Tax Credit

Tax credit is the excess amount of tax deducted from the total tax amount payable by any individual. It balances the total payable tax amount so that no entity pays more tax than is required of them. There are various types of tax credits in India that you can opt for based on your income.

In this blog lets see what a tax credit is, its different types and how a tax credit is applicable in case of foreign tax payments.

What is Tax Credit?

Tax credit means the amount that equalizes the entire tax liability of an individual. It is an amount that can later be deducted from the gross taxable amount that an individual has to pay. However, there is a difference between the tax credit and tax deductions.

Deduction is basically the amount that is applicable indirectly on the total amount which also helps reduce the base taxable amount of the individual. On the other hand, tax credits are an amount that directly reduces the tax liability amount regardless of base tax amount that needs to be paid by the taxpayer.

Types of Tax Credit

Here are the five different types of tax credit you need to know. 

Income Tax Credit

One of the most popular types of the tax credit is an Income Tax Credit. When any individual is charged more than the original amount of their tax liability, then the excess amount is known as income tax credit. This tax credit added to an individual account is then adjusted in their future tax payments.

Child Tax Credit

The Indian government has not set any set guidelines for child tax credit. However, one can avail multiple exemptions and deductions when or if they have a child.

Input Tax Credit

The input tax credit benefits manufacturers and dealers. Taxpayers can avail input tax credit when input materials are purchased for manufacturing purposes. On the other hand, a trader will receive their input tax credit on those goods that they purchase to resell.

An input tax credit is only valid on the capital goods that have been purchased within a state and goods that are involved in the process of manufacturing.

An input tax credit varies from one state to another. So, if any final product is sold outside a particular state,, the tax credit is reversed to the authorities themselves. Apart from this if the end products bear tax exemptions, the tax credit on that input is considered non-applicable.

Foreign Tax Credit

According to the Double Taxation Avoidance Agreement (DTAA), resident Indians who earn income from abroad have to pay taxes in both countries (the one where they are residing and the other where the income is coming from). However, to eradicate the hassle of double payment, DTAA allows such individuals tax credits in the country they are a resident in when or if the host country deducts TDS. 

26AS Tax Credit

26AS tax credit is a form issued by the Income Tax Department that allows individuals to go through their personal statement of tax credit. The form bears the following information regarding taxes and the taxpayer.

• TDS details on the income of taxpayers.
• Information on tax collection.
• Details on already submitted self-assessment/regular assessment/advance taxes.        
• Details regarding the paid refund in a particular financial year.
• Information regarding the high value transactions, like mutual funds or equities etc.

But it is important for users to keep in mind that they should have their PAN card numbers in place to be able to view their statement of tax credit.

How to View Your Tax Credit?

It is very simple for an individual to view their tax credit by following the below easy steps.

Step 1: Visit the official website of income tax e-filing.

Step 2: Tap on 26AS links that direct you to the form.

Step 3: Register yourself by filling necessary information such as Date of Birth, PAN card Number and other important details.

Step 4: Follow the steps that will appear on your screen from here on.

Step 5: You will then be redirected to TDS-CPC portal.

Step 6: Scroll down and tap on ‘View Tax Credit’.

Step 7: Once you click on the same, the user You will be able to see two fields: Assessment Year and View As

Step 8: Select the assessment year for which you require tax credit information from the drop down. If you only want to check the 26AS tax credit details online, you can keep the View As section as it is in HTML. However, in case you want to download the file, select PDF as an option from the same drop-down.

You will be able to see the 26AS tax credit form on your screen.

Tax Credit Example

Check out the below example to fully understand the function of tax credits when it comes to foreign tax payments.

Suppose there is an individual named Abhay who is an Indian resident. He has an annual income of Rs. 1 lakh from various sources: Rs. 20,000 from B and the rest from another country named Q (India here is B).

Now, B will impose 30 percent interest on Abhay’s gross income if it exceeds the Rs. 1 lakh mark and 25 percent if it is lesser than the capping amount. On the other hand, Q levies 40 percent interest per annum on his total income.  

Now, based on the above facts,

• Abhay’s total income= Rs. 1 lakh
• As per B’s interest rate (30 percent), the amount charged is Rs. 30,000.
• As per Q’s interest rate (40 percent), the amount charged is Rs. 8,000.
• Ordinary tax credit that has been provided: Rs. 6000 (as per that law in country B: 30 percent x Rs. 20,000)
• So, the total tax Abhay has to pay is Rs. 24,000 (Rs.30,000 – Rs. 6,000)
• His gross burden of tax: His total tax + the interest rate charged by country Q= Rs. 32,000 (which is double).

Frequently Asked Questions (FAQs)