Tax Credit: Meaning, Types & How to View Your Tax Credit

2024-08-02

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The tax credit has been an example of the fairness of the tax regime. There are some situations where a lawful taxpayer may end up paying more tax than they should. There have to be some ways through which the taxpayer can get back the additional tax paid or get compensated against future taxes. A tax credit is one mechanism to ensure this.

What is Tax Credit?

The tax credit is an amount that offsets the overall tax liability of a taxpayer. They are different from tax deductions. Unlike deductions, they are subtracted from the gross income of an individual's total tax liability. They reduce the tax liability irrespective of the base tax liability of the taxpayer.

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Types of Tax Credit

There are different types of tax credits that taxpayers can pursue under Indian IT law. Some of the popular ones are listed below:

a) Income Tax Credit

Assume you get charged more tax than your actual liabilities for any reason. In such a situation, the excess amount is available to you as a tax credit. You can adjust this credit against future tax liabilities in an absolute manner. The credit can be entirely deducted from the payable tax amount irrespective of your tax liabilities.

b) Child Tax Credit

There are no specific child tax credits available in India. However, the government offers benefits that function as tax exemptions if you have a child. The benefits are aimed to promoting high literacy rates.

c) Input Tax Credit

These are available to dealers and manufacturers who are collecting and paying GST (Goods and Services Tax) on the goods or services they buy and sell. Payment of GST on inputs purchased from the manufacturers entitles them to tax credits.

For example, a trader purchasing goods from a company to resell them pays GST on the goods price. He receives an input tax credit on goods purchased against the GST amount.

d) State Specific Credit

The Input tax credit is state-specific - if you buy goods in Maharashtra and receive a tax credit, you can use the tax credit only if you are selling the goods within Maharashtra. If you sell it in a different state, your input tax credit will be reversed. The input tax credit will not be applicable if the final product has tax exemptions.

e) Foreign Tax Credit (FTA)

Due to globalisation, cross-border transactions have surged recently. To ensure that Indian taxpayers do not have to pay double taxation, the Indian government gives foreign tax credits as per the Double Taxation Avoidance Agreement (DTAA). India maintains the agreement with over 80 countries.

If you are an Indian resident and have income from a foreign country, you will have to pay taxes in both countries. However, to avoid double taxation, DTAA allows for tax credits in the country you reside in. You can use the tax credit to minimise your tax liability.

f) Other Tax Credits

Disabled senior citizens that are under a particular income bracket may qualify for credits.Also, taxpayers with a total income of less than Rs 5 lakh in a financial year can claim a rebate of Rs 12,500 under the old tax regime. Under the new tax regime, the rebate under Section 87A has been increased to Rs 60,000 for individuals with income up to Rs 12 lakh, effectively bringing their tax liability to zero.

How does Tax Credit Work?

Different tax credits work differently. To understand how the tax credit works, we will take the example of foreign tax payments. You are an Indian resident and earn income in another country. Assume your total income is Rs 10,00,000 in a financial year from different sources. From the total income, Rs 2 lakh was earned as income from a foreign land.

Rs 0 to Rs 4 lakh – Nil

Rs 4 lakh to Rs 8 lakh – 5%

Rs 8 lakh to Rs 12 lakh – 10%

Rs 12 lakh to Rs 16 lakh – 15%

Rs 16 lakh to Rs 20 lakh – 20%

Rs 20 lakh to Rs 24 lakh – 25%

Above Rs 24 lakh – 30%

The tax rate in the foreign land is 40%.

Without any credits, you have to pay Rs 1.925 lakh as taxes (20% of 5 lakh and 5% on Rs. 2.5 lakh + 40% of 2 lakh). However, with tax credits, the calculation will be as follows:

Tax in India	Rs 1.925 lakh
Tax in foreign land	Rs 80,000
Tax credit provided	Rs 60,000 (30% of 2 lakh)
Overall tax to be paid in India	Rs 1.925 lakh - Rs 60,000 = Rs 1.325 lakh
Total tax liability	Rs 1.325 lakh + Rs 80,000 = Rs 2.125 lakh

How to View Your Tax Credit?

You can view your direct tax credits on the Form 26AS of the CBDT. You can view the form online. Follow the below steps to view the form and your direct (or income) tax credits:

Open the income tax e-filing website and look for the Form 26AS link.
Click on the link and register using your PAN, DOB, and other details.
Once you have provided the basic information, you are directed to the TDS-CPC website.
On the new page, scroll to the end of the page and look for the link titled - View Tax Credit.
Once you click on the link, you are taken to the page to view your tax credit.
You need to select the Assessment Year from the drop-down for which you need to view your tax credit.
You can view the tax credit (Form 26AS) online or download it. The option can be selected under drop-down - View As.
Based on the above two inputs, your Form 26AS would be downloaded or can be viewed online.

TDS filing is done quarterly by most companies. If you don't see the expected tax credit in your Form 26AS, you will have to request the deductor to rectify the quarterly TDS (or TCS) statement using the prescribed correction statement.

You may also see no credits in your Form 26AS, and it could be because the tax deductor failed to file periodic TDS returns, wrongly quoted your PAN while filing, or for other reasons.

You must work with the deductor to get the due tax credit reflected in your Form 26AS and use it to reduce your overall tax liability. GST and input tax credits (indirect tax), however, show up on the GST portal only.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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