Foreign Tax Credit in India – How To Avoid Double Taxation in India?

Foreign Tax Credit in India – How To Avoid Double Taxation in India?

Foreign Tax Credit – How To Avoid Double Taxation in India?

Whenever taxpayers receive income from multiple countries, taxation becomes an important aspect. Both the source country (from which the income is generated) as well as the home country (where the taxpayer is resident) can tax such transactions leading to double taxation of the same income. Taxpayers are often in receipt of doubly taxed income. This can be understood with a simple example:

Suppose Mr. A is in receipt of income from India as well as from the USA. As per the source rule, the income received in the USA is liable to withholding tax in the USA. However, as per Indian taxation laws, a person resident in India shall pay tax in India on his worldwide income. Therefore, the income earned by Mr. A in the USA will be taxed in both India and USA. This will lead to double taxation on the same income hence, doubly taxed income

Double taxation can be classified into two different types:

  • Economic Double Taxation: It happens when the same income is taxed twice in two different nations in the hands of two different individuals.
  • Jurisdictional Double Taxation: It happens when the same income is taxed twice in two different nations, one abroad and one in the home country, in the hands of the same individual.

While economic double taxation taxes two different persons, the problem arises in the case of jurisdictional double taxation. This is a direct loss to the taxpayer as he has to pay taxes twice to two different governments on the same income. But this is not the reality anymore, thanks to the concept of Foreign Tax Credits. What is Foreign Tax Credit (FTC) and how to claim Foreign Tax Credit in India? Let’s find out.

What is Foreign Tax Credit?

For the purpose of eliminating such instances of double taxation, the government has introduced Sections 90 and 91 under the Income Tax Act, 1961. Double Taxation Avoidance Agreement (DTAA) plays an important role in this regard. The government enters DTAA with other countries to eliminate double taxation of income on their residents. DTAA lays down detailed provisions as to which nation is authorized to collect tax on which type of income. This is known as bilateral relief where credit is provided for tax paid to foreign countries. In case, India is not having a DTAA with any foreign country, the Indian Government still provides unilateral relief to the taxpayers by providing credit.

Such credits under the bilateral or unilateral reliefs provided by the Indian Government to the taxpayers for taxes paid to foreign nations are known as Foreign Tax Credit. Let’s understand bilateral relief and unilateral relief in detail.

What is Unilateral Relief?

Unilateral relief against double taxation is governed by Section 91 of the Income Tax Act, 1961. Unilateral relief is provided by the Indian Government in case the taxpayer is earning from and paying taxes to a country that is not having a DTAA with the Indian Government. It is based on the general rule that the relief is provided by the country of residence when there is no DTAA. Here, the amount of foreign tax credit calculation needs to be done in order to determine the unilateral relief that the taxpayer will receive from India.

The amount of foreign tax credit that the taxpayer will receive in case of unilateral relief shall be the lower of the following:

  • Tax payable on such foreign income under the Income Tax Act and
  • Foreign tax paid

The amount of foreign tax paid shall be converted into Indian currency using the Telegraphic Transfer Buying Rate (TTBR) of the last day of the month immediately preceding the month in which the foreign tax has been paid or deducted.

What is Bilateral Relief?

Bilateral relief is granted when the two countries are having a DTAA between them and the tax on such income is calculated as per the provisions of the DTAA. Bilateral relief can be granted by either of the two methods:

  • Exemption Method: Here, the income is taxed in only one country and exempted from tax in other countries. Thus, the taxpayer will have to pay tax in  only one of the countries. 
  • Tax Credit Method: Under this method, the income is taxed in both countries. However, the foreign tax credit shall be granted to the taxpayer in the country of his residence. Thus, the taxpayer will have to pay taxes in both countries but it will not result in double taxation.

How to Claim Foreign Tax Credit?

If you are wondering how to claim foreign tax credit, the revenue department has a dedicated form for the same. For claiming relief under Section 90 / 90A / 91 of the Income Tax Act, 1961, you need to file Form 67. Form 67 – Foreign Tax Credit shall be submitted along with your Income Tax Return. However, it is important that you file your form accurately to avoid any complications to claim Foreign Tax Credit.

In a Nutshell

Most nations allow the foreign tax credit to their citizens in order to help avoid double taxation. While the rules may be different, the purpose is the same. India follows the method of unilateral relief and bilateral relief to extend foreign tax credit benefits to its taxpayers. However, it is of utmost importance to keep in mind the provisions of the Double Taxation Avoidance Agreement and the Income Tax Act, 1961 while calculating the tax liability and corresponding foreign tax credit especially because the provisions of DTAA are different for each nation. Otherwise, it can attract assessments by the revenue authorities. If you are earning income from multiple nations and want to know whether you are eligible for the foreign tax credit in India, feel free to contact the ASC Group.

Also Read - Income Tax Clearance Certificate


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Suresh Jain

Well explained article.

CA Suresh Jain

Very well explained.