Deduction & Exemption
Income Tax is a compulsory responsibility that is levied on every citizen, based on their capacity to pay, age, and gender. In regards to providing relief to the assessee from payment of taxes, in tax law, there are certain provisions for deduction and exemptions, which results in decreasing the overall tax liability. In deduction, the amount is first included in the income of the taxpayer and then the deduction is allowed as per the rules, i.e., in full or part or when certain conditions are satisfied. On the other hand, an exemption is an income that is non-chargeable to the tax.
In a simple word, the deduction is the part of Gross Total Income (GTI) which can be avail by any person based on application. Contrarily, the exemption is not a part of Gross Total Income (GTI).
Definition of Deduction
Chapter-VI (Section 80C to Section 80U) of the Income Tax Act, 1961 deals with deductions. The amount that will be subtracted from the gross amount is merely known as Deduction. According to Income Tax Act, deductions are the payments or investments made by the assessee through which a specific percentage or amount of money is reduced from their gross total income to arrive at total taxable income. If Gross total income is nil, then no deduction is permissible, or the amount of deduction cannot surpass Gross Total Income i.e., the deduction is permissible only to the extent of gross total income.
These deductions are allowed to the taxpayer only if he claims deductions for the investments he has made in particular instruments. Thus, such an income forms part of the gross total income of the taxpayer, and then the deductions are allowed to arrive at total income. Deductions are divided into three categories:
- Deduction regarding certain payments: These are the deductions taxpayer claims on Life insurance premium paid, medical insurance premium paid, donations to charitable institutions, etc.
- Deduction regarding certain incomes: These are the deductions taxpayer claims on Specific incomes from cooperative societies, Royalty on patents etc.
- Other deductions: These are the deductions taxpayer claims on investments other than above.
Definition of Exemption
The word ‘exemption’ is derived from the word exempt which means an amount which is not subject to pay. In the ambit of income tax, exemption refers to those sources of income which are not taken into consideration while calculating the total income. Hence, such sources of income are excluded from taxable incomes or not chargeable to tax.
In the list of exempted incomes, some sources of income are completely exempt from tax e.g. Agricultural income. While certain sources of income are partly exempt from tax, the exemption is allowed to a certain limit. When the partly exempted income exceeds the prescribed limit then the exceeding part of the partly exempted income will be subject to tax and considered while computing the gross total income.
Difference between Deduction and Exemption
- Section 80C to 80U of Income-tax Act, 1961 deals with deduction whereas exemptions are provided in Section 10.
- Deduction is generally referred as subtraction. In other words, an amount that is eligible to reduce taxable income is said to be Deduction. Whereas, Exemption is generally referred as exclusion. In other words, if certain income is exempt from tax, then it will not contribute to the total income of a person.
- Deduction is treated as concession to the tax-payers. On the other hand, Exemption is treated as relaxation to the tax-payers.
- Concept of deduction is that the amount of deduction is first included in the gross income and then deducted from it to arrive at the net income. Whereas, concept of Exemption is that the exempted income is not considered as a part of total income, the whole amount is an exemption for the taxpayer.
- The deduction is allowed to specific persons that qualify the particular criteria. On the other hand, the exemption is allowed to all the persons.
- Deduction is Subject to conditional, it means that, it is only allowed to those who qualify the eligibility criteria. Contrarily, the exemption is unconditional that means no eligibility criteria is required to get the tax exemption every individual is eligible to get the benefit of tax exemption.
- The main objective of providing deduction is to encourage individual savings and investments in certain instruments. While the exemption is to help the weaker section of society.
- Deductions are first added to Gross Total Income and then deducted from it. On the other hand, Exemptions do not form any part of total income.
From the above-discussed differences, one can understand that a Deduction is mainly a tool used by the government to promote savings of assessee to increase investments in certain areas, for which the income of the assessee is reduced to that extent and also deduction is not applied on every individual it is subject to a certain condition. Likewise, exemptions are used to help the weaker sections of society to grow and prosper. By providing exemptions, the government is trying to give an equal opportunity to boost that segment and every individual is eligible to get the benefit of tax exemption.
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