PROSPERR.IO

When it comes to paying income tax, finding ways to pay less is always a plus. One way to do that is by lowering your taxable income. But it's not always easy. You might have heard about two ways to do this: tax credits and tax deductions. But what do these actually mean?

Let's break it down in simpler terms.

What is Tax Deduction?

A tax deduction is an amount that you can subtract from your taxable income, thereby lowering the amount of income that is subject to taxation. In simpler terms, deductions reduce your overall taxable income, potentially putting you in a lower tax bracket and decreasing the amount of tax you owe.

Benefits: Tax deductions offer significant benefits by lowering your taxable income, potentially leading to substantial tax savings. Common deductions include expenses related to education, healthcare, home ownership, and charitable contributions.

What is Tax Credit?

Unlike deductions, which reduce your taxable income, tax credits directly reduce the amount of tax you owe to the government. They can be more valuable than deductions because they directly decrease the amount of tax you owe, rather than just lowering your taxable income.

Eligibility: Tax credits are available for specific expenses or circumstances, such as education, childcare, adoption, and other investments. Eligibility criteria vary based on the type of credit, and some credits may be refundable or non-refundable.

Check This out, New Rule Alert: Claiming Tax Credits for AY 2025–26

Tax Credit vs Tax Deduction

The first and most significant distinction between tax deductions and tax credits lies in their effect on your tax bill. Credits directly reduce the amount of tax liability, whereas deductions reduce the amount of income subject to taxation.

Tax Deductions Examples:

Let's consider a practical example to understand tax deductions better. Suppose you earn ₹10,00,000 annually and qualify for a deduction of ₹1,50,000 under Section 80C of the Income Tax Act. By claiming this deduction, your taxable income reduces to ₹8,50,000, potentially placing you in a lower tax bracket.

Understanding Tax Credits:

On the other hand, tax credits provide a reduction in your tax bill. For instance, if you owe ₹50,000 in taxes and are eligible for a tax credit of ₹10,000, your tax liability decreases to ₹40,000.

Conclusion

To optimize your tax savings, it's essential to maximize both deductions and credits available to you. Keep detailed records of eligible expenses, explore all available tax breaks, and consult with a tax professional for personalized guidance.

To plan your taxes effectively, you need to know the difference between tax deductions and tax credits. While deductions reduce your taxable income, credits directly lower your tax liability. Book a free wealth consultation call today 

[Disclaimer- The article is only for educational purposes and is not to be construed as tax advice. The relevant provisions of the Income-tax Act may be referred to, for complete understanding.]