What is income tax exemption?

A tax exemption is the right to have all or part of one’s income free from federal or state taxation. The majority of taxpayers are eligible for numerous exemptions that lower their taxable income and select persons and organisations are fully tax free.

Tax exempt organizations:

When organizations serve the public good, such as religious or philanthropic groups, the government usually exempts them altogether from paying income taxes. The government relieves certain organizations of their tax burdens, allowing them to continue to promote public welfare.

Individual tax exemptions:

An individual can claim one tax exemption if he or she is not listed as dependent on another taxpayer’s return. This is a yearly rise in a fixed amount. The exemption decreases taxable income in the same way that a deduction does, but with fewer limitations. Both spouses receive an exemption if the taxpayer is married and submits a combined tax return.

Decoding income tax exemptions:

Exempt, Exempt and Exempt: EEE stands for Exempt, Exempt and Exempt and it has 3 types. Exempt 1, Exempt 2 and Exempt 3.

Exempt, Exempt, Taxed: The acronym EET stands for exempt-exempt-taxable, which means an investor can get two exemptions on their assets.

Exempt, Taxed, Exempt: The first exemption means that investment qualifies for exemption. The term taxable denotes a taxable return during the holding period. The final exemption means that any lump sum payment at maturity or withdrawal is tax free.

Normally, a tax saving five year fixed deposit fits into this category, where the investment qualifies for an exemption, but the interest income is taxable and the maturity is exempt. National saving systems are another example of this group. Section 80C of the Income Tax Act allows for a tax deduction on these items.