Income Tax is a compulsory obligation which is levied on every citizen, based on their paying capacity, age, and gender. In order to provide relief to the assessee from payment of taxes, the tax law has certain provisions for deduction and exemptions, which decreases the overall tax liability. In deduction, the amount is first included in the income of the taxpayer and then the deduction is allowed as per the rules, i.e. in full or part or when certain conditions are satisfied. An exemption, on the other hand, is the income which is not charged to tax.
While deduction is a part of Gross Total Income (GTI), but any person can avail its benefit based on application. Conversely, the exemption is not a part of GTI. The article provided below explains the substantial differences between deduction and exemption.
Content: Deduction Vs Exemption
|Basis for Comparison||Deduction||Exemption|
|Meaning||Deduction means subtraction i.e. an amount that is eligible to reduce taxable income.||Exemption means exclusion, i.e. if certain income is exempt from tax then it will not contribute to the total income of a person.|
|What is it?||Concession||Relaxation|
|Concept||The amount of deduction is first included in the gross income and then deducted from it to arrive at the net income.||The exempted income is not considered as a part of total income, the whole amount is an exemption for the taxpayer.|
|Income is||Tax deductible||Tax free|
|Objective||To promote savings and investments of the general public.||To boost that particular section in which tax is exempted.|
|Sections||Section 80 C to 80 U deals with deduction||Section 10 deals with exemptions|
|Allowable to||Specific persons||All the persons|
Definition of Deduction
Chapter-VI (80C to 80U) of the Income Tax Act, 1961 deals with deductions. Deduction means the amount that will be subtracted from the gross amount. As per Income Tax Act, deductions are the payments or investments made by the assessee through which a specific amount or percentage is reduced from their gross total income to arrive at total taxable income. If GTI is nil, then no deduction is allowable, or the amount of deduction cannot exceed GTI i.e. deduction is allowable only to the extent of gross total income.
These are allowed to the taxpayer only if he claims deductions for the investments he has made in particular instruments. In this way, such an income form part of the gross total income of the taxpayer and then the deductions are allowed to arrive at total income. Deductions are divided into three categories:
- Deduction regarding certain payments: Example: Life insurance premium paid, medical insurance premium paid, donations to charitable institutions, etc.
- Deduction regarding certain incomes: Specific incomes from cooperative societies, Royalty on patents etc.
- Other deductions
Definition of Exemption
The exemption is derived from the word exempt which means an amount which is not liable to something. In income tax, exemption refers to those incomes which are not considered while calculating the total income. Hence, such source of incomes excluded from taxable incomes or not chargeable to tax.
In the list of exempted incomes, certain incomes are completely exempt from tax like agricultural income. But certain incomes are partly exempt from tax, in which exemption is given up to the specified limit. The exceeding part of partly exempted income will be subject to tax and considered while computing the gross total income.
Key Differences Between Deduction and Exemption
The major differences deduction and exemption are indicated below:
- Deduction means subtraction i.e. an amount that is eligible to reduce taxable income. Exemption means exclusion, i.e. if certain income is exempt from tax then it will not contribute to the total income of a person.
- The deduction is a concession, but Exemption is relaxation.
- The deduction applies to tax deductible income, whereas only tax-free income is eligible for tax exemption.
- The deduction is allowed to specific persons that qualify the particular criteria. On the other hand, the exemption is allowed to all the persons.
- The deduction is conditional, i.e. it is allowed only to those who qualify the eligibility criteria. Conversely, the exemption is unconditional.
- The objective of providing deduction is to encourage savings and investments in certain instruments while the exemption is to help the weaker section of society.
- Section 80C to 80U of Income-tax Act, 1961 deals with deduction whereas exemptions are provided in Section 10.
- Deductions are first added to GTI and then deducted from it. Unlike, Exemptions do not form part of total income.
Deduction is mainly used by the government to promote savings to increase investments in certain areas, for which the income of the assessee is reduced to that extent. Likewise, exemptions are used to help the weaker sections of the society to grow and prosper. By providing exemptions, the government is trying to give an equal opportunity to boost that segment.