Income tax Exemption gives full or partial exemption from income tax.
Income tax in India is Governed by income tax Act, 1961.
Many of us get confused between tax exemptions and tax deductions.
Tax exemptions are given on Income for which a person is not liable to pay income tax.
On the other hand, tax deductions are given on whole income which is liable to tax.
For example, House Rent Allowance (HRA) is a tax exemption given on HRA received income by a salaried person. Here HRA received is exempted from tax subject to some conditions.
Whereas Tax Deduction for Life Insurance Premium is given from the total income which is liable for tax.
Gross Total income of a person is divided into five heads.
- Salary Income
- House Property Income
- Business/profession Income
- Capital Gain income from sale of Assets.
- Other income. (Other than above four incomes)
Income tax exemptions are reduced from particular head for which it belongs.
For example HRA Exemptions will be reduced while calculating Salary income. Capital gain exemption will be reduced form capital gain while calculating capital gain.
After taking into account of income tax exemptions, the Gross total income is calculated.
So Gross total income is sum of all five heads of income in which income tax exemption is already reduced.
From Gross total income, income tax deductions are allowed to calculate total income (or net income).
Income tax exemptions are of various types.
Section 10 of income tax Act is specifically list all income tax exemptions. It includes a very long list of income which is exempted fully or partially subject to some conditions mentioned therein.
Income Tax Exemption under the salary
Some of the top Income tax exemptions for salaried employees are as follows:
- HRA exemptions
- Leave encashment exemptions
- Exemption on pension received
- Exemption of Gratuity received
- Exemption of amount received on Voluntary retirement scheme
- Exemption on amount received for Leave Travel allowance
- Exemptions on various perquisites like Free car, mobile, gas etc.
- Exemptions on various allowances like transport, uniform, travelling etc.
Income Tax Exemption under the Capital Gain
Similarly, there are certain tax exemptions given on sale of capital assets. Like: –
Section 54: Long Term Capital Gain from the Transfer of Residential House Property
Section 54B: Capital Gain on the Transfer of Agricultural Land
Section 54D: Capital Gain on Compulsory Acquisition of Land and Building of an Industrial Undertaking
Section 54EC: Long Term Capital Gain Exemption for Investment in Certain Bonds
Section 54F: Long Term Capital Gain from the Transfer of a Capital Asset other than Residential House Property
Section 54G: Capital Gain on Transfer of Capital assets in Case of Shifting of Industrial Undertaking from Urban Area
Section 54GA: Capital Gain on Transfer of Capital assets in Case of Shifting of Industrial Undertaking from Urban Area to any SEZ
There are many more income tax exemption in income tax.