What is the difference between tax exemption and tax deduction?

Both tax deduction and tax exemption are forms of tax relief or tax break extended by the government to tax payers.

If it is a tax exemption then that particular income will not be charged to income tax. In case of tax deduction one’s income tax liability decreases by the specified amount for investing in or spending money on the specified avenues.

For instance interest from tax free bonds and long term capital gain from equity mutual funds have tax exemption. This means no income tax is to be paid on such interest and profit made on selling equity mutual fund units. Similarly you get tax deduction up to Rs 1 lakh under section 80C for certain investments and expenses. This means if you make those investments or accrue those expenses, your taxable income reduces by the actual amount or Rs 1 lakh, whichever is higher.


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