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Tax Exemption vs Tax Deduction- Know the Difference
March 04 , 2013

Income tax deduction and income tax exemption are two things that many people commonly take to assume are one and the same. But if you are to make effective use of tax deductions and exemptions you must understand how they are different.

What is tax deduction?

Tax deduction allows you to put some of your income to use in certain specified investments or expenses and deduct the amount from your income, lowering your tax liability. Tax deductions make provision for you to subtract that part of income from your total income and not pay tax on it. Tax deduction is always on income forming part of your total income.

Now are you wondering which rebates you used are tax deductions? Majority of tax rebates the government provides are in the form of deductions. All chapter VIA rebates- 80C investments, 80D health insurance premium, 80E education loan interest, 80G donations are all income tax deductions.

What is tax exemption?

Tax exemption on the other hand altogether exempts certain income from being taxable. Such exempted income does not form part of your total income on which income tax has to be paid.

Wondering if you ever had any tax exemption? For salaried individuals income tax exemptions are mostly applicable to certain portions of their salary. PF, HRA, LTA, are all examples of tax exemptions on salary income. Of course to actually get exemption on some of these you'd have to provide bills showing expenses were actually incurred.

Apart from these there are other exemptions like life insurance payouts, interest from tax free bonds, scholarship money, etc.

Action

Now you're set to proactively make investments to avail deductions and exemptions. For getting tax deduction you must invest in tax saving options whereas for having tax exemption you must seek tax free options. Read more articles in Must Know and Knowledge section of our Tax page for guidance.

But don't miss out on furnishing details of your investments/expenses having tax benefits to your HR so they deduct lesser TDS on your salary. If you miss mentioning any you can claim what has been deducted as tax on declaring them by filing income tax returns.

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