"Exemptions vs. Deductions: Tax-Saving Simplified"

The article explains the differences between exemptions and deductions in tax calculations, highlighting their definitions, purposes, examples, and impact on taxable income. Exemptions exclude specific income types upfront, while deductions reduce taxable income based on eligible expenses or investments.


Aspect Exemptions Deductions
Definition
Exemptions are specific types of income that are not included in your taxable income. These are excluded from your gross salary before calculating taxable income.
Deductions are expenses or allowances that are subtracted from your gross taxable income to reduce the amount of income subject to taxes.
Purpose
To exclude certain types of income from taxation, such as allowances or benefits provided by the employer.
To provide relief on qualified expenses such as investments, insurance premiums, and other eligible allowances.
Examples
House Rent Allowance (HRA), Leave Travel Allowance (LTA), and Gratuity.
Section 80C investments (e.g., PF and LIC premiums), medical insurance (Section 80D), and donations (Section 80G).
How it impacts taxable income
Exemptions directly reduce the amount of income that is considered taxable, resulting in a lower starting point for tax calculations.
Deductions are subtracted from taxable income after exemptions, further reducing the amount of income subject to tax.
Eligibility
Exemptions typically apply to specific types of income and benefits provided as part of the salary package.
Deductions are applicable based on taxpayer expenses and investments that qualify under tax laws.
Tax Calculation Order
Exemptions are applied first when determining taxable income.
Deductions are applied after exemptions to further reduce taxable income.


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