Understanding Tax Deductions & Chapter VIA

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 yearRs.
Income from Salary (assuming no standard deductions)5,50,000
Rental Income from One House Property1,20,000
Income from Interest10,000
Total Income6,80,000
Details of Kavin’s Investments in the same financial yearRs.
Investment in Public Provident Fund (PPF)50,000
Investment in Equity Linked Saving Scheme (ELSS)60,000
Investment in 5-year Fixed Deposit30,000
Total Investment1,40,000

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 HeadsWithout Section 80With Section 80
Income From Salary chargeable to tax5,50,0005,50,000
Rent Received1,20,0001,20,000
Less: Standard Deductions u/s 24(A) (30%)-36,000-36,000
Income From other sources  
Bank Interest10,00010,000
Gross Total Income6,44,0006,44,000
Less: Deductions under section 80C: Maximum up to 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 Income6,44,0004,69,000
Income Tax Calculation  
Basic Exemption Limit:-2,50,000-2,50,000
Tax at slab rates41,30010,950
Add: Education Cess at 4%1,652438
Total Tax Liability 42,95211,388
Tax Payable 37,9526,388

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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