Tax Credit and Tax Deductions: Expenses You Can Claim in FY 2022
Did you know that the government of India offers several different types of tax concessions and exemptions for taxpayers under the Indian Income Tax Act, 1961? Tax credits and tax deductions are two such tax concession features. Tax credits, as well as tax deductions, allow taxpayers to reduce their tax liability, either by reducing the tax liability or by reducing the taxable income. In this blog, we will look at the various types of tax credits, understand tax deductions, and what makes the two different.
What are Tax Credits?
A tax credit is an amount that can be deducted from the total amount of tax due and offsets the total tax liability. The tax credit allows a taxpayer to reduce the tax amount owed by them to the government. For instance, if you were charged more tax than you owe, the excess tax is turned into a tax credit which you can use to offset future tax liability. Some of the tax credits available in India are – Income tax credit, child tax credit, input tax credit, and foreign tax credit. The type of tax credit you qualify for determines the amount of credit. Tax credits can be refundable, partially refundable, or nonrefundable.
What is a Tax Deduction?
Tax deductions are claims made to lower your taxable income resulting from a taxpayer’s specific investments and expenses. Therefore, a tax deduction lowers your overall tax liability. It is a type of tax benefit that enables tax savings. However, the amount of tax one can save will depend on the type of tax benefit he or she can claim. Individuals, HUFs, companies, etc. can avail of tax deductions in several different ways under different sections of the Income Tax Act, some of which are 80C, 80CCC, 80CCCD, 80D, 80EE, 80TTB, 80GGB, and 80AC. Note that there are several other sections apart from the mentioned ones under which you can avail of tax deductions.. The following are some of the key tax deductions available for individuals/HUF under the IT Act of 1961:
- 80C – Investing in popular investment options such LIC, Sukanya Samriddhi Account, PPF, Mutual Funds, FD, etc (Individuals and HUF)
- 80CCC – Investment in pension funds (Individuals)
- 80CCD(1) – Investment in National pension scheme and Atal Pension Yojna (Individuals)
- 80CCD(1B) – Investment in National Pension Scheme Contribution and Atal Pension Yojana (Individuals)
- 80CCD(2) – National Pension Scheme Contribution by Employer (Individuals)
- 80D – Medical Insurance Premium and Medical Expenditure (Individuals and HUF)
- 80DD- Medical treatment of dependent with disability (Individuals and HUF)
- 80DDB – Treatment expenses for specified diseases (Individuals and HUF)
- 80E – Interest paid on higher education loan (Individuals)
- 80EE – Interest paid on loan taken for buying a home (individuals)
- 80EEA – Interest paid on loan taken for buying a home for the first time
- 80EEB – Interest paid on loan taken for the purchase of an electric vehicle
- 80G – Donations made to prescribed Funds, Charitable Institutions, etc.
- 80GG – income tax deduction for house rent paid (Individuals)
- 80GGA – Donations made for Scientific Research or Rural Development
- 80GGC – Contribution to Political Parties (individuals, HUF, AOP, etc.)
- 80TTA – Interest earned on Saving bank accounts (Individuals and HUF (except senior citizens)
- 80TTB – Interest Income earned on deposits (Savings /fixed deposits) (Individuals who are 60 yrs or above)
- 80U – Disability deductions for resident individuals
- 80RRB – royalty on patents (Individuals (Indian citizen or foreign citizen being resident in India))
- 80QQB – royalty income of authors ( Individuals (Indian citizen or foreign citizen being resident in India))
The following are some of the key tax deductions available for companies under the Income Tax Act 1961:
- 80GGB – contributions to political parties or Electoral Trust
- 80IA – Profits and Gains from Industrial Undertakings engaged in infrastructure development, etc.
- 80IAB – Profits and Gains to Special economic zone developers (SEZ Developers)
- 80IAC – eligible startups (company or LLP engaged in eligible business subject to some conditions)
- 80IB – Profits and Gains from specific Industrial Undertakings other than infrastructure development undertakings (Specified Industrial Undertakings)
- 80IBA – housing projects profits ( Individual, HUF, AOP, BOI, Company, Firm, Any other person engaged in the business of Housing Projects as may be specified
- 80IC – certain Undertakings in Himachal Pradesh, Sikkim, Uttaranchal and North-Eastern states (subject to certain conditions)
- 80IE – certain Undertakings set up in North-Eastern states (subject to certain conditions)
- 80JJA – Profits and gains generated by the collection and processing of biodegradable waste (subject to certain conditions)
- 80JJAA – Employment of New Workers / Employees, applicable to Assessee to whom Section 44AB applies (subject to certain conditions)
- 80LA – Certain Income of Offshore Banking Units in SEZ and IFSC
- 80M – Deduction in respect of certain inter-corporate dividends
- 80PA – Deduction for certain incomes of producer companies.
Apart from these deductions, some of those mentioned for individuals/HUF are also available for companies. They are 80G and 80GGA.
Difference Between Tax Credit and Tax Deduction
While both tax credits and tax deductions are used for reducing tax liability on one’s taxable income, it is important to learn the differences between the two before applying for either one. A tax credit is an amount that taxpayers can deduct from the taxes they must pay. Tax credits lower the actual amount of tax owing, as opposed to deductions, which reduces the amount of taxable income. The amount of a tax credit varies and depends on the nature of the credit; some tax credits are only given to individuals or businesses in specific classifications, locations, or industries.
- A tax credit reduces the actual tax owed to the government, whereas a tax deduction reduces the taxable income.
- A tax credit is applied to the tax owed after tax deductions have been applied to the income.
- A tax credit can be applied irrespective of any investments, but in the absence of any investment in the year by an individual, no tax deductions can be applied to his/her earnings.
- Lastly, tax credits are circumstantial, but tax deductions are defined under various sections of the Income Tax Act 1961.
Different Types of Tax Credits in India
Income tax credit
If the taxes you are charged are higher than your total tax liability, the overpaid amount is remitted as a tax credit, which can then be subtracted fully from future taxes.
For example, tax deducted at the source can be claimed by the assessee as an income tax credit. The tax deducted at source (TDS) concept was introduced with the objective of collecting tax from the revenue source itself. According to this concept, a person (deductor) who is required to make a payment of a specific nature to another person (deductee) must withhold tax at the source and deposit it into the central government’s account. On the basis of Form 26AS or a TDS certificate provided by the deductor, the deductee from whose income tax source deductions have been made is entitled to get credit for the amount so deducted.
This tax credit is adjudicated in absolute terms, i.e., irrespective of the future tax liability, the income tax credit is deducted from the tax liability to arrive at the new tax amount.
Child tax credit
The Child Tax Credit is a fully refundable tax credit for tax-paying families with children. While no specific child tax credits currently prevail in India, the government may offer certain tax breaks and exemptions to taxpayers with children to promote high literacy rates and education among kids in the country.
Input tax credit
Businesses, as well as individuals working as service providers, agents, e-commerce traders, suppliers, or manufacturers, can claim an Input Tax Credit (ITC) on tax paid for the purchase of goods and services contributing to the business.
To claim ITC:
- One should be registered under GST Law.
- Have a tax invoice or debit note generated by the registered supplier that details the tax amount.
- Must have received goods or services.
- The Supplier should have made government tax payments and filed returns as necessary.
- When receiving items in lots or instalments, ITC may be claimed when receiving the final lot or instalment.
- No input tax credit is permitted when depreciation on such tax is claimed, and the input tax credit is included in the capital goods cost.
- If the input tax credit is not claimed within the allotted time period, then the Input tax credit will not be allowed.
However, ITC is state-specific, so the norms may vary accordingly. If you file a claim for Income Tax Credit, the amount will be first used for paying your Integrated Goods and Services Tax (IGST), then for payment of Central Goods and Services Tax (CGST), and lastly for payment of State GST (STGST) or Union Territory GST (UTGST).
Foreign tax credit
This credit is available under the Double Taxation Avoidance Agreement. The practice of taxing someone on the same income in two places is known as double taxation. Therefore, a variety of measures have been taken by many countries to reduce double taxation in an effort to encourage foreign revenue, which helps to increase the country’s foreign exchange reserves.
A resident taxpayer is entitled to a credit for any foreign taxes paid outside of India under Rule 128 of the Income Tax Rules, 1962. Only if the assessee timely submits Form 67 with the required information will the credit be provided. A taxpayer must submit Form 67 to file an FTC claim, which is an essential document. In addition, you must submit it on or before the deadline to finish the initial return of income required by section 139(1) to be eligible for the credit.
Sections 90 and 91 of the Income Tax Act in India deal with the concept of FTC (Foreign Tax Credit). Section 91 deals with FTC claims in cases where India has not entered into a Double Taxation Avoidance Agreement (DTAA ) with the country where a taxpayer’s income originates.
An Indian resident may only request relief under Section 91 if there isn’t a DTAA with the other nation where he/she received income. India offers this relief voluntarily because of a unilateral agreement. Section 90 deals with cases where India has signed a DTAA with another country where a taxpayer’s income originates and such a DTAA authorises such FTC claims.
This section allows a resident of India who has paid taxes abroad to obtain credit for those taxes against any unpaid Indian taxes. When two countries have an agreement, bilateral relief is given and computed in accordance with that mutual agreement between the two countries.
What is Form 26AS?
Form 26AS is a consolidated annual statement that contains details of your tax deducted at source (TDS), tax collected at source (TCS), advance tax paid by the assessee, self-assessment tax payments, details about income tax refunds, and tax deducted on the sale of immovable property, among other details. One needs to have a valid PAN to be able to have access to Form 26AS. It is a statement created by the Income Tax Department detailing the accrued, available, and applicable tax credits, along with other particulars.
Significance of Form 26AS
Form 26AS is one of the most crucial documents you should double-check before filing your ITR. All taxpayers may get this annual consolidated tax statement form via the income-tax website by entering their Permanent Account Number (PAN). If tax has been deducted from your income or you have paid taxes on your income, the income tax department already has this information in their database.
Before filing their income tax return, taxpayers can compare their actual transactions to the ones stated on their Form 26AS (ITR). This will reduce errors like omissions made when filing the ITR. An investigation may be launched if there is any discrepancy between your Form 26AS and your submitted income tax returns. Form 26AS also confirms the fact that several organisations have paid taxes on your behalf and placed the funds in the government account.
Overall, Form 26AS is a document that compiles all taxes you have paid, whether through deductions or other means, making it simpler for you to claim the credit for taxes paid when submitting your tax return. The data in Form 26AS is typically updated every quarter.. The year-end tax credits that appear on Form 26AS may be claimed when filing a tax return.
The government uses monetary incentives like tax credits and tax deductions to promote investment and spending in certain avenues of society. While tax credits do not require any obligatory investments, to be eligible for tax deductions, an individual must participate in schemes eligible for tax exemptions. Furthermore, tax credits are computed after taking tax deductions into account.
FAQs about Tax Credit and Tax Deductions
Who can claim an income tax credit?
A common type of tax credit is an income tax credit. An individual may be eligible for a tax credit if they are consistently charged taxes at a higher rate than their total liability. This credit can be used to offset future tax obligations in an absolute sense, meaning that it completely reduces the amount of taxes due regardless of the taxpayer’s tax bracket or other obligations.
Is a tax credit a refund?
There are two types of credits available for taxpayers: refundable and nonrefundable. You can reduce the amount of taxes you owe by using both types of credits. Even with no taxes owed, taxpayers can still apply for any refundable credits they qualify for and receive tax credits as a refund.
What is Double Taxation Avoidance Agreement (DTAA)?
The Double Taxation Avoidance Agreement, or DTAA, was signed between India and another nation (or any two or more nations) in order to prevent taxpayers from being subjected to both source and destination country taxes on their income.
What is Form 26AS?
Form 26AS is a consolidated annual statement that contains details of yours. It is a document that compiles all taxes you have paid, whether through deductions or other means, making it simpler for you to claim the credit for taxes paid when submitting your tax returns.
What is an income tax credit in India?
If a person owes more in taxes than they were charged, the excess is returned as a tax credit. This credit can be fully deducted from upcoming taxes that must be paid to the government.