Every year, before you pay Income tax and file your tax returns, you avail of certain benefits that slash your
tax liability. Referred to as exemptions and deductions these benefits help reduce your taxable Income. While
most of these benefits have been removed from the new tax regime you can still avail of these in the old tax
regime. Here’s what the difference between exemption and deduction means.
What is Tax Deduction?
Deductions are the specified investments or expenditures you make in a fiscal year that can be subtracted
from your gross total income. These helps bring down the total income on which you calculate your tax
liability, which means it cuts down your taxable income.
So, if you are investing in specified mutual funds, EPF, PPF or life insurance policies, paying tuition fee for your
children’s education, paying the premium for a health insurance policy, repaying a home loan or education
loan, donating to charities, etc., you can avail of tax deductions by reducing these amounts from your gross
total income.
Some Sections & limitations:
Deductions are available under different Sections of the income-tax Act, 1961, Including Section 80C, 80D,
8OG, Sec 24, etc. Most of the deductions under these Sections have, however, been removed from the new
tax regime. The limitations for some of these Sections are as follows:
– Sec 80C (Investments/expenses): Rs. 1.5 Lakh
– Sec 80CCD (1) (NPS): Rs. 50,000
– Sec 80D (Medical premium): Rs. 25,000 (below 60 years); Rs. 50,000 (above 60 years)
– Sec 80E (Education loan): Interest paid for 8 years
– Sec 80G (Donations): 50% or 100% deduction
– Sec 80TTA (Interest on savings account: Rs. 10,000 (below 60 years)
– Sec 80TTB (Interest): Rs. 50,000 (60 years and above)
Let’s understand this with an illustration of how Mr. Amit’s taxable income is calculated:
1. Gross Total Income: Rs. 20,00,000
2. Deductions:
– Section 80C: Rs. 1,50,000
– Section 80D: Rs. 20,000
– Section 80CCD(1B): Rs. 35,000
Total Deductions = Rs. 1,50,000 + Rs. 20,000 + Rs. 35,000
= Rs. 2,05,000
3. Taxable Income Calculation:
– Taxable Income = Gross Total Income – Total Deductions
– Taxable Income = Rs. 20,00,000 – Rs. 2,05,000
– Taxable Income = Rs. 17,95,000
So, the calculated taxable income of Mr. Amit is indeed Rs. 17,95,000.
What is Tax Exemption?
Tax exemption means that only specific sources of income will not be taxed, as opposed to your entire
income. So, a particular type of income like agricultural income, or specified allowances offered by your
employer such as house rent allowance (HRA) or leave travel allowance (LTA), will be exempt from tax or tax
free in your hands.
Some Sections and limitations:
Tax exemptions are allowed under Section 10 of the income-tax Act, 1961, most of which have also been
removed under the new tax regime. Some of these are as follows.
– Sec 10(13) (HRA): It’s the least of the following:
• Actual HRA received from employer
• 50% of (basic salary + DA); 40% for non-metros
• Actual rent paid minus 10% of (basic + DA)
– Sec 10(5) (LTA): Decided by employer. Twice in a block of four years.
– Sec 10(14) (Food): Rs. 50 per meal
Calculation:
In the above example, if your taxable income is Rs. 17.95 lakh and you have taken HRA exemption of Rs. 1.5
lakh and LTA exemption of Rs. 1 lakh, as allowed by your employer, then your taxable income will reduce as
follows:
Taxable Income: Rs. 17.95 lakh
Exemptions: (1.5 lakh + 1 lakh) = 2.5 lakh
Taxable Income: Rs. 15.45 lakh
Source: The Economic Times