Saving on tax is something that everyone is looking for while making investments, or while planning expenses. While on this topic, people often get confused between Tax Exemption and Tax Deduction, believing that these two terms are the same. While dealing with income tax, people often come across these terms so it is necessary to understand how these two things are different from each other. Both of these mentioned methods give you tax benefits, but they just do so in different ways. Here we have simplified the differences between the two.
Tax Exemption
Income tax exemptions are provided on particular sources of income and not on the total income. This simply means that one does not have to pay any tax for income coming from that source. For example, income from agriculture is exempted from tax. It is to be noted that even though these sources of income are generally tax-free, any interest earned on these funds is taxable. The objective is to avoid over-taxation. Salaried individuals get a house rent allowance (HRA) and this can be used to claim tax exemption under certain conditions.
Tax Deduction
On the other hand, income tax deductions can be claimed on the gross total income. This amount can be deducted from the total taxable income. These expenses are subtracted while calculating taxable income, so they can lower the amount of tax you have to pay. The deducted amount is usually expenses or payments made towards certain investments, so the objective is to encourage investment and savings. For example, an investment in specified mutual funds, interest repayment of education loans, and premium payment for medical insurance can be claimed for deductions.
Source: WalletGenius
