Deduction VS Exemption
Deduction & Exemption are two Synonyms words in first appearance but has vital difference at length in Income Tax Act. Deduction means subtraction of an amount from the SUM of Income which is already have under different heads of Income. Whereas Exemption means the whole income itself is exempt from tax. In other words, if you have income then you can get deduction whereas Income itself got exempted. Incomes from which deduction are allowable under chapter VI-A will first be included in the gross total income (GTI) and then the deductions will be allowed from such GTI whereas the income which are exempt under section 10 will not be included for computing total income. Expenditure incurred in relation to any exempt income is not allowed as a deduction while computing income under any of the Heads of Income. For getting deduction you have either to expense out or Invest in designated area in other words it is Cash outflow. On the other hand, Inflow of your income is itself exempt from tax i.e. Exemption……it result in increase of your cash inflow. The government declares the same(exemption) through either circular or notification in public interest. Generally it is for whole masses & not for classes… However government also notified some exemption for classes (For Example Higher Income Class assesssee, SEZ area, NRI income ).Government divert the funds of masses for its new scheme or ventures through various types of deductions. Deduction gives the support to other class of government schemes/ideas which requires immediate attention. It uplift not only old schemes but also useful for new schemes. Exemptions are time bound whereas Deductions are allowed on periodicals basis.
For each class of Assessee government gives separately list of deduction/exemptions. Generally deduction starts from section 80 C to 80 U & under section 10, 11 & 12 for some other Assessee. There were difference deduction too under section 80 (commonly known as Chapter VI-A deduction in case of certain income) & Tax Holiday granted to various industries, firms etc., under section 10. Some exemption & deduction also given under each heads of Income (i.e.Standard deduction in case of salary, Standard deduction in case of House Property, Various deduction available from Section 32 to 37 under Profit or Gains from Business & Profession, Deduction from Capital Gains & also from Income from other Source). Whereas Incomes are specifically exempt under section 10. Assessee classify in 1) Individual , 2) HUF, 3)Partnership firm/Limited Liability Partnership , 4) Company (Domestic & Foreign) , 5) Association of Person, 6) Body of Individuals, 7) Charitable Institute, 8 ) Co-operative society, 9) an entity registered under Local authority,10) Every artificial Juridical person. Deduction allowed to one assessee are not advantageous to other class of assessee in other words if individual enjoys certain deduction on spending some amount either for investment or towards expenses then company or firm cannot enjoy the same. They have other class of deduction allowed which an Individual/HUF cannot enjoy. For example weighted deduction allowed by other assessee other than Individual and HUF.
For all the above assessee government gives different types of Incentives through either deduction or Exemptions from time to time. These incentives give promotion to develop the particular sector over a period of time. Some deduction are Investment based and some exemptions are Tax Holiday base. For example deduction under section 32AD for additional depreciation @ 35 % if investment made in Notified Backward Area and If industry set up in Special Economy Zone then Tax holiday granted to such industry for certain period of years from the commencement of operations. Similarly deduction under section 80 IA also allowed deduction to certain category of assessee for promotion of Exports. All these points are applicable to Resident Assessee & Resident but Not Ordinary Resident assessee. For Non Resident Deduction & Exemption are also different. Non resident commonly includes Individuals, HUF, Company, LLP, and Foreign Institution Investors. For NRI Government enter in agreement with different countries and provide Double Taxation Agreement under which an NRI can take the benefit of such deduction.
NRI has also two types i) one on Citizenship & ii) other than Citizenship.
i) An Indian origin who was a citizen or his parents or grandparents are citizen of India but are not living in India for more than 182 days are Non Resident & ii) Other person who neither himself nor his parents or grandparents are citizen of India i.e. Citizen of other country (Purely Non Resident).
Resident are taxable on global income whereas Non Resident are taxable on their Indian source income or income that is received in India or has accrued or deemed to accrue in India.
Section 5 provides the scope of total income in terms of the residential status of the assessee because the incidence of tax on any person depends upon his residential status. The scope of total income of an assessee depends upon the following three important considerations:
i) the residential status of the assessee
ii) the place of accrual or receipt of income, whether actual or deemed; and
iii) the point of time at which the income had accrued to or was received by or on behalf of the assessee.
A Non-Resident’s total income under section 5(2) includes:
i) income received or deemed to be received in India in the previous year;
ii) income which accrues or arises or is deemed to accrue or arise in India during the previous year.
Apart from section 10 & 80 section 9 also play some role in Deduction Vs Exemption in case of Non-Resident. For example Explanation 1(a) to 1 (e) of section 9 (1) (i) specify the exemption . Explanation 1(a) specify that in the case of a business, in respect of which all the operations are not carried out in India in other words such part of income which cannot be reasonably attributed to the operations in India, is not deemed to accrue or arise in India. Explanation 1 (b) specify that Purchase of goods in India for Export, Explanation 1(c) specify that collection of news and views in India for transmission out of India, Explanation 1(d) specify that Shooting of Cinematography films in India & last but not least Explanation 1 (e) specify that Activities confined to display of rough diamonds in SNZs.
Allowances & Perquisites paid outside India by the Government is exempt by virtue of section 10(7). Similarly Pension payable outside India by the government to its official and judges who permanently reside outside India shall not be deemed to accrue or arise in India (however they have served their services in India before retirement but Pension paid out side India is a questionable treatment but anyway).
Indian government not only increase the foreign inflow but also create the various opportunity to expand across the country.
Section 10 of the Income Tax Act exempts from tax various incomes including the following in the hands of Non-Resident.
1) Interest on notified securities and bonds issued to non-residents section 10 (4).
a. Bonds notified by central government
b. Interest on moneys standing to credit in a Non-Resident (External) Account (NRE A/c) in any bank.
2) Interest on specified savings certificates to non-residents section 10 (4B).
Available to a person of Indian Origin only.
3) Remuneration received by individuals, who are not citizen of India section 10 (6).
i) Remuneration received by Officials of Embassies etc of Foreign States. Section 10 (6) (ii)
ii) Remuneration received for services rendered in India by a Foreign National employed by foreign enterprise Section 10 (6) (vi).
iii) Salary received by a non-citizen for services rendered in connection with employment on foreign ship Section 10(6) (viii).
iv) Remuneration received by foreign government employees during their stay in India for specified training Section 10 (6) (xi) Any remuneration received by employee of the government of a foreign state from their respective government during his stay in India is exempt from tax, if remuneration is received in connection with training in any establishment or office of or in any undertaking owned by –
a) The government, or
b) Any company owned by the central government or any state government or
c) Any company which is a subsidiary of a company referred to in (b) above, or
d) Any statutory corporation; or
e) Any society registered under society’s registration act 1860 or under any law and wholly financed by the central government or any state government.
It may be carefully noted that exemption is available under section 10 (6) only to an individual who is not a citizen of India.
4) Tax paid by government or Indian concern on income of a non-resident non-corporate or foreign company Section 10 (6A)/(6B)/(6BB)/(6C).
i) Tax on Royalty or fees for technical services derived by foreign companies. Section 10 (6A)
ii) Tax paid on behalf of non-resident Section 10 (6B).
iii) Tax paid on behalf of foreign state of foreign enterprise on amount paid as consideration of acquiring aircraft etc on lease section 10 (6BB).
iv) Income from project connected with the security of India section 10 (6C).
5) Other Incomes of non-residents exempt from tax-remuneration under cooperative technical assistance and income of consultants and technical assistance Section 10(8)/(8A)/(8B)/(9).
i) Cooperative technical assistance programme Section 10 (8).
ii) Consultant Remuneration Section 10(8A).
iii) Remuneration to employees of consultant Section 10 (8B).
6) Interest Income arising to certain persons Section 10 (15).
i) Interest on Notified Bonds
ii) Interest on Deposits to bank incorporated outside India
iii) Interest on loan for projects approved by Central Government
iv) Interest on loan in pursuance of financial co-operation agreement.
v) Interest on Foreign Currency Deposits
vi) Interest on Deposit in an Offshore Banking Unit of SEZ.