The various terminologies related to income tax* in India may appear to be confusing, but it is extremely crucial for every taxpayer to be familiar with these terms. They are especially important since taxpayers need to file income tax* returns each year, and any excess tax money can be refunded to them.
Apart from that, there are also various schemes and investments, such as Public Provident Fund, life insurance, National Pension System and others, on which one can claim tax deductions and exemptions up to a certain limit. It is mainly for this reason and many more that one should know what terms like tax exemption, tax deduction, and tax rebate mean.
What are Tax Exemptions?
Some sources of income in India are exempt from taxes and they do not attract any tax. When you compute your tax liability, these exemptions will be deducted from your gross salary. One such example is the House Rent Allowance (HRA) which is partially exempt from tax under certain conditions.
If you claim your HRA, then you will be eligible for the exemption under this salary component. However, it is important that you meet the criteria for an HRA exemption. For salaried individuals, the calculation of HRA is in accordance with Section 10 (13A) of the Income Tax Act, Rule 2A.
LTA (Leave Travel Allowance) and any pension or gratuity are also included under tax exemption that one may receive during the assessment year. If the payment for the purchase of certain perquisites such as mobiles and laptops has been made or, in certain cases, if your company provides accommodation for official tours, this amount may will also be tax-exempt subject to fulfilment of applicable conditions.
These are some of the tax exemptions that can be claimed under “Income from Capital Gains”:
- The exemption that is given if a new house is purchased a year before the sale or within two years after the sale of a property.
- There is an exemption on investments of gains arising from sale of a residential property on some long-term bonds under the government that is made for a lock-in period of at least a 3-year tenure.
Before you file your income tax* returns, be sure to inform your employer about all the tax-exempt components of your income. TDS will be calculated on the remaining income and deducted as per your income tax* slab.
Since 2016, you can also get a tax exemption if you have a start-up that has been operating since April 01, 2016, and has an annual turnover of ₹25 crores. Such enterprises or start-ups can avail of a tax holiday for a period of three years within the first seven years. Also, start-ups can be eligible for a ₹10,000-crore fund in the form of venture capital from the Government, subject to fulfilment of conditions and furnishing applicable documentations.
What are Tax Deductions?
You can derive your total gross income once the exempt income on your total salary has been accommodated, and you can also reduce the gross income through certain tax deductions. You can claim some deductions on premiums paid for life insurance plans, medical insurance and other savings and investment schemes. This will reduce the taxable income and help taxpayers save more.
Payments such as the premiums of life insurance plans, can be claimed as tax deductions under Section 80C of the Income Tax Act. The balance amount will come under your income tax* slab as the taxable amount.
These are the deductions that you can claim on investments:
- Deductions under Section 80C of the Income Tax Act on investments in Public Provident Fund, National Savings Certificate, Employee Provident Fund, Equity-Linked Savings Scheme and more.
- Medical or health insurance premiums or health rider# premiums are eligible for tax deductions under Section 80D of the Income Tax* Act. Tata AIA Life insurance plans also offer these tax deductions on the premium payments as per the prevailing tax laws.
- The interest payable by the taxpayer on the repayment of a child education loan qualifies for tax deductions under Section 80E.
- Charitable donations made by the taxpayer can qualify for deductions under Section 80G of the Income Tax* Act.
- The interest earned on your savings account are eligible for deductions under Section 80TTA.
What is Tax Rebate?
An income tax* rebate means a tax relief that an individual can receive if the taxes they are liable to pay is less Tax rebate helps individuals with low income to decrease their tax burden through the reduction of taxable income. This will also comprise what can be claimed from the total tax payable.
One can claim tax deductions and exemptions on their income. However, in the case of a tax rebate, one can only claim tax on the amount of tax payable. Therefore, income tax* rebate only applies to the following taxpayer categories:
- Individuals with an annual income of less than ₹5 lakhs.
- Individuals eligible for a rebate on total tax payable or ₹2,500, whichever is lesser.
For instance, if the TDS deducted by your employer or the Tax Deducted at Source is more than your tax liability, then you can claim the surplus from the Income Tax Department. Your tax liability can be easily computed when you file your income tax* returns.
As per the Income Tax* Act, an individual assessee can claim a tax refund only if they file their income tax* returns within the due date for the assessment year by July 31 each year or on a date notified by the government.
When filing the returns on the official website of the Income Tax* Department, fill out the ITR form, as applicable, correctly, and then click on the “Validate” and “Taxes paid and Verification”. Your tax refund, if any, will be automatically calculated. This will also be validated by the Income Tax Department, and they will certainly refund the amount to you within a given timeline.
Most people whose taxes are filed by their agents or accounts or those who have just joined the workforce and are new to the concept of taxes may initially struggle to understand how tax* exemption, tax* deduction and tax* rebate work. However, with the explanation given above, it is easy to understand that though the three terms are related, they have their own relevance and are applied differently in the tax* system of India.