Tax Credit vs Tax Deduction
Got confused between a tax credit and deduction?
Read the following piece and clear all confusions regarding tax credit vs tax deduction. So, let’s start!
What Is a Tax Credit?
A tax credit is an amount that the Government provides in exceptional circumstances to reduce the tax liability. Following is a list of credits available in India -
- Citizens aged above 65 years can avail credit of up to ₹20000.
- If individuals have earned income outside India and paid taxes for that abroad, then they can claim a tax credit in India.
- Individuals with less than ₹5 lakh of income p.a. but liable to pay taxes can claim a credit of ₹2000.
What Is a Tax Deduction?
Deductions are claims placed to reduce taxable income from different investment instruments such as mutual funds, National Savings Certificate, life insurance, tax-saving fixed deposits etc. The deductions are listed under various sections of the IT Acts. Individuals can claim a maximum of ₹1.5 lakh as deduction. Income above this amount is taxable as per the IT slab rate applicable to them.
Below is a list of a section that governs deduction in India,
- Section 80C: This section offers benefits on investments like fixed deposits, life insurance etc.
- Section 80CC: This section covers investment in pension plans.
- Section 80D: Deduction under this section is available for premium payments towards a health insurance policy (purchased for self, parents, spouse, children).
With a clear understanding of tax credit and deduction, we can proceed to answer questions like how a tax credit differs from a deduction.
What Is the Difference Between Tax Credit and Tax Deduction?
Follow the table mentioned below to learn about the difference regarding tax credit versus deduction,
Tax Credit | Tax Deduction |
It decreases the actual amount of tax an individual owes to the Government. | It decreases the income on which tax amount is computed. |
It is applicable after the deductions are made. | It is available before the imposition of tax credit. |
Which Is Better Between Tax Credit and Tax Deduction?
A tax credit directly decreases taxes. On the other hand, deductions lower the taxable income and rate, which is necessary to compute the tax. Therefore, credit is more preferable to a deduction of the same amount.
Read and understand the various pointers of tax credit vs tax deduction and make an informed decision before applying for either one.