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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.

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

✓ If an individual earns ₹4.2 lakh p.a. and has invested in insurance that offers deduction, what will be the due amount after applying for credit?

An individual earns ₹4.2 lakh p.a. and has invested in insurance that offers a deduction. Therefore, after deductions, the due amount will be ₹8000. As that individual’s income is below ₹5 lakh p.a., he/she will receive credit of ₹2000. Hence, the ultimate due amount is ₹6000.