When reading about income tax, it is highly likely that you’ll come across numerous technical phrases and terms that are interrelated. It’s not possible for an ordinary person to make out its meaning. But it is essential that you know what they mean if you want to gain knowledge of the tax structure. Some of the crucial terms include tax exemption, tax relief, tax benefit, tax deduction, and so on. Many people use these terms interchangeably but incorrectly. So it is imperative that you learn about their meaning if you want to begin dealing with income tax.
What Is Income Tax Exemption
Tax exemptions are given on specific income sources. They are not provided on the overall income. It also implies that you don’t have to pay any amount of tax for earnings accruing from that source. For instance, if you get income from agriculture, you don’t have to pay any tax on this income. It is exempted under the tax.
Apart from that, when you sell a property and get its long term capital gains, you can invest it again in a real estate property in a particular period to gain tax exemption benefits. Many people who get a salary monthly get an HRA or house rent allowance as a part of their salary. They can use this element of their salary to get tax exemption under specific conditions.
What Is Income Tax Deduction?
Income tax deductions allow people to minimize their taxable income. It helps them to minimize the tax liability of a particular financial year. In simple words, income tax deductions refer to investments that are made in a year and are offset against total yearly income when lodging income tax returns.
Tax deductions serve to instil a habit of saving in individuals and thus facilitate them to create a stable financial future for themselves. Some examples of income tax deductions are investments under section 80 of the Income Tax Act, 1961, the National Pension Scheme (NPS), and the Public Provident Fund.
Interest repayment of an education loan and investment in mutual funds also count as deductions. People who pay income tax on their salary can claim a deduction of Rs.40,000 from the total yearly salary. This deduction has recently been increased to Rs. 50,000. It minimizes an individual’s overall taxable income and minimizes the income tax they have to pay.
What Are Tax Rebates and TDS?
Income tax rebates are very different to tax exemptions and deductions. They are needed to be claimed from the overall tax payable. For instance, taxpayers who have a yearly income of Rs. 3.5 lakh can get a tax rebate of Rs. 2500. It was the limit in the financial year 2018 to 2019. It has been raised to Rs. 12500. Now a taxpayer who has a yearly income of Rs. 5 lakh can get a tax rebate of Rs. 12500.
TDS means tax deducted at source. According to the Income Tax Act, any individual or an organization who makes a payment needs to deduct tax at the source. It is so if the payment goes beyond a specific threshold. The TDS deducts gets deducted at the rates that the tax department prescribes. You should know about the different types of payment on which TDS is applied. They include the following:
Salaries
Commission payment
Interest income from finance institutions
Consultation fees
Professional fees
Rent payment
What is Tax Relief and Benefit?
Tax relief refers to a provision that minimizes the tax that a taxpayer owes. The taxpayer can be a business or an individual. Tax benefit refers to tax credit or deduction that minimizes a taxpayer’s tax liability. Tax benefits are given under various sections of the Income Tax act, 1961, like Section 80D, 80C, 10, 87A, and 24.
Under section 80C, a person can get a tax deduction to an amount until Rs 1.5 lakh. It is for expenditure and investments under categories that are eligible. These categories include five-year fixed deposits, National Savings Certificate (NSC), senior citizen savings scheme (SCSS), and the like.
Under Section 80D, an individual can claim deductions up till an amount of Rs. 25,000 for the payment of medical insurance premiums during a particular financial year. Under Section 10, there are many exemptions, like agricultural income leave travel allowance, life insurance premium, HRA, pension provident fund, and the like.
Hopefully, the various terms and phrases related to tax will now feel clear to you. You can use them to make the right decisions and keep your finances in place.
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