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What is the difference between deduction and exemption in Income Tax?

What is meant by deductions, and how are they different from exemptions?


  • Exemptions: In your income, there are several elements that are tax-free. So, while calculating your tax liability, the part of your income that is exempted from tax is deducted from your total income. One typical example of a tax exemption is House Rent Allowance (HRA). With a few conditions applied, the HRA is exempted from tax. And if you have availed this allowance, you can claim an exemption on this element of your income.
  • Deductions: After you remove the tax-exempted elements from your income, what you have is your total gross income. Now, you can further reduce the total gross income with the help of deductions. You can claim deductions through various investments or through expenses that can be claimed in various sections of the ITR.

To better understand this, let's discuss another example. In the current fiscal, you can claim a deduction of ₹40,000 from your gross salary. Moreover, under Section 80C, you can claim a deduction of up to ₹1.5 lakh for investments done in instruments like public provident fund and equity-linked savings schemes.

Sections like 80D, 80E, and 80G also offer deductions under the Income Tax Act. Each of these sections comes with a set of investments that fall under them. So, one good way to differentiate between exemptions and deductions is that while the former is unconditional, the latter has several conditions applied. Another way to remember the key difference between the two is that the tax exemptions apply to all taxpayers in the country, but tax deductions apply only to those who qualify for the specific criterion. Simply put, while exemptions are relaxations provided by the government, deductions are concessions that you can claim every year.

While trying to understand these two concepts, it is vital to remember that deductions have been formulated by the government as they encourage individual savings while also providing impetus to the rate of investments. And in a similar vein, exemptions are offered by the government to help the weaker sections of our society grow economically. After these exemptions and deductions, the amount that is left behind becomes your total income that will be under the purview of income tax. All these tax exemptions and deductions help us bring down our tax liability.

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