Income Tax Exemption Vs Rebate Vs Deductions: The Union Budget 2023, which will be tabled in Parliament on Febuary 1, will be keenly watched by taxpayers as they look forward to relaxations in taxability of their income. The relaxation in income tax is given by the government in three ways — exemption, deduction and rebate. As the Budget is round the corner, these three terms are important for taxpayers to understand.Saurrav Sood, practice leader (international tax & transfer pricing) at SW India, said, “We often find exemptions, deductions and rebate used as words synonym to tax. While many people use it interchangeably, but each has its own connotation and meaning different from the other."
Tax ExemptionIncome tax exemption means no tax will be levied. Currently, income tax is exempt up to a total annual income of Rs 2.5 lakh. For example, if an individual is earning Rs 2.5 lakh in a year, he/ she does not need to pay any income tax. In case, the annual income is Rs 3 lakh, then tax on only Rs 50,000 is to be paid while Rs 2.5 lakh is tax-free.
Tax DeductionsIncome tax deductions pertain to specific deductions which a taxpayer is eligible for on account of investments made (Section 80C) or sum expended (Section 80D or Section 80E).Maneet Pal Singh said these deductions are based on tax saving investments like life insurance premium, medical insurance premium, PPF and tuition fees, among others.Saurrav Sood said, “Where exemption means no tax to be levied on the income, deduction is reduction of taxpayer’s gross income on which tax shall be calculated."There are demands of raising the deductions limit under Section 80C in the Union Budget 2023-23, compared with Rs 1.5 lakh currently. The real estate sector is also urging the government to provide a separate deduction for realty purchases, apart from Section 80C. The current 80C limit was fixed about a decade ago.
Tax RebateThe tax rebate is different from exemption and deduction. Under the rebate, a limit is fixed up to which the income is tax-free under Section 87A of the Income Tax Act, 1961. However, if the annual income exceeds the limit, tax on whole income tax is to be paid.
He added that in a nutshell, income tax exemptions and deductions are allowed to be claimed from the ‘income’, whereas rebate is allowed to be claimed from ‘tax payable’.
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