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

Rs.

Income from Salary (assuming no standard deductions)
5,50,000
Rental Income from One House Property
1,20,000
Income from Interest
10,000
Total Income
6,80,000
Details of Kavin’s Investments in the same financial year

Rs.

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
Total Investment
1,40,000


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. 



Income Heads

Without Section 80

With Section 80

 

 

 

Income From Salary chargeable to tax

5,50,000

5,50,000




Income from House Property


Rent Received

1,20,000

1,20,000

Less: Standard Deductions u/s 24(A) (30%)

-36,000

-36,000


84,000

84,000

Income From other sources


Bank Interest

10,000

10,000

Gross Total Income

6,44,000

6,44,000

Less: Deductions


U/s 80C (Upto Rs 1,50,000)


Tax saving Investments


PPF

50,000

ELSS

        

60,000

5 Year Fixed Deposit

30,000

Total 80C

1,40,000

80 D: Mediclaim

25,000

80TTA: Bank Interest

10,000


        


Net Total Income

6,44,000

4,69,000

Income Tax Calculation

 

 

Basic Exemption Limit  

-2,50,000

-2,50,000

Tax at slab rates

41,300

10,950

Add: Education Cess at 4%

1,652

438


 

 

Total Tax Liability    

42,952

11,388

TDS                          

-5000

-5000


 

 

Tax Payable 

37,952

6,388




















































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.


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