Readers, you must know the difference between exemption and deduction

If income tax was easy to figure out, every second person would have become a chartered accountant. Even as you  warm up for the Union Budget to be delivered by the country’s finance minister, it’s about time, you have clarity on a few budget-related words. Exemption and deduction are two common words many get confused with, and most of us can’t differentiate between them. So, here is a simple explanation to figure out these terms. [caption id=“attachment_589059” align=“alignleft” width=“380”]  In the case of income tax, “exemption” gives you the freedom to not pay the tax. Moneycontrol.com[/caption] Exemption: The word “exempt” means “free from an obligation from doing something”.  In the case of income tax, “exemption” gives you the freedom to not pay the tax. So, when a particular income is not taxable at all, it’s an exemption. Of course, certain income can be exempted from tax provided certain conditions are met. For instance, leave travel allowance amount is exempted from tax, provided certain conditions are met. Likewise house rent allowance is an exemption you get under Section 10(13a) of the Indian Income Tax Act. Also, capital gains from transfer of agriculture land, invested in another agriculture land. Another example of exemption is when long-term capital gain arising from transfer of eligible equity share of company. Tip: You get tax exemption on income. Deduction: The word “deduct” means “to subtract or take away for the total”. Likewise, the word “deduction” as far as income tax goes, means the amount is taken away (reduced) from the total taxable income. Usually when the government wants to encourage savings, they offer deductions for investing in certain instruments and hence lower your taxable income by that extent. For example, if your gross income is Rs 5 lakh and you invest Rs 1 lakh in an instrument that offers deduction, your total taxable income (income on which tax is due) reduces to Rs 4 lakh. So if your tax liability is, say, 10 percent of your taxable income, after accounting for deduction, you will pay Rs 10,000 less in income-tax. Examples of financial instruments which offer various deduction benefits are as follows. Investment in an equity linked savings scheme is also available for deduction up to Rs 1 lakh this year under Section 80 C. Health insurance premiums paid for self, spouse or children, also get a tax deduction benefit under Section 80 D. Also, under Section 80 E you get a deduction on repayment of education loan (only interest) taken for higher studies for self, spouse or children when taken from authorised lenders. Keep in mind that this deduction is allowed for eight assessment years or until the entire interest is paid, whichever is earlier. Tip: You get tax deduction on payments. Now that you know how easy it is to remember exemption and deduction, keep tracking this space for more budget related terms.