Topic 2: Pairs of Confusing Financial Terms

If you've been foxed by the differences between the following terms, you're not alone. Here's how to understand and remember the distinction, says Riju Dave.

1.TAX EXEMPTION VS DEDUCTION
Both are options to reduce tax liability, but are availed of in different ways under different sections of the Income Tax Act.

Exemption
This is the amount that is excluded or removed from the gross total income. The benefit is available only from a specific source of income, not the total income, under Section 10 or 54. These can include leave travel allowance, interest from tax-free bonds, or long-term capital gain on equity funds, among others. The specified amount is removed from the total income before tax is calculated.

Deduction
This refers to the reduction in the total taxable income through benefits availed of under Section 80 (80C to 80U). This is done while calculating taxes; it is first added to the gross total income and then deducted from it. The specified amount can be reduced by investing in or spending on specific avenues. For instance, deduction of Rs.1.5 lakh is available if you invest in particular life insurance policies or spend on children's school tuition fee, among other avenues.

2. TERM PLAN VS TRADITIONAL PLAN
Term plan

This is a pure insurance tool that covers the risk to your life. It does not offer any return or maturity amount on the completion of the term and the sum assured is given to the nominee only on the death of insured person. The premium amount is low since it only covers risk and is a must have if you are an earning member and have dependents or loan liability.

Traditional plan

This tool is a mix of insurance and investment. It offers the maturity value at the end of the specified period along with some bonus or guaranteed amount. Since it includes an investment portion, the premium amount is much higher compared with that of term plans. These can also be surrendered though the charges can be high if returned early.

3. ADVANCE TAX VS SELF-ASSESSMENT TAX
Advance tax

You need to pay advance tax if you are a salaried taxpayer with other sources of income like interest on deposits and your tax liability for the year exceeds Rs.10,000 after your employer has deducted the TDS. You pay this tax in the financial year preceding the assessment year in three instalments and the due dates are 15 September, 15 December and 15 March. The penalty for not paying this tax is 1% of the due amount per month.

Self-assessment tax

This tax is paid in the assessment year before filing the income tax returns. If during the calculation of your tax liability, you realize that some tax is still due after taking into account the TDS and advance tax, then you pay self-assessment tax. There is no specified date for paying this tax and is done by filling a tax challan ITNS 280 at specified bank branches or online.

Source: Economic Times