Taxation can be confusing, but understanding the terms – tax exemption, tax deduction, and tax rebate can help you save money and plan your finances better. These three terms are important when it comes to knowing how much tax you need to pay. The Union Budget 2025, presented by Finance Minister Nirmala Sitharaman, brings some important changes and clarifications that can help you manage your tax liabilities better.
What is Tax Exemption?
It refers to a situation where certain types of income are not subject to tax at all. In other words, some portions of your income are entirely excluded from being taxed. This means that you don’t need to pay tax on that part of your income.
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How Does Tax Exemption Work?
When the government says a certain income is exempt, it means that you do not need to pay any tax on that income. This Income Tax exemption is applied before calculating your total taxable income.
Components of Tax Exemptions
Under the old tax regime, several exemptions help lower your taxable income. For example:
- Agricultural Income: Income from farming is completely exempt from tax.
- House Rent Allowance (HRA): You can claim a partial exemption if you receive HRA and pay rent, based on your salary, the rent paid, and your city’s classification.
- Leave Travel Allowance (LTA): This allows you to get a tax break on travel expenses incurred within India, provided you meet certain conditions.
- Pension and Scholarships: Some types of pension income (like a commuted pension for government employees) and scholarships are exempt from tax.
In contrast, under the new tax regime introduced in Budget 2025, most traditional exemptions are removed to offer a simpler system with lower tax rates. This means:
- Agricultural Income: Remains fully exempt, as this exemption is defined by law.
- HRA & LTA: Exemptions for HRA and LTA are not allowed, so you cannot reduce your taxable income using these benefits.
- EPF Contribution: Contribution made by the employer in EPF is tax exempted while contribution made by an employee is not deductible. This limit for EPF is 12% of the basic salary (or ₹15,000).
Tax Exemption Limits in the Old & New Budget
Old Tax Regime (Budget 2025-26):
- If you are below 60 years old, you don’t pay tax on income up to ₹2,50,000.
- If you are a senior citizen (aged 60 to 80), you don’t pay tax on income up to ₹3,00,000.
- If you are a super senior citizen (above 80), you don’t pay tax on income up to ₹5,00,000.
New Tax Regime (Budget 2025-26):
- In the new tax regime, you don’t need to pay a tax on income up to ₹12 lakhs.
- Additionally, salaried individuals get a standard deduction of ₹75,000, which helps increase the amount of income that is not taxed.
What is Tax Deduction?
It refers to the reduction in your taxable income. Instead of reducing your tax amount directly, deductions reduce the amount of income on which your tax is calculated. So, if you have more deductions, your taxable income decreases, and you pay less tax.
How Does Tax Deduction Work?
Let’s say you earn ₹10,00,000 in a year. If you claim deductions worth ₹1,00,000, your taxable income is now ₹9,00,000. This means you will pay tax on ₹9,00,000 instead of ₹10,00,000.
Components of Tax Deductions
Old Tax Regime:
- Section 80C: You can invest in instruments like PPF, NSC, life insurance, fixed deposits, ELSS funds, or pay your children’s tuition fees to claim a deduction of up to ₹1,50,000.
- Section 80D: You can deduct health insurance premiums from your income. The limit is ₹25,000 if you’re under 60 and ₹50,000 for senior citizens (60 or above).
- Home Loan Interest (Section 24(b)): If you have a home loan, you can reduce your taxable income by up to ₹2,00,000 on the interest you pay.
New Tax Regime (Budget 2025):
- Most of the above deductions such as those under Section 80C, Section 80D, and the home loan interest deduction are not allowed.
- Instead, the new regime offers lower tax rates and a standard deduction of ₹75,000 for salaried individuals.
- Contributions made by the employer towards the National Pension System (NPS) can reduce your taxable income. The limit for NPS is up to 14% of the basic salary.
This means if you choose the old tax regime, you can use various investments and expenses to lower your taxable income. But under the new regime, you get a simpler process with lower rates while giving up those extra deductions.
Tax Deductions in Budget 2025
The Budget 2025 has not introduced new deduction sections but continues to promote existing deductions like Section 80C and Section 80D. These deductions allow individuals to lower their taxable income through savings and investments.
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What is Tax Rebate?
Tax rebate meaning is different from exemptions and deductions. A rebate directly reduces the amount of tax you owe. This means that after all the calculations, if you are eligible for a Income tax rebate, the government will reduce the total tax amount you need to pay.
How Does Tax Rebate Work?
Let’s say, after all the deductions, your total tax payable is ₹50,000. If you qualify for a rebate of ₹25,000, your tax payable will be reduced to ₹25,000.
Examples of Income Tax Rebates
1. Section 87A Rebate (Budget 2025 Update):
Under the new tax regime in Budget 2025, if your taxable income is up to ₹12,00,000, you can claim a rebate of up to ₹60,000. This means that for individuals earning up to ₹12,00,000, the rebate will reduce the tax payable to zero.
2. Old Tax Regime Rebate:
Under the old regime, there is a ₹12,500 rebate available for individuals with income up to ₹5,00,000.
Tax Rebate in Budget 2025
Under Budget 2025, the Section 87A rebate under the new tax regime has been raised to ₹60,000 for individuals with a taxable income of up to ₹12,00,000.
For salaried taxpayers, the additional standard deduction of ₹75,000 means that if your gross income is up to ₹12,75,000, your tax liability will be reduced to zero.
Key Differences Between Exemption, Deduction, and Rebate
Conclusion
Understanding the difference between tax exemptions, tax deductions, and tax rebate meaning is key to managing your taxes effectively.
By analyzing your income, investments, and eligible exemptions or deductions, you can make informed decisions on which tax regime to choose in the Union Budget 2025. Whether you opt for the new tax regime or old tax regime, it’s important to evaluate your financial situation carefully to maximize savings and reduce your tax liabilities.
Frequently Asked Questions – FAQs
1. What is tax exemption, and how does it affect my income?
Tax exemption allows certain types of income to be excluded from taxation, meaning they are not considered while calculating your taxable income. For example, agricultural income and House Rent Allowance (HRA) can qualify for income tax exemption, reducing your overall taxable amount.
2. What is the meaning of tax rebate, and who is eligible for it?
Tax rebate meaning refers to a direct reduction in the total tax payable after all calculations. Under Section 87A, individuals with taxable income up to ₹12,00,000 can claim an income tax rebate of up to ₹60,000 as per the latest Budget 2025, significantly lowering their tax liability.
3. How does tax deduction differ from tax exemption and tax rebate?
A tax deduction reduces your taxable income by allowing specific expenses or investments to be subtracted from your gross income. In contrast, tax exemption excludes certain income types from taxation, and tax rebate directly reduces the tax payable. For example, under Section 80C, investments in the Public Provident Fund (PPF) qualify for a tax deduction, lowering your taxable income.
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