Deduction means subtraction of an amount from the SUM of Income which is already accounted for under different heads of Income.

Whereas Exemption relates to the situation where the entire income itself is exempt from the purview of Income Tax.

Difference Between Tax Exemption and Tax Deduction

Basis For Comparison Deduction Exemption

Meaning

Deduction means subtraction i.e. an amount that is eligible to reduce taxable income.

Exemption means exclusion, i.e. if certain income is exempt from tax then it will not contribute to the total income of a person.

What is it?

Concession

Relaxation

Concept

The amount of deduction is first included in the gross income and then deducted from it to arrive at the net income.

The exempted income is not considered as a part of total income, the whole amount is an exemption for the taxpayer.

Income is

Tax deductible

Tax free

Objective

To promote savings and investments of the general public.

To boost that particular section under which tax exemption is provided.

Relevant Income Tax Sections

Section 80 C to 80 U of the Income Tax Act,1961 deals with deductions.

Section 10 of the Income Tax Act,1961 deals with exemptions.

Allowable to

Specific persons

All the persons

Conditional

Yes

No

Tax Exemption vs. Tax Deduction

Income Tax 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. An exemption, is the income which is not charged to tax.

Income Tax 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 Income Tax Return. In deductions, the income amount is first included in the income of the taxpayer and then the deduction against the same is allowed as per the rules, i.e. in full or part or when certain conditions are satisfied.

  • Section 80C to 80U of Income-tax Act, 1961 deals with deduction.
  • Whereas exemptions are provided in Section 10.

To better understand this, let's discuss another example. In the current year, you can claim a deduction of ₹50,000 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 based on fulfilling the required conditions.

Conclusion

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.