Tax Credits

A tax credit is a tax incentive which allows certain taxpayers to subtract the amount of the credit they have accrued from the total they owe the state. It may also be a credit granted in recognition of taxes already paid or a form of state support.

Income tax systems often grant a variety of credits to individuals. These typically include credits available to all taxpayers as well as tax credits unique to individuals. Some credits may be offered for a single year only.

Low income subsidies

Several income tax systems provide income subsidies to lower income individuals by way of credit. These credits may be based on income, family status, work status, or other factors. Often such credits are refundable when total credits exceed tax liability.

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.

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.

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.

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.

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.

Tax incentives for undertakings other than infrastructure development undertakings

If certain conditions are met, a tax holiday is permitted on the profits earned by an undertaking engaged in any of the following:

• Integrated business of handling, storage, and transportation of food grains.
• Commercial production or refining of mineral oils.
• Processing, preservation, and packaging of fruits or vegetables.
• Operating and maintaining a hospital in a rural area.