It’s all about the difference
If you’ve been foxed by the differences between the financial terms, you’re not alone. Here’s how to understand and remember the distinction.
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: 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.
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.
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.
Exchange traded fund vs Index fund
Index fund: A type of mutual fund whose portfolio of stocks tracks an exchange index like the Sensex. So it is a passively managed fund with stocks in the same proportion as the index it’s tracking and has a low operating cost and low portfolio turnover.
Exchange traded fund: These are also MFs that track an index, commodity or bonds and have stocks in the same weightage as those in the index it tracks. However, the main difference is that these can be traded on the stock exchange during the day like other stocks and, hence, one needs a demat account to operate these.
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 installments and the due dates are 15 September, 15 December and 15 March.
Self-assessment tax: This tax is paid in the assessment year before filing the I-T 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.
NAV vs Market price of an ETF
Net asset value (NAV): This represents the value of each share of the fund’s assets and cash at the end of the trading day. It is calculated by adding the value of all assets in the fund, deducting liabilities, and dividing it by the number of outstanding shares.
Market price: This is the price at which shares in the fund can be bought or sold during trading hours. This price reflects the highest price at which buyers are willing to buy and the lowest price at which sellers are willing to sell. Hence, the price is determined by supply and demand.