When it comes to taxation, we often tend to use the terms tax credit and tax deduction interchangeably. Actually, there is a vast difference between these two items. While deductions are subtracted from the total taxable income of the assessee, tax credits are subtractions from the tax liability. Tax credits are also popularly called as tax rebates.
Tax deductions are available on stipulated investments
In India, the Income Tax Act offers tax deduction on specified investments with a larger social or national impact. For example, deductions under Section 80C for life insurance, ELSS, long-term fixed deposits, provident funds etc. Contribution to health insurance of dependents is also eligible as deduction under Section 80D. Here the idea is to encourage people to buy long-term social security and make them save compulsorily. These are in the nature of deductions from the total taxable income.
For example, PPF is intended to help people save for their retirement. ELSS is intended to encourage investors to participate in equity from a long-term perspective. Similarly, life insurance is meant to provide long-term security to the assessee and the family. In addition, the Income Tax Act also provides exemption for payment of Tuition Fees under Section 80C as it looks at it as indirect encouragement to education. The outer limit is defined (currently at Rs 1.50 lakh) and how the mix is structured is left to the individual.
What are the typical tax credits available to an assessee?
Tax credit is a rebate that the government provides in special circumstances and subject to the taxpayer meeting certain specified criteria. Let us look at some examples of tax credits in the current contest.
# Firstly, there is tax credit available in case of foreign income earned outside India where tax is paid abroad. India has signed double taxation avoidance agreements (DTAA) with select countries to reduce the cascading effect of income tax in multiple geographies. In such cases, the tax credit can be claimed in India for taxes already paid abroad. Such credits can be set off against the tax payable in India.
# Secondly, taxpayers having total income of less than Rs 5 lakh per annum can claim tax rebate of Rs 2,000. Effective the Interim Union Budget 2019, any individual receiving net taxable income up to Rs 5 lakh can claim the entire tax liability as a rebate (tax credit) and pay nil tax.
(By Sandeep Bhardwaj, Chief Sales Officer, Angel Broking Ltd)