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July 2, 2023

Introduction

Tax credits play a crucial role in balancing the total tax payable by individuals. It is the excess amount of tax deducted from the total tax amount, ensuring that no entity pays more tax than required. While there are several types of tax credits in India, this blog will focus on understanding the concept of tax credits, exploring different types, and examining how tax credits are applicable in the case of foreign tax payments.

What is Tax Credit?

Tax credits refer to the amount that equalizes the tax liability of an individual. Unlike tax deductions, which indirectly reduce the base taxable amount, tax credits directly reduce the tax liability irrespective of the base tax amount payable. This provides individuals with a more favorable means of reducing their overall tax burden.

Types of Tax Credit

There are five main types of tax credits:

1. Income Tax Credit

Income tax credit occurs when an individual is charged more than their original tax liability. The excess amount is credited to their account and can be adjusted in future tax payments.

2. Child Tax Credit

While there are no specific guidelines outlined by the Indian government regarding child tax credit, individuals can avail multiple exemptions and deductions when they have a child.

3. Input Tax Credit

Input tax credit benefits manufacturers and dealers. It allows taxpayers to avail credit for input materials purchased for manufacturing or goods purchased for resale.

4. Foreign Tax Credit

Under the Double Taxation Avoidance Agreement (DTAA), resident Indians earning income from abroad are required to pay taxes in both the host country and their resident country. To prevent double payment, DTAA allows individuals to claim tax credits when the host country deducts TDS.

5. 26AS Tax Credit

The 26AS tax credit is a form issued by the Income Tax Department, providing individuals with a statement of their tax credit. The form contains information on TDS details, tax collection, self-assessment/regular assessment/advance taxes, refunds, and high-value transactions.

How to View Your Tax Credit?

Viewing your tax credit is a simple process. Follow these steps:

  1. Visit the official website of income tax e-filing.
  2. Click on the 26AS links.
  3. Register by providing necessary details such as Date of Birth and PAN card number.
  4. Follow the on-screen instructions.
  5. You will be redirected to the TDS-CPC portal.
  6. Click on ‘View Tax Credit’.
  7. Select the desired assessment year and view the details online or download the file in PDF format.

Tax Credit Example

Let’s understand the concept of tax credits with an example:

Suppose Abhay, an Indian resident, earns an annual income of Rs. 1 lakh. His income includes Rs. 20,000 from source B and the rest from source Q (a foreign country). Both source B and Q have different tax rates.

Based on this information, Abhay’s total income is Rs. 1 lakh. Source B charges 30% tax interest on income exceeding Rs. 1 lakh and 25% for income below that threshold. Source Q levies 40% tax interest on Abhay’s total income.

Considering these factors:

  • Abhay’s total income: Rs. 1 lakh
  • Tax charged by Source B (30%): Rs. 30,000
  • Tax charged by Source Q (40%): Rs. 8,000
  • Ordinary tax credit provided by source B (30% of Rs. 20,000): Rs. 6,000
  • Total tax Abhay has to pay (after deducting tax credit): Rs. 24,000
  • Gross burden of tax (including the tax charged by Source Q): Rs. 32,000

FAQs

1. What do you mean by tax credit?

Tax credits are an amount that directly reduces liability regardless of the base taxable amount of the taxpayer.

2. Is tax credit considered good?

Yes, tax credits are considered better than tax deductions as they directly reduce the total amount that the taxpayer needs to pay.

3. Can you claim child tax credit for a 17-year-old?

No, child tax credit cannot be claimed for a 17-year-old. The child’s age should be below 17 years for eligibility.

4. How many tax credits are there?

There are about 53 tax credit and tax deduction options available.

5. What is the difference between tax credit and tax deduction?

Tax deduction indirectly reduces the base taxable amount, while tax credit directly reduces the liability amount regardless of the base tax amount.

Conclusion

Tax credits play a vital role in balancing an individual’s tax liability. Understanding the different types of tax credits and their implications, such as income tax credit, child tax credit, input tax credit, foreign tax credit, and 26AS tax credit, can help taxpayers optimize their tax payments. By leveraging tax credits effectively, individuals can ensure they pay the correct amount of tax without incurring unnecessary burdens. It is essential to stay informed about tax credit options and consult a tax professional if needed.

If you have any further questions or would like assistance with your tax credit queries, feel free to reach out to our team of experts. We are here to help you navigate the complexities of tax credits and ensure you maximize your benefits.

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