Income Tax Exemption vs Discount vs Deductions: The Union’s 2023 budget, due to be tabled in parliament on February 1, will be closely watched by taxpayers as they look forward to easing the taxability of their income. The relaxation of income tax is given by the government in three ways: exemption, deduction and discount. Since the budget is just around the corner, these three terms are important for the taxpayer to understand.
Saurrav Sood, Practice Leader (International Taxes and Transfer Pricing) at SW India, said, “Often we see exemptions, deductions and rebates used as synonyms for tax. While many people use it interchangeably, but each has its own connotation and meaning that different from the others.”
Tax exemption
Income tax exemption means that no tax is levied. Currently, income tax is exempt up to a total annual income of Rs 2.5 lakh. For example, if a person earns Rs 2.5 lakh in a year, he/she will not have to pay income tax. In the event that the annual income is Rs 3 lakh, only Rs 50,000 tax has to be paid while Rs 2.5 lakh is tax free.
Maneet Pal Singh, partner at IP Pasricha & Co, said: “Tax exemptions can be viewed as full exemption from taxes and are claimed on specific portions of income and not total gross income. The Income Tax Act of 1961 provides various exemptions from income below principal salary, such as rent allowance (HRA) and from income below principal earnings, which are exempt from taxation based on certain criteria.
SW’s Sood said rent allowance, travel allowance and extras such as mobile phones and laptops fall under the category of exemptions when calculating salary income. “There is also a similar exemption for other income categories.”
While the current income tax exemption limit is Rs 2.5 lakh, industry association Assocham has urged the government to increase it to Rs 5 lakh in the 2023 budget.
Tax deductions
The income tax deductions relate to specific deductions for which a taxpayer is eligible due to investments made (article 80C) or amounts spent (article 80D or article 80E).
Maneet Pal Singh said these deductions are based on tax-saving investments such as life insurance premiums, medical insurance premiums, PPF and tuition fees, among others.
Saurrav Sood said, “Where exemption means no tax to be charged on the income, deduction is a reduction of the taxpayer’s gross income on which tax is calculated.”
There are demands for increasing the deduction limit under Section 80C in the Union Budget 2023-23, as compared to Rs 1.5 lakh currently. The real estate industry is also urging the government to provide a separate deduction for real estate purchases in addition to Section 80C. The current 80C limit was set about ten years ago.
Tax returns
The tax credit is different from an exemption and deduction. Below the rebate, a limit is set to where the income is tax free under section 87A of the Income Tax Act, 1961. However, if the annual income exceeds the limit, tax must be paid on the entire income tax.
For example, the income tax rebate is currently given up to an income of Rs 5 lakh. So, if a person earns an income of Rs 5 lakh, the entire income is tax free. However, if the annual income is Rs 5.1 lakh, the tax is levied on the entire Rs 2.6 lakh (as income up to Rs 2.5 lakh is exempt).
Archit Gupta, founder and CEO of Clear, said, “Rebate is usually a tax credit or tax credit after the total tax has been calculated.”
South India’s Saurrav Sood said that the income tax rebate is more of a set-off of the tax to be paid.
IP Pasricha & Co’s Maneet Pal Singh said: “The tax credit is a tax refund to an individual of his gross tax liability given under section 87A of the Act. It helps to reduce the tax burden of low-income individuals.”
He added that, in a nutshell, income tax exemptions and deductions may be claimed from “income” while rebates may be claimed from “tax payable.”
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