Tax Credit – How to Calculate Tax Credit?

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The tax credit is a sum of money that an individual can subtract from the total payable tax to offset his liability If the taxpayer charged more tax than his current liability so the taxpayer has an option either they can apply for a refund or adjust in future liabilities. 

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What is Tax Credit.? 

The amount that lets a taxpayer subtract from their tax liability is called as Tax Credit. Tax credits reduce overall tax liability you owe to the government. Income tax credit and input tax credit are the most popular terms in Tax credit. Tax credits are more favourable than tax deductions or Income Tax Exemptions because they reduce the tax that is owed to the government. 

Types of Tax Credit:

  • Income Tax Credit
  • Input Tax Credit
  • Foreign Tax Credit

Let’s discuss all these Tax Credit in detail. 

Income Tax Credit:

Income tax credit is popular among individual taxpayers. If a taxpayer charged more tax than the actual tax payable, the remaining Tax will be available as Tax Credit and in some cases, they can offset the future liability or apply for a refund.

The Taxpayer can check their Income Tax Credit online through Form 26AS. Form 26AS is the Tax Credit Statement which can be accessed from the Income-tax Department e-filing portal and allows individuals to view their tax credit, so they can see their current Tax Credit and file Income Tax Return according to that.

Form 26AS consists of many details like:
  • Source of Tax Deduction (Salary, Interest and Capital Gain, etc) and Tax Deducted details
  • Advance tax, self-assessment tax, and regular assessment tax deposited by PAN holders.
  • Details of High-Value Transactions
  • Refund received Details 
View Form 26AS

You can view Form 26AS in following ways:

Steps to view Form 26AS through E-Filing Portal:
  1. Visit page E-Filing portal and log in using PAN, Passwords and Captcha Code.
  2. Go to ‘MY ACCOUNT’ at the Dashboard and select the first option ‘VIEW Form 26AS (Tax Credit) and Click on ‘CONFIRM’.
  3. You will be redirected to the TRACES Portal select the ‘Checkbox’ and click to ‘PROCEED’ and then click on ‘VIEW TAX CREDIT (Form 26AS)’.
  4. The password for opening Form 26AS is your Date of Birth (in DDMMYYYY format)
  5. Select the ‘Assessment Year’ from the drop-down menu and select ‘HTML’ in ‘View As’ then click on ‘View/Download’.
  6. Now you can access the Form 26AS.

Through NET Banking facility: You can also view your Form 26AS through Internet Banking if your Pan Number is Linked with your Bank Account.

Input Tax Credit: 

Dealers and Companies mostly deal with the input tax credit. Dealers and Companies receive the input tax credit on the purchase of capital goods which can be used to reduce the current tax liability at the time of sale. In other words, Input Tax Credit reduces the tax liability of the business.

Input Tax Credit can be claimed by anyone who is registered under the Goods and Services Tax. But you need to file a return to claim your Input Tax Credit amount if you fail to do so then you cannot offset your liabilities with your ITC.

Process to claim ITC:
  1. You need to register under GST.
  2. You need a Purchase Invoice from a GST Registered seller.
  3. Cross-check auto-generated GSTR-2A.
  4. File GSTR-3B with your ITC details.

Foreign Tax Credit:

Foreign Tax Credit is available to those Indians who are working outside India and to stop the Double Taxation on the individual taxpayer, India maintains the Double Taxation Avoidance Agreement (DTAA) with more than 80 countries worldwide. Double Taxation Avoidance Agreement is a tax treaty (DTAA) signed between India and another country so that taxpayers can avoid paying double taxes on their income earned from the source country as well as the residence country. This tax credit can be used to reduce the current tax liability.

Let’s Check Example of Tax CreditLet’s assume A is the Dealer and purchase the goods of Rs. 10,000 and then A Sold his goods at Rs. 12,000, Taxes charged at the rate of 5%

ITC Calculation: 10,000×5% = Rs 500 will be his Input Tax Credit 

 Current Liability: 12,000×5% = Rs 600

Tax Credit – Current Liability

As he already paid Rs 500 in advance which can be claimed as Input Tax Credit, So the total amount A has to pay is only Rs 100 (Rs. 600 – Rs.500)

 

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