pri Income Tax Exemptions versus deductions Income Tax Exemptions versus deductions

Generally we observed in industry that, many tax payers got confused in two words i.e ‘Exemptions’ and ‘Deductions’.  Hence today I am writing this article for stating bifurcation in between ‘Exemptions’ and ‘Deductions’.

A provision does not become an exemption provision merely because the marginal notes to the section or the heading of the section call it so. Tax law contains chapters dealing with incomes which do not form part of total income. There are chapters dealing with deductions and allowances. Chapter III refers to various incomes which are exempt from tax. It excludes certain types of income from the ambit of ‘total income’ as defined under the Income-Tax Act, 1961.

The incomes enumerated in Section 10 of the Act are not only excluded from the taxable income of the assessee but also from his total income. They are not to be taken into computation for determining the taxable income. By their very nature certain classes of income are entitled to exemption — agricultural income and income held under charitable trust are cases in point.

Exemption is conferred indelibly on a particular kind of income and does not depend on the character of the recipient. There is a second category of exemption which depends on the character of the assessee. Incomes of local authorities and consuls are examples. Income tax exemptions are provided on particular sources of income and not on the total income. It can also mean that you do not have to pay any tax for income coming from that source. Some of the examples of the exemptions are mentioned below. Tax exemptions are generally covered under Section 10 of the Income Tax Act.

Chapter IV, on the other hand, deals with various heads of income and their computation. Chapter VIA deals with deductions to be made in computing total income. Income tax deductions can be claimed on the gross total income. Certain specified investments and expenditure are considered to claim deductions. Tax deductions are covered between the scope of Section 80C to 80U of the Income Tax Act.

The distinction between exemptions and deductions is crucial to an understanding of the computation provisions. Deduction is that which is deducted, the part taken away, an abatement. Deductions are made from gross income in arriving at the net income for tax purposes. Many of the deductions are itemised in detail under appropriate captions and subtracted to arrive at income subject to tax.

Exemptions Versus Deductions

Some example of Exemptions and Deductions are as under:

Income tax Exemptions:

Income Tax Deductions

At the end to conclude this article I want to state there is very thin line between tax exemption and tax deduction hence while claiming it in return be very careful.

Disclaimer: The contents of this article are for information purposes only and does not constitute advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer to relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up.  The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that Author / TaxGuru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof. This is not any kind of advertisement or solicitation of work by a professional.

(Republished with Amendments by Team Taxguru)

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July 2021