Key Differences Between Tax Deduction and Tax Credit in Direct Tax

When it comes to Direct Tax, understanding the differences between tax deduction and tax credit is essential for managing your tax obligations effectively. Here are the key distinctions:

Tax Deduction

A tax deduction reduces the amount of your taxable income. This means that you will only pay taxes on the remaining income after deductions have been applied. Deductions are typically based on eligible expenses such as charitable contributions, mortgage interest, and medical expenses.

Tax Credit

A tax credit, on the other hand, directly reduces the amount of tax you owe. This is a dollar-for-dollar reduction in your tax liability. Tax credits are usually offered for specific activities or expenses, such as education expenses, child care costs, or energy-efficient home improvements.

In summary, while tax deductions lower your taxable income, tax credits lower the actual amount of tax you owe. Understanding how each one works can help you maximize your tax savings and minimize your tax liability.