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

dateKnowledge Centre Team dateNovember 6, 2020 views123 Views 4 Minute Read

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, exemption and deductions which in turn help lower their total tax outgo.

Income from certain sources are not taxed, therefore they are the first deductions 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, an individual can claim a rebate of up to Rs 12,500 under Section 87A of the Income Tax Act if his or her salary is upto Rs 5 lakh (FY 2019-20). The purpose of a tax rebate is to reduce the burden on the lower-income groups.

Tax deduction

Rebate and exemption should not be confused with the tax deduction. Under Section 80C, an individual can claim deductions on your 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 done when a taxpayer pays more than he owes.
  • 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 the Indian residents. In order to get the refund, you must have an Aadhar 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 only if his or her income is upto Rs 5L.

List of incomes exempted under the new tax regime

1. Under Section 10(15), the interest received on post office saving account balance is exempted.

2. 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.

3. Capped at Rs 7.5 lakh in a financial year, the contributions made by an employer to the employees EPF and NPS are exempted.

4. Investment in Sukanya Samriddhi Yojana is also exempted. Individuals will receive tax-exempted 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 the 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 deduction 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 Rs 50,000, in addition to the Rs 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

Like 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. An individual, however, can avail one under Section 80CCD(2), which allows a deduction on the amount the employer contributes to the employee’s NPS account, capped at 10 percent 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 are 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 Invest 4G 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.

Hi, I am Radhika Palkar, a professional Chartered Accountant associated with an esteemed CA firm based out of Mumbai. Today I am here as part of the Tax video series by Canara HSBC Life Insurance Company. In this video, I'll be taking up a very interesting topic The Difference Between Income Tax Exemption and Income Tax Rebate. Though these terms are sometimes used interchangeably there is a vast difference between the two but let's try and understand this difference.

Tax Exemptions: Tax exemption is those components of income of an assessee on which no tax is liveable, in short, those are the tax-free components of the income, it is important to know that these income tax exemptions are allowed from the specific sources of income and not from the gross income of an assessee.

Some of the examples of income tax exemptions say under the Head "Salaries" are:

1) House Rent Allowance (HRA) (Entire/partial exemption will be allowed depending on case to case basis)

2) Children Education allowance

3) Leave travel allowance (LTA)

It is pertinent to note that these income tax exemptions are allowed based on certain prerequisite conditions And also, on the availability of the evidence of documents substantiate these conditions.

Income Tax rebate: It is the final deduction that is allowed before discharging the tax liability on the net taxable income of a resident Individual.

Net taxable income is the gross total income after deducting the tax exemptions, (Standard deduction and income tax deduction) The main reason for introducing rebate under section 87A was to reduce the tax burden on an individual having lower income.

Rebate u/s 87A is allowed for individuals having net taxable income up to rupees 5 lakhs. The maximum tax rebate allowable under Section 87A is Rs 12500 or the actual tax liability of an individual whichever, is lower.

Thus, in simple words, Tax exemptions are the tax-free components of an individual's income whereas Rebate is the final deduction that is allowed to be claimed from the total tax payable of an assessee.


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