With the tax return deadline looming, understanding key terms is essential. Tax rebates, exemptions, and deductions play a role in determining tax liabilities. Rebates apply up to a certain income level, while exemptions exclude specific incomes, and deductions reduce taxable income.
Here’s a detailed guide explaining tax rebate, deduction and exemption —
What is a tax rebate?
A tax rebate is tax relief provided to individuals who earn up to a certain income level, according to Section 87A of the Income Tax Act. It is claimed from the total tax payable. A tax rebate is not deducted from income. Hence, it reduces the total tax payable by deducting a fixed amount from the calculated tax.
“Tax rebate is direct relief given on the final tax payable, reducing it or making it zero,” according to CA Shefali Mundra, Tax Expert at ClearTax.
For FY 2024–25, people with taxable income up to ₹7.75 lakh under the new regime will get a full rebate, except on special incomes of ₹25,000, as per Section 87A, Mundra said. “Tax rebate aims to provide relief to small and middle-income taxpayers,” she added.
What is a tax deduction?
Tax deductions are claims used to lower taxable income from different investments and expenses a taxpayer incurs, thereby reducing the overall tax liability. They subtract specific expenses from the total income.
“Specific investments or expenses are deducted from your gross income before calculating tax. This reduces your taxable income, which in turn lowers the base on which tax is calculated. As a result, the income slab used for tax purposes decreases,” Mundra noted.
For example, Section 80C provides a tax deduction on investments in ELSS, PPF, and LIC up to ₹1.5 lakh, while Section 80D covers medical insurance up to ₹25,000. If income is ₹9 lakh and deductions are ₹1.75 lakh, then the taxable income will be ₹7.25 lakh.
What is a tax exemption?
An income tax exemption is provided on certain types of income, but not all of it. This means that, depending on the type of income, a portion may still be tax-free. When calculating your tax liability, exempt income is the first thing deducted from your salary or other income.
In cases of tax exemption, certain types of income are entirely excluded from taxation. That portion of income is never included in your taxable income, reducing the amount subject to tax, Mundra said.
For example, if you earn ₹10 lakh and ₹50,000 is house rent allowance (HRA) exemption, tax is calculated on ₹9.5 lakh, the tax expert noted.
Tax rebate vs tax deduction vs tax exemption
| Aspect | Tax Rebate | Tax Deduction | Tax Exemption |
|---|---|---|---|
| Meaning | Direct relief is given on the final tax payable, reducing it or making it zero. | Specific investments/expenses are reduced from your gross income before tax calculation. | Certain types of income are completely excluded from taxation. |
| How It Works | Applied after tax liability is computed → reduces tax payable directly. | Lowers taxable income → lowers the base on which tax is calculated. | That part of income is never added to your taxable income. |
| Stage Applied | After final tax liability is computed. | While computing taxable income. | Before taxable income is calculated. |
| Impact | Decreases final tax payable, which can result in zero tax liability. | Decreases the income slab used for tax purposes. | Decreases the portion of income subject to tax. |
| Examples in India | – Section 87A rebate: For FY 2024–25, individuals with taxable income up to ₹7.75 lakh (new regime) get full rebate (except on special incomes) of ₹25,000. |
Section 80C: Investments in ELSS, PPF, LIC up to ₹1.5 lakh. Section 80D: Medical insurance up to ₹25,000. Eg: If income = ₹9 lakh and deductions = ₹1.75 lakh, taxable income = ₹7.25 lakh. |
House Rent Allowance (HRA) exemption. Eg: If you earn ₹10 lakh and ₹50,000 is HRA exemption, tax is calculated on ₹9.5 lakh. |
| Key Benefit | Provides relief to small and middle-income taxpayers. | Encourages savings/investments and reduces taxable income. | Completely removes certain incomes from taxation. |
Source: CA Shefali Mundra, tax expert at Clear Tax.
Disclaimer: This article is for informational purposes only and does not constitute legal or tax advice. Taxpayers are advised to consult a qualified tax professional or refer to the official website of the Income Tax Department for accurate and up-to-date guidance before filing their returns.