Tax Deductions Vs Salary Exemptions Differences You Need To Know

You can use income tax exemptions and deductions to reduce your income tax, especially if you’re a salaried employee. Most of these are based on the expenses you’ve made in the year so let’s look at what expenses are tax deductible and which of them are exemptions. 

There’s a clear distinction between a deduction and an exemption. If you understand the difference between them, it will help you a lot in reducing the tax you need to pay. Further, let’s look into the differences of tax deductions vs salary exemptions.

Tax deductions are investments or expenses that can be subtracted from your taxable income, reducing the amount of money you must pay in taxes. This implies that you will only be required to pay taxes on the remaining balance following the deduction of your expenses. 

In contrast, tax exemptions are forms of income that fall within the category of allowances and are exempt from income tax at all income levels. These are frequently offered to promote some investments or activities. Employers provide their workers with set sums of money for certain purposes, such as housing or travel. 

While exemptions exclude some forms of income from taxes entirely, deductions lower your taxable income. While exemptions apply only to specific forms of income, deductions can be applied to a broad range of investments and expenses. 

While exemptions may have varied requirements and restrictions, deduction amounts are predetermined and vary based on the various sections of the Income Tax Act. While exemptions support some activities or offer relief in particular circumstances, deductions are frequently utilised to encourage savings and investments. 

To understand how to calculate your taxable income, you must know the deductibles available for you:

All salaried taxpayers can claim a standard deduction of ₹50,000 per year which has been a staple of income tax filings for a very long time, though the amount may have varied. Now, let's get into the most common tax deductions and exemptions in India.

This is one of the most well-known sections that tells you about what expenses are tax deductible. Under Section 80C of the Income Tax Act, you can claim deductions for investments such as: 

• Employee Provident Fund (EPF)

• Public Provident Fund (PPF)

• National Savings Certificate (NSC)

• Life insurance premiums

• Employee Provident Fund (EPF)

• Public Provident Fund (PPF)

• Equity-Linked Savings Scheme (ELSS)

• Tuition fees for children

• Life insurance premiums

• Home loan principal repayments 

You can claim a total deduction of up to ₹1.5 lakh per financial year under this section.

Also Check: Key Tax Deductions for Smarter Financial Planning

If you have taken a home loan, the interest paid on the loan is deductible under Section 24(b) of the Income Tax Act. You can claim deductions for up to ₹2 lakh on the interest paid on your home loan.

Premiums paid for health insurance policies, including those for your family, are eligible for deductions under Section 80D. The deduction limits vary depending on the age of the insured individuals and the type of coverage. 

You can claim deductions for premiums paid for health insurance for yourself, your spouse, children, and parents. The limit is up to ₹25,000 for self, spouse, and children and an additional ₹50,000 for senior citizen parents.

You can claim a deduction for interest on an education loan under Section 80E of the tax act. This deduction is available for interest paid on an education loan taken out to finance your own education and also the education of your spouse or children.

The following are some of the salary tax exemptions you can enjoy when calculating your taxable income:

This is an allowance that is given to employees who pay rent for their accommodation. The amount of HRA that you can claim depends on your salary, the rent that you pay and the rent that is paid by other employees in the same city. If you receive HRA as part of your salary, you can claim an exemption for it under Section 10(13A) of the Income Tax Act. The exemption is limited to the actual HRA received or the rent paid minus 10% of your salary, whichever is lower.

You must remember that your HRA is fully taxable if you live in your own house or pay no rent.

This is an allowance that is given to employees to help them cover the cost of travel to their home-town or other approved destinations. The amount of LTA that you can claim depends on your salary and the distance between your place of work and your home-town. LTA covers travel expenses during leave within India and is exempted twice in a block of four years. However, do note that costs like food and accommodation aren't covered.

This section provides exemptions for specific allowances to employees.

• Hostel Allowance: An exemption of ₹300 per month per child for up to two kids.

• Conveyance Allowance: Exemption to the extent of actual expenditure incurred by you on conveyance to your workplace.

• Entertainment Allowance: For government employees, the least of ₹5,000, one-fifth of the salary (excluding benefits and perquisites) or actual entertainment allowance received is exempt.

• Children Education Allowance: You can claim an exemption of up to ₹100 per month per child, for a maximum of two children.

• Transport Allowance: To meet commuting expenses, this allowance is exempt up to ₹3,200 per month if you’re blind, deaf, or orthopedically handicapped.

Here are some of the other allowances and perquisites with specific exemptions:

• Books and Periodicals: Exempted to the extent of actual expenditure.

• Uniform Allowance: Exempted for the expenditure on uniforms.

• Assistant Allowance: Exempted for actual costs incurred for hiring a helper for official duties.

• Agricultural Income: If you’ve an agricultural source of income, you don’t have to pay tax on that income.

Depending on the type of deduction or exemption that you’re claiming, you’ll need to submit the relevant documents to your employer or to the Income Tax Department. 

Each of these tax deductions and exemptions might require you to furnish proofs, receipts, or other documentation to your employer or the tax authorities. 

You might’ve gotten an idea by now about the key differences between tax deductions and exemptions. Understanding this difference and using it properly can help you in saving a lot on your taxes and keep more of your hard-earned money to yourself.

• Tax deductions lower your taxable income based on eligible investments and expenses

• Tax exemptions exclude specific types of income from being taxed entirely

• Deductions, such as those under Section 80C, 80D, and 80E, incentivise savings and investments (e.g., EPF, insurance, home loans)

• Exemptions, like House Rent Allowance (HRA) and Leave Travel Allowance (LTA), provide tax relief on employment-related allowances

• To claim deductions and exemptions, taxpayers must provide valid proofs, such as investment receipts, insurance premium statements, or rent agreements

Some tax deductible expenses include deductions for property tax, home mortgage interest, salary tax deductions self-employed or salary deductions, health insurance premium, business, home office, and self-employed tax deduction. 

Tax deductions allow you to make claims from various investments and expenses in a financial year. These deduction overall reduce your tax liability which helps save more on taxes.

Tax exemptions available to salaried employees include house rent allowance (HRA), leave travel allowance, EPF, gratuity, ELSS, home loan principal, life insurance, mobile reimbursements, etc. 

Tax deductions reduce your taxable income whereas salary exemptions avoid certain income types from taxation. Tax deductions can be applicable to a wide range of investments whereas salary exemptions are limited. 

Salary exemptions lower the portion of your taxable income, thus reducing your tax liability. For example, some parts of your salary such as HRA and leave travel allowances are exempted. This overall reduces your taxable income and your tax liability is lowered.

Yes. Capital expenditure for business commence operations up to ₹10,000 is applicable for 100% tax deductions. However, this deduction is not allowed if the amount is more than ₹10,000 incurred in cash. 

Yes. You can claim both deductions and exemptions in the same tax year as they work together to reduce your tax liability and taxable income.

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