What are the Benefits of Tax Exemptions?

The government has decreed that the income from certain investments as per the RBI guidelines are not taxable. Hence, the biggest benefit of tax exemption is that you will be able to save on the amount you pay as income tax while generating returns.

If you have a regular income coming in then there are going to be two months of the year when the words “income tax” are going to give you quite a few nightmares. In most countries, including India, there is a tax that is payable on the income that is received by you. Even when it comes to companies, there are certain taxes that need to be paid but there are certain provisions under the Income Tax Act that allow certain income to be exempt from tax. This should not be confused with tax benefits/deductions and tax rebates as all three are completely independent tools used by the government. But it can be said that all three, put together, work towards the common goal of reducing the taxes that are due from an individual or a company.

How do Tax Exemptions Work?

Tax exemption is basically tax on certain sources of income or certain money received from a specific source, which is not taxable due to exemptions announced by the government. It is worthwhile to note that when it comes to exemptions, they can be increased or removed as per the policies announced by the government. A simple example would be that capital gains are subject to tax at about 20% but at the moment the government has exempted income gained in the form of long term capital gains through investments like mutual funds. The condition that governs this exemption would be that the investments has to be maintained for a minimum of 1 year for the returns to be considered long term capital gains.

Difference Between Tax Benefit and Tax Exemption?

The average taxpayer will regularly come across terms like tax exemptions, tax rebate and tax benefits and some might think that they mean the same thing. The truth is that they don’t, the three are actually very different from one another. So what is the difference?

Tax Benefit: The term tax benefits is used to describe investments that an individual or a company can make in order to reduce the tax they have to pay. These benefits are applied on the gross income and can include things like investments in life and health insurance, fixed deposits, special schemes like the Sukanya Samriddhi Scheme, etc. What tax benefits do is to lower the taxable income by removing the invested amount from the amount that needs to be considered for income tax.

Tax Exemption: This term describes the tax that is due on certain income that is actually not charged due to special circumstances. These circumstances may be announced by the government and can cover a wide variety of situations. These exemptions, in terms of income tax, are applied to very specific sources of income and need to be claimed under the appropriate headings when filing the taxes.

Tax Rebate: Tax rebate is again applicable mostly to tax payable as income tax and refers to an actual reduction in the tax due as per the government’s policies. For example, at the moment, those who earn up to Rs. 5 lakhs per annum get a tax rebate of Rs. 2,000 per years. An example of this would someone who has an annual income of Rs. 5 lakhs and after having made investments, is assessed to pay Rs. 10,000 as income tax may get that amount reduce by Rs. 2,000 as part of the rebate offered to him for the annual income. This means that the tax due will come down to Rs. 8,000.

Read about Tax Benefits on Loans in India.

The Most Common Tax Exemptions:

The most common tax exemptions that can be availed are offered by employers to employees. Exemptions may also include certain other sources of income.

  • Tax exemption on long term capital gains from investments in mutual funds.
  • The money paid to a salaried individual as house rent allowance is not taxable income.
  • Any allowance that a company may give to an employee as allowance to be spent on a vacation, also known as the leave travel allowance, is exempt from tax if it is actually used for a vacation.
  • Some companies provide employees with the option of leave encashment. In case an employee does choose to encash their leave, then the money they get is exempt from tax.
  • If an individual has retired and is retired and is receiving a pension then the pension, whether taken as a lump sum or in monthly instalments, is exempt from tax.
  • Even gratuity payments made by employers to their employees are exempt from tax.
  • If an income is received from agricultural activities then it is exempt from tax.
  • An individual’s share of the family income of a HUF (Hindu Unified Family) is exempt from taxes.
  • If a person receives an income as a share of the profits made by a firm, then it can be exempt from taxes.
  • Allowances paid to members of parliament and members of the legislative assembly can also be exempt from taxes.
  • Even the income received by an individual in Ladakh is exempt from taxes as long as the individual is a member of a scheduled tribe.

There are also plans by the government to bring in tax exemptions that will benefit corporates but those are yet to be implemented as of now. Currently the exemptions that exist for companies are in things like the commodity transaction tax which is payable by the sellers of commodity futures. This tax is currently exempted on commodities trading that deals with agricultural products.

The biggest and main benefit of a tax exemptions is that they help reduce the burden of taxes that are to be paid by an individual or a company.

News About Income Tax Exemption

  • Changes sought in Income Tax Exemption Limit

    Finance Minister Mr. Arun Jaitley received a number of suggestions from representatives of banks and financial institutions during a pre-budget consultation meeting. Some of the major suggestions included fixing the interest rates on small savings schemes, removal of dividend distribution tax and a hike in the exemption limit on savings. The current exemption limit of savings is Rs 2.5 lakh, which the representatives’ hope will be increased.

    Some of the other requests included incorporation of CSR expenditure into business expenditure, thereby simplifying the taxation process, the probability of banks issuing off-shore INR bonds in order to raise funds for domestic infrastructure and digitization of land records to ensure farmers are directly benefitted through different schemes.

    18 January 2016

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