What is a Tax Shield?

A Tax shield is a legal deduction that helps to lower the taxable income, which means it reduces the amount of the tax you need to pay on your income tax returns. We can also say that a tax shield is a deduction that helps to reduce your all over tax liability to help individuals and businesses on the tax you owe. 

How is a Tax Shield Used? 

Here are some of the most common uses of a tax shield given below: 

• According to section 24b, you can get up to 2 lakhs as a deduction on the home loan interest, which can help you lower your taxable income and help you further for future savings. 
• Business owners can claim the depreciation on the capital assets like equipment and machinery, which also reduces their taxable income, and helps them get profits by reinvesting back into the business. 
• You can also lower your income by paying the interest on the business loans, which include working capital loans and term loans. This will help you to lower the taxability and provide you with a better cost of borrowing. 
• If you have any premium insurance or paid for the high medical expenses, you can get a low taxable income under Section 80D for the health insurance plans, and Section 80DDB for the medical treatments. 
• Investments in the tax savings instruments like the public provident funds (PPF) or the national pension system (NPS), or the Employment Provident Funds (EPF), then you can get the deduction under the sections 80C and 80CCD, which allows you to get the long-term savings while lowering your taxable income. 
• On charitable donations under Section 80G, you can get the benefit of claiming the relief funds as a deduction, which you have donated to the NGOs and get an advantage of doing a social cause. 
• Your daily expenses are also eligible for the deduction and can be used as a tax shield to manage the cost and enhance the cash flow. 

Tax Shield Formula 

Here is the formula through which you can calculate your tax shield.

Let's take an example to calculate the tax shield on a home loan. 

Imagine you have paid INR 2,00,000  as an annual interest on your home loan. If you are in the 30% tax bracket, then our tax savings will be: 

Tax shield INR 2,00,000 X 30%= INR 60,000 

Your tax savings would be INR 60,000 from your home loan interest. 

Let's calculate the tax shield on the business case. 

Suppose you have borrowed INR 50 lakhs from a company at a 110 % interest rate, which makes your annual interest a total of 5 lakhs at a 30% tax rate. Your tax shield will be: 

INR 5,00,000 X 30% = INR 1,50,000 

Your tax shield is INR 1,50,000, which helps you to reduce the cost of borrowing. 

Tax Shield for the Medical expenses

For the person who pays more tax in the medical expenses are covered by the standard deductions, which they can choose to get a larger tax shield. A person can also deduct their medical expenses, which are more than 7.5% of the adjusted gross income, by filing Schedule A(4). 

Tax Shields as Incentives 

The tax shield can also be used for a home mortgage, which is beneficial for many middle-aged individuals for whom homes are a major component of their net worth. It also provides an opportunity to those who are interested in buying a house, which provides a tax benefit to the borrower. 

Additionally, students as also been used as a tax shield, which is deductible, and it can help a taxpayer to reduce the taxable income and lower their tax burden.