Reducing Tax Liability by Using Deductions under Chapter VIA

[Tax Planning Series]

Session 1: Reducing Tax Liability By Using

Deductions Under Chapter VIA

We are glad to have you with us for our 1st Session on Tax Planning – (…and that is…) ‘Reducing tax liability by using deductions under Chapter VIA of Income-tax Act, 1961

Alright so let’s get started...

All of us engage in some economic activity and earn an income to make a living. Based on the quantum of income, we, as citizens of this country have a constitutional duty to abide by i.e. pay taxes and contribute to the nation building efforts of the Government. Nevertheless, it is equally important to save tax, to the extent possible, through prudent tax planning. Remember the proverb, “A penny saved is a penny earned”.

In this session of Money Simplified, we will tell you how to reduce your tax liability optimally by using deductions under Chapter VIA of the Income Tax Act, 1961.

So, let’s begin with our today’s session on...

Reducing tax liability by using Deductions under Chapter VIA

The process of tax planning begins with computation of your Gross Total Income (GTI)...

  • Gross Total Income (GTI) is the total income earned by an individual before availing any Deductions under the Income Tax Act, 1961

  • This includes income from various sources like:
    • Salary

    • House property

    • Profits and gains from business & profession

    • Capital gains (short term and long term) and

    • Income from other sources

    This helps you assess where you stand in terms of total income earned during a financial year.

  • It is vital to know your GTI to undertake tax planning exercise prudently that you can plan by using the relevant provisions of theIncome Tax Act to avail applicable deductions to GTI

  • After having computed GTI, the next step is to compute your Net Taxable Income (or NTI)… Net Taxable Income (NTI) is the amount obtained after subtracting various Deductions under Chapter VIA (which contains deductions under Section 80C to 80U of the Income Tax Act) from GTI.

Snapshot of deductions available under
Section 80C to 80U of the Income Tax Act, 1961

Section Quick Description of Deduction
80C Key investment instruments eligible for deduction under this Section upto a maximum limit of Rs 1. 5 lakh include – Equity Linked Savings Scheme (ELSS), Public Provident Fund (PPF), EPF (Employee Provident Fund), NSC (National Saving Certificate), Senior Citizen Savings Scheme (SCSS), 5-year tax saving bank fixed deposits, 5-year Post Office Time Deposit (POTD) , premium paid for life insurance plans, housing loan principal repayment, etc.
80CCC Contribution to Pension Fund of Life Insurance Corporation or any other insurer referred in section 10(23AAB). The deduction limit is upto Rs.1.5 lakh aggregated across section 80C, 80CCC, 80CCD.
80CCD Contribution to Pension Scheme (National Pension System) notified by the Central Government. The deduction limit is upto Rs.1.5 lakh aggregated across section 80C, 80CCC, 80CCD. Additional deduction of up to Rs.50,000 is allowed for contribution towards NPS which is over and above the limit of Rs 1.5 lakh under section 80CCD(1B).
80CCG Rajiv Gandhi Equity Savings Scheme (RGESS)
80D Premium paid for medical insurance
80DD Maintenance including medical treatment of a handicapped dependent who is a person with disability
80DDB Expenditure incurred in respect of medical treatment
80E Interest on loan taken for pursuing higher education
80G Donations to certain funds and charitable institutions
80GG Rent paid in respect of property occupied for residential use
80GGA Certain donations for scientific research or rural development
80GGC Contribution made to any political parties or electoral trust
80TTA Deduction in respect of interest earned on savings bank deposits
80U Person suffering from specified disability(s)
Note: The list is not exhaustive, but only indicative
(Source: PersonalFN Research)

Availing / accounting for these deductions help you reduce your taxable income and thus your tax liability (…which in turn can also help achieve your long term financial goals ).

Let’s focus on the most popular Section 80C which encourages one to invest and save tax effectively...

Schemes Interest Rate Tenure Min – Max Investment Premature Withdrawal Current Tax on returns
Tax planning with market-linked instruments
Equity Linked Savings Scheme (ELSS) Market-Linked Returns Ongoing; Lock-in-period: 3 years Varies from scheme to scheme. Can range from Rs 500 - No upper Limit Withdrawal allowed post lock-in Dividend & Capital gains are tax free
Unit Linked Insurance Plans (ULIPs) [80C & 10(10D)] Market-Linked Returns 10 - 20 years; Lock-in-period: 5 years Premium varies from scheme to scheme Yes Capital gains post lock-in are tax free
National Pension System (NPS) Market-Linked Returns 30-35 years Rs.500 per month or Rs 6,000 per annum, no upper limit Yes Capital gains taxed on withdrawal
Tax planning the "assured return" way
Public Provident Fund 8.7% p.a. 15 years^ Rs 500 - Rs 1. 5 lakh Yes* Interest income is tax free
National Savings Certificate 5 yr : 8.5% p.a. 5 years Rs 100 - No upper Limit No Interest accruedis taxed everyyear as per one’s income-tax slab
Bank Deposits 7.00% p.a.# 5 years No upper Limit No
Post Office Time Deposit 5-Yr: 8.5% p.a. 5 years Rs 200 - No upper Limit Yes*
Senior Citizens Savings Schemes 9.30% p.a. 5 years Rs 1,000 - Rs 15 lakh Yes*
Non-ULIP Insurance Plans Sum Assured Only(i.e. Insurance Cover) 5-40 years Premium depends upon the insurance cover Varies from policy to policy Redemption amount is tax free
All information is as of December 31, 2015
* Partial withdrawals allowed subject to conditions; ^can be extended in tranches of 5 years; #The interest rate mentioned here is that of SBI Tax Saving Scheme.
(Source:Offer documents of respective instruments sourced from websites and PersonalFN Research)

The Section 80C offers you a host of popular investment instruments mentioned here, which are market linked as well as fixed income investment instruments.

Investing in any or all instruments under Section 80C qualifies for a maximum deduction of Rs 1.5 lakh p.a.

Tax Saving through Mutual Funds
  • Equity linked Savings Scheme (Section 80C)

  • Most ELSS are diversified equity funds with a lock in period of 3 years.

  • An Individual/HUF is entitled to deduction from Gross total income for investments in ELSS upto Rs 1.5 lakh u/s 80 C of the Income Tax Act 1961.

  • You can invest in ELSS with as little as Rs 500 and can invest via SIP (Systematic Investment Plan) mode or Lump sum (depending upon what suits you, but every SIP instalment would be subject to a lock-in period of 3 years).

  • ELSS should not be looked upon as a 3-year product because of the lock-in; but more as a product to reach long-term goals which are generally more than 5 years away.

  • Rajiv Gandhi Equity Savings Scheme (Section 80CCG)

  • Rajiv Gandhi Equity Savings Scheme (or RGESS) was introduced in the Finance Act, 2012, under Section 80CCG provides for deduction for investment in RGESS

  • The Deduction under RGESS scheme will be available to new retail investors who comply with the conditions of the scheme and whose gross total income for the financial year in which the investment is made under RGESS is less than Rs 12 lakh

  • Sec 80CCG defines ‘New retail investor’ interalia shall mean any resident Individual who has not opened a demat account

  • The maximum Investment permissible for claiming deduction under RGESS is Rs 50,000

  • The investor would get a 50% deduction of the amount invested from the taxable income for that year u/s 80CCG. The benefit is in addition to deduction available u/s Sec 80C

  • Investments are to be made directly in eligible listed equity or Follow on Public offer of such listed equity or into units of mutual funds and ETFs

  • The total lock-in period for investments under the RGESS would be divided into 'fixed lock-in period' and 'flexible lock-in period'

  • The initial period of lock in shall be known as Fixed Lock-in Period which shall commence from the date of purchase of such securities in the relevant financial year and end on the 31st day of March of the year immediately following the relevant financial year. The new retail investor shall not be permitted to sell, pledge or hypothecate any eligible security during this fixed lock-in period

  • The period of two years beginning immediately after the end of the fixed lock-in period shall be called the flexible lock-in period. Upon completion of the fixed lock-in period, new retail investors would be allowed to trade in the eligible securities. Investors would, however, be required to maintain their level of investment during the next two years (i.e. the flexible lock-in period) at the amount for which they have claimed income tax benefit or at the value of the portfolio before initiating a sale transaction, whichever is less, for at least 270 days in each of these 2 years. Such investment value shall exclude the value of investment which is under the fixed lock-in period.

  • For Further details visit to website

Learning by example:

Particulars Amount (in Rs)
Investments in RGESS (New retail investor) 50,000^
Investments in ELSS 1,00,000
Eligible Deductions under Chapter VIA &absp;
ELSS u/s 80C 1,00,000
RGESS u/s 80CCG (50% of Rs 50,000) 25,000
Total deduction that can be availed 1,25,000
^ Provided you fulfil RGESS eligibility criteria
This table is for illustration purpose only
Source:PersonalFN Research)

So say you have invested a sum of Rs 1,00,000 and Rs 50,000 in ELSS and RGESS respectively; for deduction under chapter VIA of the Income Tax Act, you can avail Rs 1,00,000 deduction under Section 80C for investments in ELSS, while for RGESS it would 50% of the amount invested i.e. Rs 25,000 under Section 80CCG. Thus the total deduction one can avail will be Rs.1,25,000.

Computing Tax Payable

After having effectively saved tax using Section 80C to Section 80U, compute your tax liability.

  • Tax liability is computed based on your income tax slab

    The income- tax rates for Individuals and HUFs for FY 2014-15 is depicted here:

    Net Taxable Income (in Rs) Rate
    Upto Rs 2,50,000 [for Individual (including NRIs / PIOs and HUFs) Nil
    Upto Rs 3,00,000 (for resident senior citizens 60 years and above but below 80)
    Upto Rs 5,00,000 (for resident super senior citizens aged 80 and above)
    Rs 2,50,001 to Rs 5,00,000 # 10%
    Rs 5,00,001 to Rs 10,00,000 ## 20%
    Above Rs 10,00,000 30%
    #For resident senior citizens of 60 years of age and above but below 80 years of age, the slab is between Rs.300,001 to Rs 5,00,000 taxable @ 10%
    ## For resident super senior citizens aged above 80 years, the second slab is between Rs 500,001 to Rs 10,00,000 taxable @ 20%
    Note: 1) Additional surcharge @ 12% will be levied if the total income during the financial year exceeds Rs 1 crore
    2) Education cess @ 2% + Secondary and higher education cess @ 1% – i.e. total of 3% as cess is applicable on computed tax liability (Income tax plus surcharge, if applicable)
    source:PersonalFN Research)

    For Individual (including NRIs / PIOs) and HUFs – net taxable income upto a sum of Rs.2,50,000 is exempt from tax. NTI between Rs.2,50,001 and Rs.5,00,000 is subject to tax @ 10%, between Rs.5,00,001 and Rs.10,00,000 @ 20% and above Rs.10,00,000 @ 30%. For resident senior citizens (i.e. 60 years and above but below 80), the basic exemption limit is Rs.3,00,000. Hence for them, income between Rs.3,00,001 to Rs.5,00,000 is taxable @ 10%, between Rs.5,00,001 to Rs.10,00,000 @ 20% and above Rs.10,00,000 @ 30%. For resident super senior citizens (i.e. those aged 80 and above) the basic exemption limit is Rs.5,00,000. Hence income over Rs.5,00,000 but upto Rs.10,00,000 is taxable @ 20%, while above Rs.10,00,001 @ 30%.

  • Also if your total income during the financial year exceeds Rs.1 crore, an additional surcharge @ 12% would be levied. This is in addition to the 3% cess that is paid on the total income-tax.

  • Apart from the tax rate, you would have to pay an education cess @ 2% + Secondary and higher education cess @ 1% – a total of 3% as cess on your computed tax liability (Income tax plus surcharge, if applicable).

  • For individuals whose NTI is below Rs 5 lakh a Tax Credit or Special Rebate of Rs 2,000 is available (u/s 87A), but the rebate is limited to the extent of your tax liability or Rs 2,000, whichever is less. Thus if your tax liability is say Rs 1,500, you will get a tax credit of only Rs 1,500 under Section 87A and no tax will be payable.

    Learning with an example: Assume your GTI is Rs.11.00 lakh and you invest Rs.50,000 in RGESS and Rs.1,00,000 in ELSS. The total deduction you will be eligible for under chapter VIA will be Rs1.25 lakh. This will reduce your Net Taxable Income (or NTI) to Rs.9.75 lakh as per this table...

    Computation of Tax Liability (2015-16)
    Gross Total Income (A) Tax Rate 11,00,000
    Investments done in FY 2015-16 &absp; &absp;
    RGESS &absp; 50,000
    ELSS &absp; 100,000
    Eligible for deduction u/s. 80C (B) &absp; 1,00,000
    Eligible for deduction u/s. 80CCG (C) &absp; 25,000
    Net Taxable Income (in Rs) = (A) – (B) – (C) &absp; 9,75,000
    Upto 2,50,000 Nil -
    Rs 2,50,001 to Rs 500,000 10% 25,000
    Rs 500,001 to Rs 10,00,000 20% 95,000
    Rs 10,00,001 & above 30% -
    Tax payable (in Rs) &absp; 1,20,000
    Education Cess 3% 3,600
    Total Tax Liability (in Rs) &absp; 1,23,600
    This is for illustrative purpose only
    source:PersonalFN Research)

  • Out of the NTI, the first Rs 2,50,000 will be exempt.

  • The slab between Rs 2,50,001 and Rs 5,00,000 will be taxed @ 10% i.e. a sum of Rs 25,000.

  • The next slab between Rs 5,00,001 and Rs 10,00,000 will be taxed @ 20% i.e. balance Rs 4,75,000 will be taxed @ 20% i.e. Rs 95,000.

  • Total tax payable before education cess will amount to Rs 1,20,000.

  • (And…) After adding total education cess (Education Cess (EC) of 2% and Senior and Higher Education Cess (SHEC) of 1%) on tax payable, the tax liability will be Rs 1,23,600

  • It should be noted that during the financial year, if tax has been deducted at source from your account, don’t forget to adjust / account for the same while computing your tax liability and furnish the respective form(s) while filing your income-tax returns. .

What you should do to reduce your tax liability

  • Avail exemptions and deductions available under the respective heads of income

  • Invest in tax saving instruments under Section 80C of the Income Tax Act to avail a maximum deduction of Rs 1.5 lakh

  • Optimise your tax deductions further by effectively using other deductions available under Chapter VIA...think beyond the provisions of Section 80C

  • Try to compliment investment planning with tax planning. Consider your age, income, expenses, assets & liabilities, risk appetite and financial goals, to prudently select investment instrument in this exercise. You may seek the help of your independent financial advisor / financial planner or tax consultant for the same. For example, you may choose ELSS for their potential to provide higher inflation-adjusted returns over the long run though they are relatively riskier vis-à-vis traditional tax saving products offering assured returns.

Remember, tax planning as an exercise is not just limited to filing returns and paying taxes. It is a process whereby your larger financial plan needs to be taken into consideration after accounting for host of factors. So in the last quarter of the financial year, ensure you’re taking the right steps on tax planning.

[This video transcript is dated January 18, 2016.]

So to end our learning exercise today, we now invite you to test your learning by taking up this simple quiz (and win exciting prizes!)

Just Click On The Link Below.

Thank You For Participating!

The Information contained in this video transcript is not a complete representation of every material fact and is for information purposes. All details are provided on a best effort basis. It is not to be used or considered to be an offer to sell or buy units of Franklin Templeton Mutual Fund schemes. This video transcript is for information purposes only, provided on an ‘as is’ basis. Nothing in it should be construed as personal financial advice. You are responsible for your own investment decisions and the recipient is advised to consult a professional financial advisor prior to arriving at any investment decision. The video transcript is for personal non-commercial use only and may not be copied, stored, redistributed or broadcast in any way. We recommend you read the complete Terms of Use of the website.

Mutual Fund Investments Are Subject To Market Risks, Read All Scheme Related Documents Carefully.

Get Free Access Now!
(No Payments To Be Made. Free For Life!)

Franklin Templeton Mutual Fund & PersonalFN have partnered together in this Investor Education and Awareness Initiative.

Our goal is to help you understand concepts related to saving & investing and understanding the basics of mutual funds and its benefits. And ultimately to guide you in planning your finances so that your life's goals can be achieved.

And yes, we will do all this for free. No strings attached! Come, join us in this journey to make money simple!

By signing up, we will keep you posted on new releases and other updates that will be helpful for you!

As soon as you sign up, we will also send you our free guide on the "16 Rules of Investment Success" by Sir John Templeton. Go ahead, sign up now!

Name »      
Email »      
Contact »   
(We Value Your Privacy and Read our Terms Of Use.)

By registering in this portal, you are authorizing both PersonalFN and Franklin Templeton Mutual Fund to send Mutual Fund scheme related documents, promotional materials and other information related to the products offered by Franklin Templeton Mutual Fund and PersonalFN to your email id and Mobile number.

The Retirement Planning Guide

The Retirement Planning Guide