Difference between tax deduction and tax credit

Difference between tax deduction and tax credit

One of the biggest concerns of taxpayers around the world how to reduce their tax liability without circumventing the law. There are two legitimate ways to reduce an employee's tax liability, than a tax deduction and a tax credit. Tax deductions are requests, which can help reduce the beneficiary's taxable income, provided certain conditions are met. These can be requested at the time of filing the tax return.

Due to some misconceptions, people juxtapose the tax deduction for the tax credit, but there is a difference. The tax credit implies the amount, which reduces the recipient's overall tax burden. This article will help you understand the difference between tax deduction and tax credit, so take a reading.

Comparative chart

Basis for comparison Tax deduction Tax credit
Sense A tax deduction connotes an eligible expense, which limits the recipient's taxable income. A tax credit a tax incentive, in which the taxpayer can subtract the tax amount, in special circumstances.
Reduction in Taxable income Tax obligation
registration It is corrected before the application of the tax rate. adjusted after the tax due ascertained.
Tax savings Reduces fees by marginal rate. Reduce fees due to rupee for rupee.
occurence Due to various expenses incurred by the evaluator. Due to taxes already filed with the tax authorities or due to certain circumstances.
QTY It depends on the deduction requested. It depends on the nature and purpose of the credit.

Definition of tax deduction

Tax deduction involves the reduction of taxable income, as a result of investing in certain schemes or funds, which are suitable for attracting deduction. The reduction in taxable income may also be due to a series of events that occur during the year.

It is a qualifying expense, which has the ability to reduce total gross income, based on a specific amount or percentage, as approved by the tax authorities. The amount of the allowance allowed by the government can be subtracted from the beneficiary's total gross income to arrive at the total taxable income. In addition, the amount of the deduction differs, based on the deduction requested by the evaluator.

An assessee can request deductions on various expenses such as medical bills, donation to charities and so on. You can also take advantage of the tax deduction if you have made an investment in insurance plans, savings plans or government-approved funds.

Definition of tax credit

In simple terms, the tax credit refers to the amount that can be offset against the overall tax obligation. the sum that the assessor can subtract from the taxes payable to the tax authorities. a tax incentive, which is used by the government to encourage tax payments. The main advantage of a tax credit that directly minimizes tax liability. Various types of tax credit available in India are:

  • Income tax credit : when a person is charged a tax higher than his actual liabilities, resulting from various factors, the excess amount available as a tax credit to the evaluant, which can be carried forward and corrected on the basis of future tax obligations.
  • Input Tax Credit : Tax credit available for resellers or registered manufacturers for inputs they purchase for resale.
  • Foreign tax credit : to ignore the cascading effect, the foreign tax credit available to Indians. According to the Double Taxation Avoidance Agreement (DTAA), if an assessee is an Indian resident, but gets income from the source outside the country and charges taxes in both countries, the tax credit available to the Indian resident if the host country charged TDS on income.

Key differences between tax deduction and tax credit

The points indicated below are noteworthy, as regards the difference between tax deduction and tax credit:

  1. A tax deduction defined as an eligible expense; which reduces the assessor's taxable income. On the other hand, the tax credit can be understood as a tax incentive, in which the taxpayer can subtract the tax amount, in special circumstances.
  2. While the tax deduction reduces the recipient's taxable income, a tax credit reduces the assessor's overall tax liability.
  3. The adjustment for deductions is made before the application of the income tax rate that can be taxed. Vice versa, the amount of the tax credit is adjusted after the assessment of the tax due.
  4. The tax deduction saves the taxpayer's income by a small amount, as it reduces the taxes by marginal rate. Against this, the tax credit saves the taxpayer's income by a higher sum, as it reduces the rupee of tax liability for the rupee.
  5. A tax deduction available to the evaluator if he / she has incurred any specified expenses. On the contrary, the tax credit arises if the tax has already been deposited with the tax authorities or due to certain circumstances.
  6. The amount of the tax deduction depends on the deduction requested, but the amount of the tax credit depends on the nature and purpose of the tax credit.


Both the tax deduction and the tax credit help reduce the overall tax burden on the taxpayer and also save taxes. However, the tax credit is more favorable than a tax deduction, as the former lowers the rupee of the tax debt for the rupee while the latter only reduces the tax liability by nominal rate.