Tax Credits vs Tax Deductions

Personal Finance • 5 min read

Introduction: The ₹2 Lakh Confusion

Arun earned ₹50 lakhs annually. His accountant said: "You can save ₹30,000 tax through Section 87A rebate AND reduce income by ₹2 lakhs using 80C deductions."

Arun asked: "Are these the same thing? Or do I get both benefits?"

Most Indians are confused about this. Tax credits and tax deductions are COMPLETELY DIFFERENT, but both reduce your tax! Understanding the difference can save thousands of rupees.

Misunderstanding leads to mistakes: Skipping deductions (thinking they're same as credits), choosing wrong regime, missing ₹50K+ NPS additional deduction. These mistakes cost ₹3-10 lakhs over a career.

This guide reveals the exact difference between tax credits and deductions, how each works with real calculations, which provides bigger savings, Section 80C limits, Section 87A rebate mechanics, and examples showing how to maximize BOTH for maximum tax savings.

The Core Difference: Tax Credits vs Tax Deductions

TAX DEDUCTION: Reduces INCOME (before tax calculation)

Example: Annual income ₹50 lakhs
80C deduction: ₹1.5 lakhs
Taxable income: ₹50L - ₹1.5L = ₹48.5L
Tax calculated on: ₹48.5L (not ₹50L!)
Savings: ₹1.5L × 30% slab = ₹45,000

Key: Deduction reduces the amount you owe tax on!

TAX CREDIT: Reduces TAX (directly from tax bill)

Example: Tax calculated on ₹50 lakhs = ₹15 lakhs
Section 87A rebate: ₹30,000 (for income ≤ ₹12L)
Final tax payable: ₹15L - ₹30K = ₹14.97L
Direct reduction in tax bill: ₹30,000

Key: Credit directly reduces your final tax amount!

Aspect	Tax Deduction	Tax Credit
What It Does	Reduces taxable income	Reduces actual tax owed
When Applied	BEFORE tax calculation	AFTER tax calculation
Benefit Depends On	Your tax slab (higher slab = more benefit)	Fixed amount (same for everyone)
Examples	80C (₹1.5L), 80D (₹25-50K), 24(b) home interest	87A rebate (₹30-60K), 89(1) surcharge relief
Can You Use Both?	YES (deductions reduce income first)	YES (credit reduces final tax)

Tax Deductions Explained: Section 80C & Beyond

Section 80C: The Most Popular Deduction (₹1.5 Lakh)

What Can You Claim Under 80C?

✅ PPF contributions: ₹1.5L maximum annually (you can contribute more, but only ₹1.5L deductible)
✅ ELSS mutual funds: Any amount up to ₹1.5L
✅ Life insurance premiums: Up to 10% of sum assured
✅ Home loan principal: Amount you pay to reduce loan
✅ NSC (National Savings Certificate): Any amount
✅ Employee contribution to EPF: Automatic (employer also contributes)
✅ School/college tuition fees: Up to 2 children

Section 80D: Health Insurance (₹25K-₹1L)

Medical Insurance Deduction:

Self + spouse: ₹25,000
Self + spouse + 2 kids: ₹50,000
Self (60+) + spouse (60+): ₹50,000
Parent (60+): Additional ₹50,000 (total ₹1L for senior citizens!)

Other Deductions

Frequently Missed Deductions:

Section 80CCD(1B): Additional ₹50K for NPS contributions (OVER 80C limit!)
Section 24(b): Home loan interest (₹2L deduction, DIFFERENT from principal!)
Section 80E: Education loan interest (NO LIMIT, max 8 years)
Section 80TTA: Savings account interest (₹10K, only for resident individuals)

Tax Credits Explained: Section 87A & Others

Section 87A Rebate: The 2025 Game-Changer

✅ Massive Increase (FY 2025-26):

Rebate raised to ₹60,000 (was ₹25,000)
Applicable for income up to ₹12 lakhs (was ₹7L)
Result: Many middle-income earners pay ZERO tax!
This is DIRECT tax reduction (credit, not deduction)

How Section 87A Works (Example)

Scenario: Income ₹10 lakhs

New regime tax calculation:
₹4L × 0% = ₹0
₹4L × 5% = ₹20,000
₹2L × 10% = ₹20,000
Tax before credit: ₹40,000

Apply Section 87A rebate:
Tax owed: ₹40,000
87A rebate: ₹60,000 (available)
But rebate is limited to tax owed!
Final tax: ₹0 (rebate reduced it from ₹40K to ₹0!)

Benefit: ₹40,000 saved directly!

Real Scenario: How Deductions vs Credits Impact Tax

Scenario: Salaried Employee, ₹12 Lakh Annual Income

OPTION A: New Regime (minimal deductions)

Gross income: ₹12L
Standard deduction: ₹75,000
Taxable income: ₹12L - ₹75K = ₹11.25L

Tax calculation:
₹4L @ 0% = ₹0
₹4L @ 5% = ₹20,000
₹3.25L @ 10% = ₹32,500
Total tax: ₹52,500

Apply 87A rebate: ₹60,000 (more than tax owed!)
Final tax: ₹0

Effective tax rate: 0%!

OPTION B: Old Regime (with deductions)

Gross income: ₹12L
80C deduction: ₹1.5L
24(b) home loan interest: ₹1L
80D health insurance: ₹25K
Total deductions: ₹2.75L

Taxable income: ₹12L - ₹2.75L = ₹9.25L

Tax calculation:
₹2.5L @ 0% = ₹0
₹2.5L @ 5% = ₹12,500
₹4.25L @ 20% = ₹85,000
Total tax: ₹97,500

87A rebate: ₹60,000 (limited to income ≤ ₹12L)
Final tax: ₹37,500

Effective tax rate: 0.31%

WINNER: New Regime wins! ₹0 vs ₹37,500. The enhanced 87A rebate (₹60K) makes new regime unbeatable for income up to ₹12L!

Maximum Deductions You Can Claim (2025-26)

Section	What You Can Deduct	Maximum Limit
80C	PPF, ELSS, LIC, Home loan principal, NSC, SCSS, Sukanya Samriddhi	₹1,50,000
80CCC	Annuity/Pension plan contributions	₹1,50,000 (combined with 80C)
80CCD(1)	NPS contributions (Tier-1)	10% salary or 20% self-employed income (combined with 80C)
80CCD(1B)	ADDITIONAL NPS contributions	₹50,000 (OVER AND ABOVE 80C limit!)
80D	Health insurance premiums	₹25K-₹1L (depending on family composition)
24(b)	Home loan interest	₹2,00,000
80E	Education loan interest	NO LIMIT (8 years max)

Real Stories: Deductions vs Credits Impact

Story 1: Rajiv - Missed ₹50K Deduction

The Costly Mistake:

Annual income: ₹15 lakhs
80C deduction: ₹1.5 lakhs claimed
BUT he forgot: 80CCD(1B) = ₹50K additional NPS deduction!

Tax calculation with ₹50K missed:
Taxable income: Higher by ₹50,000
Additional tax @ 20% slab: ₹10,000
Over 30 years career: ₹3 LAKHS wasted!

Simple mistake: Forgot one deduction line, lost ₹3L lifetime tax savings!

Story 2: Priya - Old Regime Winner

The Smart Strategy:

Income: ₹20 lakhs
Deductions:
80C: ₹1.5L
80CCD(1B): ₹50K
24(b) home loan interest: ₹2L
80D health insurance: ₹50K
Total deductions: ₹4L

Old regime tax on ₹16L (after deductions):
Tax: ₹2.5L @ 0% + ₹2.5L @ 5% + ₹11L @ 20% = ₹2.3L

New regime tax on ₹20L:
Tax: More than ₹2.5L (87A rebate won't fully cover)

Priya saves ₹20,000+ by using OLD regime due to deductions!

Which Regime Should YOU Choose?

🎯 Choose NEW Regime If:

✅ Income ≤ ₹12 lakhs (87A rebate = nil tax)
✅ Limited deductions (no home loan, limited insurance)
✅ Don't have ₹2L+ in eligible deductions
✅ Simple salary income (no rental, interest income)

🎯 Choose OLD Regime If:

✅ Income > ₹15 lakhs (deductions save more in high bracket)
✅ Have home loan (24(b) ₹2L deduction)
✅ Can claim ₹2-3L+ in total deductions
✅ Plan to invest in ELSS/PPF ₹1.5L annually

Conclusion: Credits vs Deductions - Use Both!

The Key Differences (Simplified):

✅ Tax Deduction: Reduces income → less tax slab → saves tax (benefit depends on your bracket)
✅ Tax Credit: Reduces tax directly → fixed savings for everyone

Maximize Both:

✅ Claim ALL deductions: 80C (₹1.5L), 80CCD(1B) (₹50K), 80D (₹25-100K), home loan interest (₹2L), education loan interest (no limit)
✅ Use appropriate credits: 87A rebate (₹60K for ≤ ₹12L income) applies automatically
✅ Choose right regime: For income ≤ ₹12L: New regime wins. For > ₹15L: Old regime usually wins.

Real Tax Saved (Real Examples):

Income ₹12L with deductions ₹2.5L:
Without optimization: ₹80K tax
With optimization (new regime + 87A): ₹0 tax
Saved: ₹80,000!

Income ₹20L with deductions ₹3.5L:
New regime: ₹2.3L tax
Old regime: ₹1.9L tax
Saved: ₹40,000 by choosing old regime!

💚 Understand Deductions vs Credits. Claim Both. Save Lakhs Over Your Career!