What is an 'Exemption' in tax?

An 'Exemption' in tax refers to income or transactions that are not subject to tax under the law. This means that certain types of income or specific transactions can be excluded from the total taxable income, which can help reduce the overall tax liability for an individual or business. Exemptions can apply to various situations, such as specific kinds of income, like scholarships, certain types of investments, or income sourced from specific activities, allowing taxpayers to lower their taxable income.

Understanding this concept is essential for tax planning and compliance, as it helps identify opportunities where income may not be taxed, thus offering potential tax savings.