TaxFinancial Glossary
Exemption (Tax)
Definition
Income or a portion of income that is completely excluded from taxable income under the Income Tax Act. Unlike deductions, which reduce gross income, exemptions exclude certain income entirely. Examples include HRA exemption, LTA, agricultural income, and long-term capital gains on equity up to Rs 1.25 lakh.
Why It Matters
Exemptions can be more valuable than deductions because they remove income from the tax calculation entirely. HRA exemption alone can save Rs 50,000-1 lakh in tax annually for salaried individuals paying rent in metro cities. Maximizing legitimate exemptions is the first step in tax planning.