Exemption, Deduction and Rebate

•  Meaning of exemption, deduction and rebate
•  Why it’s important to understand the difference between these.

Income tax Return filing season has come…you’re busy pouring over your investments. So, you take the decision to brave the trials of filing returns on your own. Like any diligent tax payer, you want to get to the bottom of every section, but long words confuse you. Traditionally, regular folks would refer to an income tax ready reckoner; burning the midnight oil, reading endless complicated paragraphs. Now, you can simply go online and get what information you need. But is this information accurate or even current? This article is aimed at breaking down your income tax confusion. We’ll try to make terms (and the explanations) as simple as we can.

In income tax computation, the main objective is to pay taxes and do it on time. We’re all responsible citizens, and we understand the importance of being regular in taxes. There is, however, also a need to understand how tax is computed and what each section entails. Here, we will explain the holy trinity of income taxes—Exemption, Deduction and Rebate. These three words are used synonymously, but each is unique. We will also explain not only the difference between exemption and deduction, but also what a rebate is. Let’s see what these words mean:

Meaning of Income Tax Exemption:

If you’re a salaried individual, you must have seen components like HRA, LTA, and/or, Gratuity. These are the sources of your annual income, which are exempt from income tax. You don’t need to pay tax on any income arising from these. During tax computation, components of exempt income are the first to be reduced from your tax liability. You’ll find a list of these components under Sections 10 and 54 of the Income Tax Act of India—1961. Apart from salary components included u/s 10, exemptions can be claimed on other sources of income like Long-Term Capital Gains (LTCG) u/s 54. The basis or rules for exemption, will vary for each component. For example, you can claim an exemption on HRA (House Rent Allowance) based on:

•  Your salary
•  Place of residence
•  Rent amount paid (by you)
•  HRA you receive

Some important things to note, not all components under Section 10 will be applicable to all taxpayers. Moreover, individual salary structures will also vary.

Meaning of Income Tax Deduction

Once you’ve computed the exemption on your income, you need to include deductions. These deductions help reduce your tax liability even further. Here we will summarise standard deduction, and other deductions under sections 80C, 80CCD, 80D, 80E and 80G.

Standard Deduction:

This deduction is applicable to all individual taxpayers, irrespective of expenses incurred, or investments made. It is allowed at a blanket rate and you don’t have any documented proof to avail this deduction. Two types of income qualify for a standard deduction.

•  From Rent: Allowed at 30 percent
•  From Salary or Pension: For F.Y. 2018-2019 the standard deduction on salary is Rs. 40,000. This limit has been raised to ₹50,000 from F.Y. 2019-2020. In the Union Budget of 2019, the finance ministry announced an increase in standard deduction, in place of transport allowance and medical reimbursement.

Also, in a recent update, if a taxpayer receives pension (from former employment), it is taxable under salary income. This in turn qualifies for standard deduction. So, in computation, the lower of the two (standard deduction or pension), is considered.

Deductions Under Other Sections

Once you’ve accounted for standard deduction, you need to look for deductions in other sections. For an individual taxpayer, these deductions are found in Section 80 of the Income Tax Act. Let’s look at the common ones.

Section 80C:

This is a popular one among salaried individuals. Every December, you probably see an e-mail pop-up from your HR Department. It usually begins with: “Please submit your investment declarations for this financial year…etc.” This is where your 80C investments come in. A maximum of ₹1.5 lakh is the permissible amount and you need to provide documented proof for these. The combination of investment products is entirely up to you. Examples of investments are: PPF, EPF, NSC, ELSS, NPS, Life Insurance Premiums, Principle on Home Loan EMIs.

Section 80CCD:

Any investment in the National Pension Scheme–NPS, also qualifies for an additional benefit under 80CCD. The subsections are: 80CCD (1), 80CCD (1B)–for taxpayers own contribution, and 80CCD (2) for an employer’s contribution to an employee’s NPS account.

Section 80D:

This section gives you a tax deduction on premiums, you pay for medical insurance. Medical insurance policies usually cover hospitalisation, medical expenses and/or medical check-up for the policy holder/s. Under section 80D, you can get a deduction of up to ₹25,000 if you’re paying premiums for you, your spouse, and/or dependent children. There are added benefits if you’re also paying premiums of your parents, or senior citizen parents. Moreover, if a taxpayer himself or herself is a senior citizen, paying premiums, the benefits are higher.

Section 80E:

If you’ve availed of an education loan, the interest component qualifies for a deduction. Benefits under section 80E are applicable on the entire interest component of this loan type.

Section 80G:

If you’ve made donations to pre-approved, government funds, trusts, charities or religious structures, you can avail of a deduction under this section.

These are all the common provisions of permissible deductions. You may now have a better idea of the difference between exemption and deduction, after reading these paragraphs. We will now move on to the meaning of tax rebates.

Meaning of Tax Rebate:

A tax rebate is usually provided for those whose tax liability is high, but belong to a lower income bracket. The provisions for an income tax rebate, are found under Section 87A of the Income Tax Act of India—1961. With a rebate, a tax payer’s liability witnesses a marginal reduction.

The Union Budget of 2019 has proposed changes to 87A, these are only proposals and not yet in effect. Here’s an overview of the current rebate provisions and proposals for F.Y. 2019-2020.

•  You have to be a resident of India.
•  Your total income (after deductions u/s 80), should be equal to, or less than 3.5 lakh. For F.Y. 2019-2020, the proposed income is raised to 5 lakh.
•  The maximum rebate is 2500, for F.Y. 2019-2020, the proposed limit is 12,500. If a tax payer’s total payable tax is lower than the rebate limit, that amount will be considered as a rebate.
•  This rebate is applied before adding the Education Cess of 4%.

Here’s an example to understand these provisions. Let’s say you’re an individual resident of India, earning a total annual income of 3.5 lakh. Your tax payable after deductions comes to 5000. Apply the current rebate u/s 87A you get 2500 (5000-2500). Add 4% Education Cess to 2500 (2500+100) = 2600. So, your total tax payable is 2600.

Difference Between Exemption, Deduction and Rebate

These three terms are used interchangeably, but there is a difference. Here’s an overview:

•  Exemptions can be claimed only on specified sources of income and not on the gross total income. For example, an exemption like HRA, claimed under salary, can be computed only once.
•  Deductions can be claimed from their respective sections (investments u/s 80C, insurance premiums u/s 80D etc.), and the gross total income.
•  A rebate can be claimed on the total tax payable.

Conclusion

The primary difference between exemption and deduction is, the treatment under gross total income. While these two are permissible to be claimed from income; an income tax rebate, however, is applicable only on the tax amount you have to pay. Once you understand these key differences, you’ll get a better idea of how income tax is computed.