Difference Among Tax Exemption, Tax Deduction and Tax Rebate

Difference Among Tax Exemption, Tax Deduction and Tax Rebate

PT facts

• Tax exemptions:
  • Reduces the overall taxable income. It refers to income, expenditure or investment on which no tax is levied
  • Tax exemptions can be claimed from a specific source of income and not from the gross total income
  • For example, once can claim House Rent Allowance (HRA) and Leave Travel Allowance (LTA) which will get deducted from gross income and hence lower taxable income.
• Tax deductions:
  • This is a reduction from a taxpayer’s gross income as a result of expenses like transportation charges, medical expenses, tuition fees etc. The aim is to reduce the amount of one’s income on which tax will be levied.
  • For example, Deduction under Section 80C for specific types of investments like Provident Fund, Public Provident Fund, National Savings Certificate,
• Tax Credit:
  • It is a tax incentive, which is used by the government to encourage the payment of taxes. The major advantage of a tax credit is that it directly minimizes the tax liability.
  • For example, Input Tax Credit and Income Tax Credit etc.
• Tax rebates:
  • A tax rebate is a refund on taxes when an individual has lower tax liability than the tax he or she has paid.
  • A tax rebate helps to reduce the tax burden on individuals in the low-income bracket.
  • Income tax rebates apply to those who have an annual income under Rs. 5 lakhs and the individual is eligible for a rebate of their entire tax payable or Rs. 2,500, whichever is less.
• Tax Evasion:
  • Tax evasion is a deliberate attempt by a person/organisation/entity to avoid paying a true tax liability. In some countries it is a criminal offence.
• Tax Avoidance:
  • Tax Avoidance is the artful and knowledgeable filing and reporting of income and write-offs in a way that maximizes deductions and takes advantage of tax laws
• Tax Foregone:
  • The tax/Revenue Foregone is tax expenditures arising out of measures such as special tax rates, exemptions, deductions, rebates, deferrals and credits which are an integral part of the tax policy of the Government.