Difference between Tax Exemption, Tax Deduction and Tax Rebate

Key Difference: A tax exemption exempts certain things, so that no tax must be paid on it. Tax deduction is an amount that is deducted from the total income of the person. Tax rebate, also known as tax refund, is a refund of money that a taxpayer has paid as taxes in the previous year.

Taxes are a complicated matter, especially for the layman who need not necessarily have all the information or knowledge regarding the matter. In these cases, even the terminology is confusing. What is the difference between Tax Exemption, Tax Deduction and Tax Rebate?

A tax exemption is exactly what it sounds like. It exempts certain things, so that no tax must be paid on it. These are usually investments, insurances, long term capital gains, etc. This reduces the income that is taxable, hence reducing the tax to be paid. In simplest terms, tax exemption means tax free.

 According to Investopedia, tax deduction is a deduction from gross income that arises due to various types of expenses incurred by a taxpayer. Basically, this means that the tax deduction is an amount that is deducted from the total income of the person; as the total income decreases, so does the payable tax. Hence, one ends up paying only part tax on the things that are eligible for tax deduction.

Tax Rebate, on the other hand, is something completely different. Tax rebate, also known as tax refund, is a refund of money that a taxpayer has paid as taxes in the previous year. This happens when a person had paid extra taxes in the previous year and is hence now eligible to get that extra money refunded or returned.

 Hence, all three are helpful tools in paying taxes. Both, tax exemption and tax deduction help one to save money by paying less taxes, while tax rebate returns money to you if you have been over taxed before.

Comparison between Tax Exemption, Tax Deduction and Tax Rebate:

 

Tax Exemption

Tax Deduction

Tax Rebate

Description (Investopedia)

To be free from, or not subject to, taxation by regulators or government entities. A tax exempt entity can be excused from a single or multiple taxation laws.

A deduction from gross income that arises due to various types of expenses incurred by a taxpayer.

The return of excess amounts of income tax that a taxpayer has paid to the state or federal government throughout the past year.

Type of

Excused from tax

Reduction of income

Refund of tax paid

How it works

Indirectly reduce tax bills

Indirectly reduce tax bills

Refunds excessively paid tax

Reduction

Exempts tax on some things, hence reducing tax to be paid.

Reduces the income on which the tax is calculated

Refunds tax that has been paid beforehand

On the basis of

To encourage behaviors like investment

Expenses, particularly those incurred to produce additional income

Taxes already paid

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