When you move out of India during a financial year and start earning in another country or still have some financial interest in India, the taxation becomes a little bit more complicated. You would not only be taxed in the new country that you have moved to but might also be taxed in India. To avoid taxing the same income twice relief is available under section 90, 90A and 91. Tax relief can be claimed as follows:
- There exists DTAA with the Country, then Tax Relief can be claimed u/s 90.
- If there is DTAA with the Specified Associations, then Tax Relief can be claimed u/s 90A.
- In case there is No DTAA, then Tax Relief can be claimed u/s 91.
Types of Relief
Relief from Double Taxation can be provided in two ways:
- Bilateral Relief: When there is an agreement between two countries, relief is calculated as per the mutual agreement between such two countries. Bilateral relief can be granted by either of the following methods:
- Exemption Method: Under this method, income is taxed in only one country
- Tax Relief Method: Under this method, income is taxed in both countries. Relief is granted in the country of residence.
- Unilateral Relief: When there is no mutual agreement between the countries, relief is provided by the home country.
Relief under Section 90
Section 90 of the Income Tax Act is associated with relief measures for taxpayers involved in paying taxes twice i.e. paying taxes in India as well as in Foreign Countries or territory outside India. This section also contains provisions that will certainly enable the Central Government to enter into an agreement with the Government of any country outside India or a definite territory outside India. Further, it intends to grant relief for the taxes paid in India and in any country outside India. Let us understand with an example:
Mr. Ankit, a resident, earned income in India INR 4,00,000/-. He also earned income from a foreign country INR 1,00,000 (Tax paid in foreign country INR 10,000). How much tax relief can he claim and how much tax he has to pay?
The relief shall be calculated as follows:
- Global income is INR 5,00,000/- (4,00,000+ 1,00,000)
- Tax on global income INR 12,500/-
- Average rate of tax INR 2.5% (12,500/5,00,000100)
- Tax required to be paid INR 2,500/- (Rs.1,00,0003*2.5/100)
- Tax paid in a foreign country is INR 10,000/-.
- The amount of relief shall be lower of (4) and (5) i.e INR 2,500/-
Relief u/s 90A
- When there is DTAA with the Specified Associations, then Tax Relief can be claimed u/s 90A and shall be calculated in the same manner as Section 90.
- When a specified association in India enters into an agreement with a specified association abroad, the Central Government, may by notification adopt such agreement and can provide relief u/s 90A of the Income Tax Act, 1961.
- The relief can be claimed only by the residents of the countries who have entered into the agreement with the Government of India. If resident of other countries want to claim the relief, then they have to obtain a Tax Residence Certificate (TRC) from the government of that country.
Relief under section 91
Section 91 shall apply if the country in which tax is paid has not entered into any agreement with the Government of India. Further, where there is no Bilateral Agreement in such cases unilateral agreement applies. Therefore, without any agreement with any other country a relief is given to the assessee as per the following method.
Steps to compute relief
- Calculate the tax payable in India
- Compare the Indian tax rate and Foreign tax rate
- Multiply the lower tax rate with the doubly taxed income
- Relief will be the amount as computed in Step 3.
Let us understand this with the help of an example:
Vartika has a doubly taxed foreign income of INR 1,00,000, when the tax payable in India is to be calculated at the rate of 30% and the foreign tax rate is 20%, then the relief is;
- Tax payable in India 100000*30% = INR 30,000/-
- Lower tax rate between 30% and 20% is 20%.
- Relief shall be > 100000*20% = INR 20,000/-
FAQ
Yes, a non-resident can claim relief if his/her income is chargeable to tax under the Income Tax Act, 1961. Therefore, if the income of non-resident is not chargeable to tax, than the question of claiming relief does not arise.
Yes, the residential status of a person earning income is very much relevant for determining the taxability of such income in his hands.
Taxability of any income in the hands of a person depends on the following two things :
(1) Residential status of the person as per the Income-tax Law; and
(2) Nature of income earned by him.
Hence, residential status plays a vital role in determining the taxability of the income..
Hi @Dixita
In case there is No DTAA, then Tax Relief can be claimed u/s 91. You can follow the below-mentioned steps to compute relief:
Hope this help
Hey @rkarora1967,
Since he is a resident, the person is required to pay tax on his global income. Further, he will get the benefit of India – US DTAA wherein he can get the benefit of income tax paid in the USA, whether directly or by deduction. However, such deduction will be restricted to income tax on that income in India.
So, the business profits earned will be taxable in India. He has to declare total income and then claim credit of the taxes paid in the US under DTAA. So, eventually, his income from the US parent company after deductions will be taxed in India.
Hello @AKSHAY1990 ,
DTAA can be claimed when same income is taxed in two countries. Since, no tax is levied in his current country, he will pay tax on Interest and Dividend income received in India.
Hope it helps.
@Divya_Singhvi @Laxmi_Navlani @Kaushal_Soni can you?
Hey @SanDiego01 ,
Generally, taxability of income is determined by the residence rule. A Resident refers to a person who as per the relevant laws of the Contracting States, i.e. India and the US are liable to pay tax by reason of domicile, residence, citizenship, place of management, place of incorporation, etc.
As per Article 10 of India - USA Double Taxation Avoidance Agreement, Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State.
Eg: If a US Company pays a dividend to an Indian Resident shareholder, then the dividend income will be liable to tax in India. Further, USA (Company paying the dividend) also has a right to tax the said dividend in their state.
However, if the beneficial shareholder is a resident of India i.e. a resident of the other contracting state, then the tax so charged shall not exceed:
(a) 15 per cent of the gross amount of the dividends if the beneficial owner is a company which owns at least 10 per cent of the voting stock of the company paying the dividends.
(b) 25 per cent of the gross amount of the dividends in all other cases.
You can additionally refer below article for more insights about DTAA:
Further, you can also file your tax returns and claim the foreign tax credit as well.
I hope, it helps!
I shifted to US in Dec 2020. In filing FY2020-21 tax return as Indian resident,
Manish.
@Kaushal_Soni @Divya_Singhvi @Laxmi_Navlani @Saad_C can you help with this?
Hey @magnishe
While filing your income tax return for FY 2020-21 as indian resident, you should report US salary income according to US tax year i.e. Jan - Dec 2020 and no need to proportionate the income.
As per India-US DTAA, taxes mainly covered federal income taxes excluding social security tax, personal holding company tax and accumulated earning taxes.
Further, while filing ITR-2, Form 67 has to be filled on or before the due date of filing return.
You can read below article of Form 67 for more clarity:
Hope, it helps!
Hi Kaushal,
Thanks for the quick reply. This is helpful. Will show Dec2020 income in this year’s ITR. Thanks for pointing out Form67 requirement also.
So any Jan-Mar2021 US income will be shown in next year’s FY2021-22 return later?
Manish.
Hi @Gugan
If your income is doubly taxed than you can claim the credit of the same in your Income Tax Return based upon the DTAA between the countries. In order to claim the relief, you need to file Form 67 on IT Portal before the due date of filing the income tax return.
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