We easily understand terms like income or savings, because they are relatable. But, Tax Exemption, Tax Rebate, and Tax Deductions sound tiring and dull, even though these have the potential to reduce our tax burden.
In this video, we tell you what each of these 3 things is, how they are different, and how they can help you reduce the amount of taxes you pay. We also discuss the right approach to using these options
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We will begin by discussing Tax deduction!
What is a tax deduction?
Just as the name suggests, the income tax deduction is a reduction in tax obligation from your gross taxable income.
The standard deduction is the first brush with tax savings that you benefit from. Standard deduction of Rs 50,000 is available to all taxpayers from their total income.
Say your gross annual salary is Rs 8 lakh, with the Rs 50,000 standard deduction, it will become Rs 7.5 lakh.
Apart from this standard deduction, income tax deductions also offer a whole lot of other opportunities to reduce your tax.
However, to claim these, you need to save or invest in the stated instruments to qualify for a reduction in your gross taxable income.
However, the widely popular section of the income tax act that taxpayers opt for each year to save and invest is Section 80C.
You can claim a maximum tax deduction of Rs 1.5 lakh in each financial year from your gross income by saving, investing and spending on instruments that qualify for tax deductions under Section 80C.
From over a dozen options provided under this section, you can choose the one that is appropriate for you. Different tax saving options have different lock-in periods and return possibilities.
If you are in the highest tax bracket of 30%, the collective tax savings under Section 80C works to Rs 46,800/-
This is a very attractive way to reduce tax costs.
Another popular way to save tax is through contributions that qualify for deduction under 80D towards health insurance.
Under this section, you can claim a deduction of Rs 25,000 on the premium paid towards health insurance for self, spouse and dependent children.
An additional deduction for health insurance of parents is available up to Rs 25,000 if they are less than 60 years of age.
And, if your parents are senior citizens, the deduction limit is Rs 50,000. This section also allows deduction towards preventive health check-up for a maximum of Rs 5,000 each year, as long as it is within the prescribed limits
There are several other ways to claim tax deductions subject to conditions. For example, under section 80E, you can claim a deduction on the interest paid for an education loan.
As you can see, with tax deductions, you can reduce your tax liability quite substantially
Now, let us look at the tax exemption.
Tax exemption simply means that you don’t have to pay tax for certain components of your income. Tax exemptions mostly help salaried people reduce their taxable income through different allowances.
Some of the popular allowances include House Rent Allowance -HRA, Children Education Allowance, Gratuity and Leave Travel Allowances - LTA among others.
Then there are special conditions to qualify for tax exemption. For example, senior citizens in the 60-80 year age group do not have to pay income tax if their annual income is within Rs 5 lakh.
That’s how tax exemption always acts in favor of you!
Now the last subject … What is the tax rebate?
The tax rebate is a final reduction in the actual tax that you pay. It is like the final bargain that you can claim from your taxable income after you have claimed exemptions and deductions.
Tax rebate under Section 87A of the Income Tax Act is the last reduction from your tax which reduces your tax liability by up to Rs 12,500.
This rebate’s purpose is to reduce the taxpayers’ burden, especially those who are in the lower-income slabs.
If you are someone whose taxable income after removing deductions and exemptions is Rs. 5 lakhs or less, your income tax outgo becomes nil, when availing the rebate.
That is because, for a taxable income of Rs 5 lakh, the tax liability is Rs 12, 500. Here, under section 87A (B) a rebate of Rs 12,500 is claimed
The smart way to make the most of your tax savings options is to first claim the standard deduction, next claim the possible exemptions before venturing to specific deductions and finally settling on the rebate.
Now that you have learned the difference between tax deduction, exemption, and rebate, put all these to use this tax season, to reduce tax and save money!
