What is Tax Credit?
Tax credit is an amount that offsets the overall tax liability of a person. It is basically the sum that can be subtracted from the total payable tax by an individual. Tax credits are different from deductions as deductions are applicable indirectly, i.e. they help in reducing the base taxable amount of an individual, whereas tax credits directly reduce the amount of liability irrespective of the base tax liability of the tax player.
Income Tax Credit:
Income tax credit is a popular form of tax credit. If an individual is invariably charged more tax than their actual liabilities due to various factors, then the excess amount is available as tax credit to the individual. This credit can be adjusted against future tax liabilities in an absolute manner, i.e. the credit is entirely deducted from the payable tax amount regardless of the individual’s tax bracket or liabilities.
Child Tax Credit:
There are no specific laws regarding child tax credits in India. However, there are various exemptions and deductions that can be claimed if you have a child.
Input Tax Credit:
Input tax credit is available for manufacturers and dealers. These taxpayers are entitled to tax credit on inputs purchased through the course of manufacture. Similarly a trader will receive input tax credit on goods purchased for the purpose of reselling. The tax credits are available on capital goods purchases made within the state, and only those goods that are involved in the processing or manufacture are applicable under this credit.
This tax credit is state-specific. If the final product is sold outside the state of manufacture, the input tax credit has to be reversed to authorities. Also, if the final product has tax exemptions, the input tax credit will not be applicable. The tax credit is usually spread over a period of 3 years, however rules vary according to individual states.
Foreign Tax Credit:
Foreign tax credit is available to Indians as per the Double Taxation Avoidance Agreement (DTAA), which India maintains with more than 80 countries worldwide. According to this agreement, if you are a resident Indian with income from abroad, you will be levied taxes in both the countries. To avoid double payment, DTAA allows for tax credits in the country of residence if the host country has deducted TDS on income. This credit can then be used to reduce the amount of payable tax in the country.
26AS Tax Credit:
The 26AS is a form available from the Income Tax Department which allows individuals to view their personal tax credit statements. This form consists of the following information:
- Tax deduction details done by deductors on taxpayer’s income
- Tax collection details from collectors
- Regular assessment tax/ advance tax/ self-assessment tax etc. deposited by PAN holders.
- Paid refund details in a financial year
- Details pertaining to high value transactions in instruments such as mutual funds, equities etc.
A valid PAN number is must to view the tax credit statement.
How to View Your Tax Credit?
You can view the Form 26AS details online by following a few simple steps.
- Open the income tax e-filing website and click on the form 26AS link.
- Register by providing your DOB, PAN and other details.
- Follow the steps as per the website. You will be redirected to the TDS-CPC website during the course of registration.
- Once this page opens, scroll to the bottom and click on the link titled View Tax Credit (Form 26AS).
- Next, you will be presented with two fields titled ‘Assessment Year’ and ‘View As’. Select the assessment year you want tax credit details for through the drop-down menu. You can leave the second field at the default option of HTML if you just want to view the statement online. For downloadable file, select PDF from the drop down menu.
- Your form should be visible on the screen now.
Alternatively, a number of banks are already registered with NSDL for the purpose of presenting Form 26AS or the tax credit statement. You can check the list of registered banks online to see if your bank offers this feature.
Tax Credit Example:
To illustrate how tax credits work in case of foreign tax payments, the example below has been presented.
Let’s assume ABC is the resident of India (State of Residence ‘R’) and has earned income in another country (State of Source ‘S’). ABC has earned Rs.1 lakh in a year from all his endeavours. Out of this, an amount of Rs.20,000 was earned from State S. The State R levies interest at the rate of 30% of overall income if income exceeds Rs.1 lakh and 25% if income is below that ceiling. State S on the other hand charges taxes at the rate of 40% p.a.
- Total income = Rs.1 lakh
- State R tax (@30%) = Rs.30,000
- State S tax (@40%) = Rs.8,000
- Ordinary tax credit provided = Rs.6,000 (30% of Rs.20,000 as per State R’s rules)
- Overall payable tax in State R = Rs.30,000 – Rs.6,000 = Rs.24,000
- Total tax burden = Rs.24,000 + Rs.8,000 = Rs.32,000