It is very likely that you may run into a number of technical terms and phrases that are linked when reading about income taxes. It’s impossible for the average individual to understand what it means. But if you want to understand the tax system, you must be aware of what they mean. The words “tax exemption,” “tax relief,” “tax benefit,” and “tax deduction,” among others, are among the most important. These words are frequently and wrongly used interchangeably. Therefore, if you want to start dealing with income tax, it is crucial that you learn about their significance.
Income Tax Exemption
On some sources of income, tax exemptions are provided. The total income is not given to them. Additionally, it suggests that you are exempt from paying taxes on earnings derived from that source. As an illustration, you are not required to pay taxes on revenue from agriculture. It is not subject to tax.
In addition, you can reinvest long-term capital gains from the sale of a property in real estate for a set length of time to benefit from tax exemptions. Many people who receive a monthly salary also receive an HRA, sometimes known as a housing rent allowance, as part of their pay. Under some circumstances, they can use this pay component to obtain a tax exemption.
Income Tax Deduction
People can use income tax deductions to lower their taxable income. It helps them to pay less tax for a certain fiscal year. In other words, investments made during the year are subtracted from total annual income when submitting income tax returns.
Tax deductions aid in the formation of the saving habit, enabling individuals to create a stable financial future for themselves. Tax deductions include things like contributions to the National Pension Scheme (NPS), the Public Provident Fund, and investments made in accordance with Section 80 of the Income Tax Act of 1961.
Mutual fund investments and student loan interest repayment are both eligible deductions. It is possible to deduct Rs. 40,000 from the annual earnings of those who pay income tax on their wages. This deduction’s value was recently increased to Rs. 50,000. It lowers both the total amount of taxable income and the amount of income tax the person must pay.
Tax Rebates and TDS
Tax exemptions and deductions are substantially different from income tax rebates. They must be deducted from the total amount of tax owed. For example, taxpayers with an annual income of Rs. 3.5 lakh are eligible for a tax credit of Rs. The cap applied to the fiscal years 2018 and 2019. The price has increased to Rs. 12500. A taxpayer who earns Rs. 5 lakh per year can now receive a tax credit of Rs. 12500.
Tax deducted at source, or TDS. Any person or organization that makes a payment is required by the Income Tax Act to withhold tax at the source. If the payment exceeds a certain amount, it is true. The tax department’s prescribed rates are used to calculate the TDS deductions. You should be aware of the various payment forms to which TDS is applied. These are a few of them:
Salaries
1.Commission payment
2.Interest income from financial institutions
3.Consultation fees
4.Professional fees
5.Rent payment
Tax Relief and Benefit
A provision that reduces a taxpayer’s tax liability is referred to as a tax relief measure. The taxpayer may be a person or a company. A tax credit or deduction that lowers a taxpayer’s tax obligation is referred to as a tax benefit. Several portions of the Income Tax Act of 1961, including Sections 80D, 80C, 10, 87A, and 24, provide tax benefits.
A person is eligible for a tax deduction under section 80C up to a maximum of Rs 1.5 lakh. It is for purchases and investments made in accordance with qualified categories. These categories include National Savings Certificates (NSC), Senior Citizens Savings Schemes (SCSS), and five-year fixed deposits.
Under Section 80D, a person can claim up to Rs. 25,000 in deductions for paying medical insurance premiums in a given financial year. Under Section 10, there are a lot of exemptions, such as agricultural income leave travel allowance, life insurance premium, HRA, pension provident fund, and so on.
You should now understand the different words and phrases that have to do with taxes. You can use them to help you make good decisions and manage your money well.
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