| Definition |
A reduction in taxable income achieved through allowable deductions. |
A range of incomes taxed at a specific rate under progressive tax systems. |
| Purpose |
To lower the overall tax liability by using deductions such as interest, depreciation, etc. |
To determine how much income is taxed at what rate, ensuring fairness and progressivity. |
| How It Works |
Deductions reduce taxable income, which lowers tax payable. |
Different portions of income are taxed at increasing rates as income rises. |
| Formula |
Tax Shield = Deductible Expense × Tax Rate |
No specific formula; rates apply based on income ranges (e.g., ₹2.5L–₹5L @ 5%). |
| Examples |
Home loan interest, depreciation, business expenses. |
India's tax slabs: 5%, 10%, 20%, 30% based on income levels. |
| Who Uses It |
Used by individuals and businesses for tax planning and saving. |
Applies to all taxpayers based on their total annual income. |
| Impact |
Reduces effective tax paid; improves cash flow. |
Determines how much tax one owes depending on income. |
| Relation to Income |
Reduces the income that is subject to tax. |
Classifies income into slabs to apply the correct tax rate. |
| Tax Planning Tool? |
Yes, it's a proactive strategy to minimize taxes legally. |
No, it’s a framework set by the tax authority. |
| Government Role |
Allows certain deductions to incentivize behavior (e.g., investments, loans). |
Creates brackets to ensure tax equity and progressiveness. |
| Effectiveness |
More effective for high-income individuals or firms with large deductions. |
Affects all taxpayers based on their total income. |
| Frequency of Change |
Depends on changes to tax laws and allowable deductions. |
Revised periodically in budgets or finance bills. |
Tax Shield vs Tax Bracket