There is a huge confusion between the terms – income tax exemption, income tax deduction, and income tax rebate. People often end up using these terms interchangeably. Although all these terms are related to each other and beneficial to the taxpayers, they are pretty much different from one another and the difference is explained below:
Before we proceed to explain the difference between these three terms, let’s make you understand the calculation of tax on income.
| Income from Salary (Tax exempted) | XYZ (D=XYZ-ABC) | D | XYZ |
| Income from Property (Tax exempted) | XYZ (D=XYZ-ABC) | D | XYZ |
| Income from Business (Tax exempted) | XYZ (D=XYZ-ABC) | D | XYZ |
| Income from Capital Gains (Tax exempted) | XYZ (D=XYZ-ABC) | D | XYZ |
| Income from other Source(s) (Tax exempted) | XYZ (D=XYZ-ABC) | D | XYZ |
| Gross total Income (Tax exempted) | Income Tax Deduction | XYZD | |
| Total Taxable Income Tax as per applicable tax slab (Tax exempted) | Income Tax Deduction | XYZ XYZ D | |
| Total Tax Payable | XYZ |
What is Income Tax Exemption?
Income tax exemption is referred to as the exemption that is allowed to be claimed from a particular source of income and not from the Gross Total Income of an individual. Moreover, income tax exemption that can be claimed under the head Salary cannot be claimed under any other head.
Likewise, you can claim income tax exemption under Capital Gains head u/s 54, 54F, and 54EC and not under any other head.
For instance, an individual can avail income tax exemption based on travel leave allowances, leave encashment, income from pension, house rent allowance etc.
What is Income Tax Deduction?
Income tax deduction is referred to as the deduction that is allowed to be claimed from total income under each head as well as from the Gross Total Income of an individual. Any deduction allowed is subject to one or more expenses incurred or investments that are done by a taxpayer.
For instance, an individual can claim income tax deduction based on their medical bills or treatment expenses and investment(s) under section 80C (life insurance or an investment of a specific type), 80D (health insurance premium paid), 80G (any donation), 80E (repayment of the interest on an education loan), and 80TTA (interest earned on a savings account).
What is Income Tax Rebate?
Income tax rebate is referred to as the tax rebate that is allowed to be claimed from the Total Payable Tax by an individual. Tax rebate in India is allowed for funds, senior citizens, and employees of organizations. Employees can avail income tax rebate under section 89(1) of the IT Act, 1961 within the following criteria:
• When they receive salary in advance
• When they receive salary in arrears
• When they receive salary for more than 12 months
• If they opted for a share in the company revenue and not the salary
Note: Both Income Tax Exemption and Income Tax Deduction can be claimed from an individual’s income, whereas the Income Tax Rebate in India is allowed to be claimed from an individual’s Total Payable Tax.
Now, we at Policybazaar do hope that you’re clear about the difference between tax exemption, tax deduction, and tax rebate and you won’t confuse going forward. Hope it has been a good read.