There is some confusion on the tax rebate announced in the union budget today. People are using rebate and exemption interchangeably. This is incorrect. A tax exemption is when the income you earn does not attract tax. While calculating tax liability, exempt incomes are the first components that get reduced from the gross income. For instance, if house rent allowance is a part of an assessee’s salary component, it is exempted from tax depending upon certain rules.

Also, as per section 10(1) of the Income tax Act, 1961, agricultural income earned by the taxpayer in India is exempt from tax. A tax rebate is the amount of tax that an assessee is not liable to pay. A tax deduction is the expense or investment made by a tax payer that can be used to reduce taxable income. For instance, a deduction of up to 1.5 lakh under section 80C for investment made in equity linked savings schemes, public provident fund, national savings certificates and few other instruments reduces your taxable income by 1.5 lakh.

The finance minister has announced a rebate and not an exemption. This means that people whose taxable income, after all the deductions, is higher than 5 lakh, the old tax rates will apply. For example, a person with taxable income of 10 lakh will pay a 5% tax on his taxable income between 2.5 lakh to 5 lakh.

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