Tax credits vs. tax deductions in India is a common confusion for many taxpayers. While both reduce your income tax liability, they do so in different ways. Understanding this distinction is vital to optimise your tax planning and savings. Let’s break it down in simple terms.
What Are Tax Deductions and How Do They Work?
Tax deductions lower your taxable income, not the final tax amount. You subtract these from your gross income before calculating tax. For example, if your total income is ₹10 lakh and you claim ₹1.5 lakh under Section 80C (investments in PPF, ELSS, etc.), your taxable income becomes ₹8.5 lakh. Common tax deductions in India include:
- Section 80C: Investments up to ₹1.5 lakh (ELSS, PPF, LIC premiums)
- Section 80D: Health insurance premium (up to ₹25,000)
- Section 24(b): Home loan interest (up to ₹2 lakh)
In addition, business owners can claim deductions on operational costs like rent, depreciation, and salaries.
What Are Tax Credits and When Can You Claim Them?
Tax credits, on the other hand, reduce your actual tax payable. That means they apply after the tax amount is calculated. For instance, if your final tax liability is ₹50,000 and you qualify for a ₹10,000 tax credit, you only need to pay ₹40,000. Key tax credits available in India include:
- Foreign Tax Credit (FTC): For Indian residents earning abroad, as per Rule 128 of Income Tax Rules
- Minimum Alternate Tax (MAT) credit: For companies paying MAT, this credit can be carried forward up to 15 years
- TDS and advance tax paid: Already deducted/paid tax counts as a credit while filing returns
Moreover, if excess TDS has been deducted from your salary, you can claim a refund via credit while filing ITR.
Tax Credits vs. Tax Deductions: The Core Differences
Here’s a quick comparison to make it easier to understand:
| Feature | Tax Deduction | Tax Credit |
|---|---|---|
| Reduces | Taxable Income | Tax Payable |
| Applied | Before tax is calculated | After tax is calculated |
| Benefit Type | Indirect saving | Direct saving |
| Common Examples | Section 80C, 80D, 24(b) | TDS, MAT credit, Foreign Tax Credit |
| Impact on Refund | May lower final tax but not always | Directly increases refund value |
Therefore, if you’re eligible for both, you should claim both to reduce your tax outgo significantly.
Why This Matters?
Understanding tax credits vs. tax deductions in India helps you take full advantage of tax laws. Whether you’re salaried or a freelancer, you can:
- Invest smartly to claim deductions
- Monitor your TDS or foreign earnings for credits
- File ITR on time and correctly to avoid penalties
As per Economic Times, over ₹1.6 lakh crore in tax refunds were issued by the Income Tax Department in FY 2024. Additionally, taxpayers can track credits through Form 26AS and AIS on the income tax portal.
Conclusion:
Maximizing savings through smart tax planning is not just about knowing the law—it’s about applying it correctly. By understanding the difference between tax credits and deductions, you can optimize your finances better. Ready to reduce your tax burden? Explore more financial insights now!
– Ketaki Dandekar (Team Arthology)
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