Tax Exemption vs Rebate - Income Tax Exemption Limits

Written by : Knowledge Centre Team

2026-01-06

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What is Tax Exemption & How Is It Different From Tax Rebate?

Taxpayers are almost always in search of ways to bring down their taxable income. Therefore, it is important to know the difference between the tax rebates, exemptions, and deductions, which in turn help lower their total tax outgo.

Income from certain sources are not taxed, therefore, they are the first deduction made from the total taxable income during the income tax calculation. There are several tax exemptions, for the salaried class employee such as House Rent Allowance (HRA), Leave travel allowance (LTA) and income from gratuity.

The Income Tax department offers a rebate on an individual’s tax liability. For instance, under the new tax regime from FY 2025-26, an individual can claim a rebate of up to ₹ 60,000 under Section 87A if their total income is up to ₹12 lakh. Under the old regime, a rebate of ₹ 12,500 is available for income up to ₹ 5 lakh. The purpose of a tax rebate is to reduce the burden on the lower-income groups.

Tax deduction

Rebates and exemptions should not be confused with tax deductions. Under Section 80C, an individual can claim deductions on their investments like Employee Provident Fund (EPF), National Pension Scheme or Equity Linked Saving Schemes (ELSS). Besides, a deduction can be claimed under several other Sections like 80 (D) and 80 (E).

Tax exemption vs Rebate:

While tax exemption means that taxes from certain sources are not taxed at all, a tax refund or tax rebate is give when a taxpayer pays more than they owe.
Section 10 of the Income Tax Act, 1961 deals with tax exemption, while Tax rebate falls under Section 87A.
Benefits in tax exemption are given by not taxing House Rent Allowance (HRA), Children Education Allowance, Gratuity and Leave Travel Allowances (LTA), among others, but the rebate is given as a final reduction in the actual tax you pay after claiming exemptions and deductions.

Section 87A, Income Tax Rebate

Income Tax Rebate under Section 87A can only be availed by Indian residents. In order to get the refund, you must have an Aaadhar card to prove your citizenship. However, a non-resident Indian cannot apply for a refund under Section 87A.

Under this section, an individual can apply for a rebate of up to ₹ 60,000 if their total income is up to ₹ 12 lakh (new regime), or up to ₹ 12,500 if the income is up to ₹ 5 lakh (old regime).

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List of incomes exempted under the new tax regime

Under Section 10(15), the interest received on the post office savings account balance is exempted.
If an employee has worked more than 5 years in an organisation, the gratuity received from the employer is exempted from tax up to a certain limit.
Capped at ₹ Rs 7.5 lakh in a financial year, the contributions made by an employer to the employees EPF and NPS are exempted.
Investment in Sukanya Samriddhi Yojana is also exempted. Individuals will receive tax-exempt interest too.

Besides, the amount received under voluntary retirement is exempted. The total sum received at the time of the maturity of the NPS account is also exempted.

How is Tax Deduction different from tax exemption and rebate?

Unlike the refund and exemption, the tax deduction gives a benefit to an individual on their investment in certain kinds of instruments. Section 80C is a key regulation in the Income Tax Act, 1961, which governs the range of deductions that is applicable for payments in life insurance premium, Public Provident Fund (PPF), Employee Provident Fund (EPF), National Pension Scheme (NPS) and National Saving Certificate (NSC) among others.

Besides, home loan principal repayment and the tuition fee amount for your children's education also fall under this section. Another popular way to claim deductions is an investment in Equity Linked Saving Schemes (ELSS) and Sukanya Smriddhi Yojana.

Other deductions

For instance, you made an investment in NPS. Under 80CCD(1B), you can claim ₹ 50,000, in addition to the ₹ 1.5 lakh limit under Section 80C.

Under Section 80D, you can also claim deductions on the amount you pay as premiums towards health insurance policies for your family members.

Under Section 24, you can claim the interest that you pay for your home loan. This deduction is over and above the one, you can claim under Section 80C (home loan principal repayment).

New regime

As mentioned earlier, most deductions/exemptions mentioned above -- such as those under section 80C, 80D and others in HRA and LTA -- are not applicable in the new regime, except for the standard deduction of ₹ 75,000 and the employer’s contribution to NPS under Section 80CCD(2). An individual, however, can avail pf one under Section 80CCD(2), which allows a deduction on the amount the employer contributes to the employee’s NPS account, capped at 10 per cent of his or her salary. It must be mentioned that the salary here refers to the basic plus the DA component of the salary.

Conclusion

Understanding the tax exemption, rebate, and deduction is extremely important in tax planning. Especially with the option to switch to the new regime, one has to calculate taking all these benefits into account to drive the maximum benefit. With the ULIP from Canara HSBC Life Insurance, you get ample flexibility to modify the policy according to your needs. You can opt for the whole life option or the premium funding benefit option. You also get the option to choose from seven different investment funds as per your risk profile.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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