What is the difference between exemption and deduction?

Both are options to reduce tax liability but are availed of in different ways under different sections of the Income Tax Act.

Exemption: The amount 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, etc.

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.

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