The terms Income Tax Rebate, Income Tax Deduction, and Exemption are interchangeably used most times by the common man. However, the meaning & treatment of these terms vary.
Income Tax deduction signifies specific expenses/investments that can be reducible from the gross total income of a taxpayer. These expenses are usually transportation charges, medical expenses, tuition fees, etc. The aim is to reduce the amount of income that is subject to tax. Some examples of investments that qualify for deductions are Life Insurance Premiums, Public Provident Fund, Fixed Deposits, Senior Citizen Savings Scheme, National Savings Certificate, Post Office Time Deposits, Unit-Linked Insurance Plans, Home Loan EMIs, Mutual Funds, ELSS, Registration Charges and Stamp Duty for a new home, Mediclaim, Infrastructure Bonds, Charitable Contributions, Deduction on House Rent Paid et al. The benefits of the deductions under Section 80 is available to NRIs as well.
Both tax deduction and exemption refer to reduced taxable income – however, tax exemptions can be considered as complete relief from taxes, or reduced tax rates and taxability only on specific parts of your income. The Income Tax Exemptions are claimable not from the Gross Total Income, but from a specific source of Income. Similarly, IT Exemptions are claimable under Capital Gains, Sec 54, 54EC, 54F, etc, but not under any other head. An NRI can thus avail the benefit of exemptions from capital gains at the time of filing and claim a refund.
Tax exemptions come under Section 10 of the Income Tax Act. Some examples of Income-tax exemptions are HRA, LTA, Gratuity/ Pension / VRS received in the year of assessment, perquisites, entertainment allowance, etc. Investments under the Sukanya Samriddhi Scheme are fully exempt from tax.
All exempt income items claimed must be disclosed to the employer before the tax filing. The employer then goes ahead and computes tax on the remaining income, and TDS deduction is on the basis of the specific income slab the employee comes under.
A tax rebate is a refund on taxes when the taxpayer has lower tax liability than the tax paid. The tax rebate helps to lessen the tax burden of the low-income group. Listed below are applicable criteria to claim the provision of tax rebates.
- The individual must be a resident of India and his/her total income after deductions should not exceed 5 lakhs.
- If the total tax payable is less than Rs 2500, then that would be the rebate under Sec 87A. This rebate applies to the total tax before the addition of the 3% Education Cess. Senior citizens are not eligible to file for tax rebates.
- Tax rebates are claimable by individuals only – HUFs, firms, and organizations cannot claim them.
So, what is a tax refund then? This is the amount claimed back from the Income Tax Department when the tax paid at source by your employer is more than the computed tax liability at the time of tax filing.