Understanding Form 16: Chapter VI-A Deductions

In our article Understanding Form 16:Part 1 we had looked at the Details of Salary paid and how the Gross Salary is calculated. In this part we have described the part of Form-16 which deals with deductions under Chapter VI-A of Income tax act. You shall learn about Income Tax Act of 1961 and chapter VI-A, various subsections.

Income Tax Act 1961 and Chapter VIA

The Income Tax Act 1961 came into force on April 1, 1962. It applies to whole of India including the state of Jammu and Kashmir. It is a comprehensive piece of legislation having 23 Chapters, 298 Sections, various sub sections and 14 schedules. Since 1962, it has been subjected to numerous amendments by the Finance Act of each year to cope with changing scenario of India and its economy. Introduction (pdf) explains about the history of income tax act. Interested readers can read about the Income Tax Act,sections and chapters online at kolkatanetonline

Govt. of India in its Income Tax Act, 1961 has provided a provision of saving income tax by investing in some investment products and also expenditures like medical premiums, education loan etc. This is to encourage certain type of savings (mostly long term) and expenditure(Education loan, medical premium) .

These deductions detailed in chapter VIA of the Income Tax Act must be distinguished from the exemptions provides in Section 10 of the Act. While the deductions in Section 10 are to be reduced from the gross total income, the chapter VIA deductions do not form part of the income at all, they are to encourage  long term savings and specific expenditure.

Chapter VI-A of income tax act is about DEDUCTIONS TO BE MADE IN COMPUTING TOTAL INCOME. It specifies the sections from 80A to 80U under which deductions are  allowed to be deducted from the assessee’s gross total income. Different sections are applicable to different kind of assesses. If you look at ITR -1 or Sahaj form you will see 13 deductions, while ITR-2 form has 14 deductions. (80RRB is extra).

Deductions under chapter VIA in ITR-1 Form

Deductions under chapter VIA in ITR-1 Form

 

Deductions under Chapter VIA in ITR 2

Deductions under Chapter VIA in ITR 2

Few sections are given below. Income Tax Overview talks about these deductions in detail.

 Code Maximum Limit  Schemes
80C 1 lakh
  • Public Provident Fund provides 8.6% return compounded annuallyPayment of life insurance premium.Investment in pension Plans.
  • Equity Linked Savings schemes (ELSS) of mutual funds
  • National Savings Certificates
  • Tax saving Fixed Deposits provided by banks for a tenure of 5 years. Interest is also taxable
  • Principal repayment of housing loans
  • Tuition fees upto 2 children
  • Post office investments.

This section has been introduced by the Finance Act, 2005.

80CCC  1 lakh  Payment of premium for annunity plan of LIC or any other insurer.The Finance Act 2006 has enhanced the ceiling of deduction under Section 80CCC from Rs.10,000 to Rs.1,00,000 with effect from 1.4.2007.
80CCD  10% of his salary. Deposit made by an employee in his pension account.
80CCF  Rs. 20,000. Subscription to long term infrastructure bonds. Was for the financial year 2010-11 and 2011-12. However, the exemption is no longer present from financial year 2012-13.
80D  Rs 35,000.00 divided as follows:15,000.00 for premium payments towards policies on self, spouse and children
15,000  non-senior citizen dependent parentsOR20,000.00 towards senior citizen dependent
Premium in health insurance of you, your spouse, children or dependent parents
80G  100% of donation amount for special funds50% of donation amount for all other donations. Donation to certain funds, charitable institutions etc

Deductions are based on Declarations by Employee

The deductions mentioned in the Form 16 are based on the declaration submitted by the employee to the Finance department of his organization. Employees make the declaration twice: at the beginning of the financial year and one towards the end of the year, usually in February.

Declarations at the beginning of the year:At the beginnning of the financial year, the salaried need to fill up a declaration form and give to their respective companies. This declaration form provides the snapshot of all the necessary investment that the salaried person proposes to undertake during the year. Based on this statement, company calculates the tax liability for the year and deducts it every month from the salary. One needs to remember that Provident Fund is also part of deductions available under Section 80C. If, say, a person’s PF contribution each year is Rs 30,000, he will only need to make other investments worth Rs 70,000 only, to exhaust the 80C available.

Declaration at the end of the year: Towards the end of finanical year, usually in February, Finance department sends Actual Investment Declaration Form to all its employees. In this employees fill their ACTUAL Investments details along with the supportive documents for their investments .

If there is any difference, between the declarations in the beginning and end of year, then the finance dept will again calculate employee’s tax liability based on the “Actual investment Declaration form” and deduct his tax accordingly. Hence the actual declarations are asked in beginning of February and not March end so that employees can make investments if not made and company gets opportunity to make calculation and adjust tax liability.(At times companies cut more tax from salary in month of February and March) Sample declaration form (pdf)

An employee may or may not have reported all deductions to the employer. That is no problem. He can still claim them in while filing Income Tax Return(ITR). In general, its a good idea to report tax deductions to the employer as then TDS is minimized.

Form 16 - Deductions under chapter VI A example

Form 16 - Deductions under chapter VI A example

The above example shows Deductions under Chapter VI-A for Employee Provident Fund only.

Form 16 - Deductions under chapter VI A example

Form 16 - Deductions under chapter VI A example

The above example shows Deductions under Chapter VI-A for Employee Provident Fund, Insurance Premium.

Deductions under Chapter VI-A example

Deductions under Chapter VI-A example

The above example shows Deductions under Chapter VI-A for Employee Provident Fund, ULIP Premium, under section 80E. Also note that even if investments are made for amount greater than maximum allowable limit only maximum limit is deducted. As in above example the EPF amount itself is 1,16,610  so the deductions under Section 80C exceeds 1 lakh, so only 1 lakh is deducted.

After deducting the deductions allowed under Chapter VI-A from Gross Salary the taxable salary is arrived on which tax is calculated. We shall discuss it in next part Understanding Form 16 – Part 3.

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