Difference Between Tax Deduction and Tax Credit Explained

Are you confused between tax credit and tax deduction?

Read the following blog and clear all confusions regarding tax credit vs tax deduction. So, let’s start!

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What Is a Tax Credit?

A tax credit is an amount or rebate of tax that the Government provides in exceptional circumstances to reduce the tax liability. Following is a list of credits available in India -

If individuals have earned income outside India and paid taxes for that abroad, then they can claim a tax credit in India.

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What Is a Tax Deduction?

Tax Deductions are expenses that are allowed to be deducted from an income that is offered to tax.Deductions are also 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 under section 80C, 80CCC, and 80CCD. To claim deductions certain conditions as specified in the Act must be met. Income above this amount is taxable as per the IT slab rate applicable to them.

Deductions are governed by chapter VIA of Income Tax Act which contains deductions from section 80C to 80U.

Below is a list of some sections 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).

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These deductions are allowed to individuals who opt for the Old Tax Regime.

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.

Though both tax credit and deduction reduce tax liability, the above-mentioned difference between deduction and credit compels individuals to think about the superiority between the two. So, let’s find out!

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.

Frequently Asked Questions

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If an individual earns ₹4.2 lakh p.a. and has invested in insurance (LIC premium Rs 20,000) that offers deduction, what will be the due amount after applying for credit?

Gross Income: Rs 420000

Less: Deductions u/s 80C Rs 20,000

Total Income: Rs 400000

Tax under Old Tax Regime: Rs 7500

Less: Rebate u/s 87A: Rs 7500

(Rs 12500 or Actual Tax whichever is lower)

Hence, Tax is Nil.

Can individuals with disabilities avail themselves of tax credits, and how can they calculate them?

Individuals with disabilities can avail themselves of tax deductions (not tax credits) under sections 80DD, 80DDB, and 80U of the Income Tax Act, subject to specific conditions outlined in these sections. To calculate these deductions, individuals can use an income tax calculator, which helps them estimate based on their eligibility and the applicable conditions.