Income tax is a liability that is a burden, especially for salaried individual taxpayers that they try to reduce as much as possible. To save taxes, taxpayers try to turn tax provisions in their favour. Understanding the complex terminologies of tax laws is difficult for a normal person. However, if they desire to save their hard earned money and save tax bills, they have to understand the two most important terms, Exemption and Deduction.
The basic meaning of Exemption is ‘freedom from the obligation of doing something or liability to pay’. According to tax laws, exemption means a particular part of the income that is free from tax at source, and you don’t have to pay tax on such income. However, you exempted from paying tax on these incomes on the fulfilment of conditions prescribed for it. Some of the common examples of exemptions on tax are House Rent Allowance (HRA), Leave Travel Allowance (LTA), etc.
Coming to deductions, which means subtraction, in taxation, it means that a certain part of the taxable income is subject to deduction if you have made certain investments and expenses. It means that after calculating your taxable income and considering your exemptions (if applicable), you can use this taxable income for expenses and investments that are tax deductible. These investments and expenses are deducted from your gross taxable income and to calculate your net taxable income. Investing in NCS, ELSS, PPF, medical insurance, charities and donations, etc., are some examples of deductible investments and expenses.
You can reduce your tax liabilities to a great extent once you thoroughly understand the deductions and exemptions that you’re eligible for.
You can read the original article given below, written by our Managing Director. This write-up appeared as an authored article in Deccan Herald.