All individuals like to keep their income tax liability as low as possible. While the purpose of both tax credit and tax deduction is to reduce tax liabilities, the difference lies in their working and how they impact the final taxable income.
The tax credit is a direct rebate provided to the taxpayer by the government under particular circumstances. The taxpayer must meet specific criteria to become eligible for various tax credits available.
Types of Tax Credits
Some of the popular tax credits provided under the Income Tax Act are:
● Income Tax Credit
If you are charged taxes higher than your actual tax liabilities, the government remits the overpaid amount as an income tax credit. The income tax refund you get on filing ITR is an example of such credit.
● Foreign Tax Credit
India has Double Taxation Avoidance Agreement with many countries. As per this agreement, you are eligible to claim benefits of the foreign tax credit if you have foreign income earned outside India for which you already paid taxes in that country.
● Input Tax Credit
Individuals with businesses like e-commerce, manufacturing, supply can claim the input tax credit (ITC) on tax paid for purchasing capital goods or any other spending that contributes to the business.
The taxpayer can claim a tax deduction against investments in specific financial instruments. The government of India offer such tax deductions to encourage the habit of investing and spreading financial literacy among Indians.
The public provident fund, national savings scheme certificate, and tax-saving mutual funds are popular financial instruments taxpayers use for tax deductions.
Types of Tax Deductions
● Section 80C
Under this section, an individual can claim a tax exemption of up to ₹1,50,000 every year against investing in tax saving investments such as ELSS, PPF, etc.
Section 80C has various subsections dealing with different investments such as investing in annuity pension plans, NPS, etc.
● Section 80D
You can claim up to ₹25,000 as a tax deduction under this section on the amount paid towards your health insurance premium. You can also claim this deduction for the health insurance of your spouse and children.
Furthermore, you can claim additional deductions against your parents’ health insurance.
● Section 80E
You can use this section to claim income tax deductions against an education loan taken for higher education.
● Section 80G
You can claim a tax deduction against the total donations you made towards some recognized charitable trust in a year. For instance, you can claim a 100% tax deduction on the amount donated to the Prime Minister’s relief fund.
● Section 80U
Individuals with specific disabilities can claim a deduction of up to ₹75,000 every year.
Difference Between Tax Credit and Tax Deduction
|Tax Credit||Tax Deduction|
|It is subtracted from the tax liabilities.||It is subtracted from the taxable income.|
|It is applied after the tax deductions are applied.||It is applied to the taxable income before claiming any tax credit.|
|It can be claimed without showing investments.||Except section 80U, all other sections for tax deductions require you to declare certain investments or donations.|
|While central government laws govern most tax credit rules, ITC rules are governed by the respective states.||Central government laws govern all types of tax deduction rules.|
|Tax credits can be claimed under both the old and new tax regimes of the income tax laws.||Most of the tax deductions are offered only under the old tax regime.|
Whether you are planning to claim benefits under tax credit or tax deductions, or both, remember to file your income tax return carefully on time to avail those benefits. Furthermore, take the help of a professional if you find the tax filing process overwhelming at first glance.
The government wants you to take advantage of tax rebates and deductions, and you can very well avail such benefits with proper knowledge of how they work.