The Income Tax Act, allows for certain deductions from the gross total income of the assessee. These deductions are given under Chapter VIA of the Income Tax Act. Such deductions cannot exceed the gross total income of the assessee (i.e. you) and apply through Sections 80C to 80U.
Break-Up of Deductions under Chapter VIA
Deductions under Chapter VIA can be loosely broken up into those that are within the limit of Rs. 1,50,000 and those that are over and above the Rs. 1,50,000 limit.
How Tax Deductions work?
Let’s understand this with an illustration: Mr. Kavin has certain streams of income and has made investments as well. Let us understand how his tax liability would differ without the benefit of Section 80 deductions.
We assume TDS deduction to be Rs. 5000 for the year.
|Details of Kavin’s earnings in a particular financial year|
|Income from Salary (assuming no standard deductions)||5,50,000|
|Rental Income from One House Property||1,20,000|
|Income from Interest||10,000|
|Details of Kavin’s Investments in the same financial year|
|Investment in Public Provident Fund (PPF)||50,000|
|Investment in Equity Linked Saving Scheme (ELSS)||60,000|
|Investment in 5-year Fixed Deposit||30,000|
Now let's look at the calculation of his tax outflow with and without the usage of Section 80 deductions that are available through Chapter 6A.
Without Section 80
With Section 80
|Income From Salary chargeable to tax|
|Income from House Property|
|Less: Standard Deductions u/s 24(A) (30%)|
|Income From other sources|
|Gross Total Income|
|U/s 80C (Upto Rs 1,50,000)|
|Tax saving Investments|
|5 Year Fixed Deposit|
|80 D: Mediclaim|
|80TTA: Bank Interest|
|Net Total Income|
|Income Tax Calculation|
|Basic Exemption Limit |
|Tax at slab rates|
|Add: Education Cess at 4%|
|Total Tax Liability |
|Tax Payable |
Therefore from the above calculation, we can see the total deductions claimed is Rs.1,75,000 out of which Rs.1,40,000 has been invested under Section 80C investments.
Tax Deductible Investments and the Power of Compounding
This Rs.1,40,000 will be not be cash in hand as this is already invested. Now let’s take a look at how our investments grow over a 5 year period.
* Based on past returns
* Value of Fixed Deposit is Initial Deposit + Compounded Interest
The total value of the sum invested is now Rs. 2,22,140. Hence not have we saved tax but also seen a growth in assets over a period of time.
In summary, tax deduction tools are not only a great tax saving avenue but also a great way to undertake some forced saving.