per the applicable income tax slab.
know about: income tax assessment order
Tax exemptions vs tax deduction
Income tax exemptions are applicable on certain sources of income and not to the total income of the assessee. It may mean that one need not pay income tax for the income generated through that source. For example, income from agriculture is exempted from income tax.
Upon deducting the tax exemption from one’s total salary, the total gross income is calculated. One can further reduce the gross income by means of income tax deductions. Some examples of deductions can be medical expenditures, transportation charges, tuition fees, etc.
Certain investments, or expenses can be claimed as deductions as per the I-T Act. Investment in specified mutual funds, interest repayment of education loan, and payment of medical insurance premiums qualify for tax deductions. Moreover, salaried individuals are eligible for a standard deduction of Rs 50,000. Thus, tax deductions help reduce one’s taxable income.
Examples of investments that can be claimed as deductions under various sections of the I-T Act are mentioned below:
- Section 80C of the I-T Act, for certain investments such as Employee Provident Fund (EPF), Public Provident Fund (PPF), Equity-Linked Savings Scheme (ELSS), National Savings Certificate (NSC), etc.
- Section 80D for payment of premium for medical insurance policies.
- Section 80E for interest repayment on child’s education loan.
- Section 80G of the I-T Act for donations made.
- Section 80TTA for interest earned on a savings account.
all about: income tax on mutual funds
Tax rebate
An income tax rebate refers to a tax refund when a taxpayer has lesser tax liability than the amount of taxes paid. Tax rebates help individuals in the low-income bracket to lower their tax burden. It includes components allowed to be claimed from the total amount of tax.
Difference between tax exemption, tax deduction and rebate
One can claim income tax deductions and tax exemptions from their income. However, one can claim an income tax rebate only from the amount of tax payable. Moreover, it applies only to some individuals, such as individuals with an annual income below Rs 5 Lakh.
Tax rebate allowed under Section 87A
According to the Section 87A of the I-T Act, resident individuals are eligible to claim an income tax rebate if their total taxable income is up to Rs 7 Lakh in a financial year. As announced in the Union Budget 2023, the amount of tax rebate under the new tax regime has been increased to Rs 25,000 or the tax payable amount, whichever is lower, from Rs 12,500, applicable for the old and new tax regime till FY 2022.
Tax Refund
If the tax deducted at source by the employer exceeds the tax liability calculated while filing tax returns, one can claim the excess amount as tax refund from the I-T Department.
One is eligible to get an income tax refund only if the taxes paid to the government exceeds one’s actual tax liability. This usually occurs when the self-assessment tax, TDS or advance tax paid from the taxpayer’s income exceeds the overall tax liability.
To claim an income tax refund, one must file his tax returns by 31st July in the applicable assessment year. After filling the relevant ITR form, click on the ‘validate’ tab on the sheet ‘Taxes paid and Verification’. The tax refund amount will be auto calculated. After filing and verification of the ITRs, the I-T Department will validate the authenticity of the claim and initiate the process of tax refund.
FAQs
What is the difference between tax rebate and tax relief?
Tax relief is available as a tax deduction that enables one to deduct an amount from the total income. A tax rebate or tax refund is a refund of tax that has already been paid by a person.
Can NRIs claim a tax rebate under Section 87A?
NRI taxpayers are not eligible for the tax rebate under Section 87A. It is allowed only for resident individuals.
