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 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
     
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 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 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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