What Does Tax Exemption Mean And How Does It Work?
Many people confuse tax exemption with tax deduction. Both terms have similar rulings and reduce the amount of tax you must pay. To be fair, the tax world can have too much confusing jargon. However, knowing the difference between each term can be a tremendous help for you to navigate the tax world. You will be more aware of the taxes you’re paying and how you contribute to the country.
Tax Deduction vs Tax Exemption?
In short, the exemption is when you are free from tax obligations such as filing or paying for a transaction or income. The interest you receive from bonds you own is primarily tax-exempt. The same goes for products or items you purchase abroad during your travel.
While a deduction is when the tax agency reduces the amount of tax you owe to the government. Deduction means you still must pay the tax, at a reduced amount, while exemption means you are free from the obligation. The wording may sound similar, but they have a different effect and applies to a specific situation.
Exemptions on Personal Income
The income you receive from investments you make such as in insurance or short-term bonds is exempt from tax. But in 2011, the Nigerian government issued regulations that short-term federal bonds and securities are subject to income tax and VAT.
Nigerian citizen has their income as taxable regardless of the location of the income source. However, if you’re a foreigner who lives in Nigeria but receives income from a company, not in Nigeria, you are exempt from income tax. A different case is if your income source is a Nigerian company. If your income is eligible for the exemption, you should file a claim to start the process and see how much you owe to the government before it’s too late.
Exemptions on Company
For a company, the calculation to receive an exemption is not as clear-cut as personal. A for-profit or regular company can receive the status when they are a charitable or educational body, promoting the sport, or a body formed under local or federal law.
A company that acts as a trading body can also be exempt from tax when its dividend or interest is from abroad or in a foreign currency. Exporting companies also can be exempt from tax. One thing to note is the company must provide complete paperwork to the tax agency to show that they are eligible for exemption.
Benefits Of Exemptions In Nigeria
The primary benefit is you will have fewer taxes owed to the government. In many cases, exemption means you may be as well as tax-free. This is highly beneficial if you’re running in the non-profit sector such as humanitarian organizations. Your donor will not have to pay for extra charges as you also can deliver the contribution directly.
Tax exemption is when you are not obligated to pay for the tax of your income or any of your revenue to the government. It’s a common practice to prevent you from paying the same tax multiple times. Exemption for your income is different from the exemption for a company.
