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.