Introduction
More commonly across the globe, a government may grant tax credits to encourage specific actions from taxpayers. These include the replacing of any older appliances with more energy-efficient ones. Alternatively, it is present to help underprivileged taxpayers by decreasing the overall cost of housing.
Tax credits are favoured to tax deductions or exemptions. It is because tax credits will reduce tax liability by every penny. Although a deduction or exemption still decreases the final tax liability, it works within an individuals marginal tax rate.
What is Tax Credit?
A tax credit is the amount of money taxpayers are permitted to subtract from the income tax liability that they owe to the government. These can be various forms under Indian income tax laws such as the tax deducted at source, advance tax, foreign tax credit, and tax on arrears received in later years. Anyone who has a net taxable income less than Rs. 5 lakh during the year but is liable to pay tax, can claim a tax rebate of Rs.12,500.
On the other hand, tax credits can be rebates that the government provides in case of special circumstances surrounding a person.
Who is eligible to pay?
Different tax credits can be availed by different persons, depending on what the tax credit is. A person belonging to a particular slab of taxable income becomes eligible for the tax rebate under Section 87A of the Income Tax Act.
Any person whose taxable income falls below Rs 5,00,000 shall be eligible for tax deduction of up to Rs 12,500. Similarly, a tax assessee who is aged above 60 years and 80 years have some tax concessions. These are called tax credits.
As per Double Taxation Avoidance Agreement between two countries, one of them being India, a tax assessee whose income is under the scope of taxable income in both the countries may have to pay tax only in one country by taking credit of the tax paid in the second country. These are specific cases where a person is eligible for a tax credit.
A detailed breakdown of the procedure for filling the tax
Under the Income Tax Act, certain types of tax credits require proof of evidence to be filed or submitted along with the income tax return being filed. For example, the foreign tax credit require proof of income earned and taxes paid in the second country to avail the credit in the first country.
