Avoid Double Taxation without Headache

I was lounging in my living room on a Sunday morning when my next-door neighbor Samit came who is presently working in a foreign country on a project for the last one year. I welcomed him and asked how are you doing? He was looking little anxious and asked me

“Why will I pay tax twice on my same income in two countries?

I smiled:

“That’s where Double Taxation and Foreign Tax credit concepts come in. These are critical to reducing the overall tax liability of taxpayers.”

In today’s interconnected world, people and businesses are no longer confined within national borders. Professionals travel abroad for work, students pursue education in foreign universities, and companies expand operations across continents. While this global movement creates new opportunities, it also raises an important question: Who has the right to tax income that is earned in one country but belongs to a resident of another?

The answer lies in international treaties. These agreements between nations define how cross-border rights and obligations are shared. Among them, tax treaties—more formally known as Double Taxation Avoidance Agreements (DTAAs)—play a vital role in ensuring that individuals and companies are not unfairly taxed twice on the same income.

DTAA under income tax work by allocating the right to tax certain types of income to one country while the other country gives complete or partial exemptions. 

A Foreign Tax Credit (FTC) is a credit that is allowed against the amount of tax payable in India on income that has already been taxed in another country.

To see how this works in practice, let’s look at the story of Samit, an Indian professional working in the United States.

Samit’s Story: The Double Tax Headache

Samit, an IT consultant from Kolkata, was sent on one year project to the United States. During this time, he earned a salary equivalent to Rs. 80 lakhs. Like any employee in the US, withholding tax was there (tax is deducted from his pay check) and Samit ended up paying around Rs. 15.5 lakhs in US taxes.

Samit finally returned to India and began filing his income tax return, he realized something troubling. As an Indian tax resident (because he stayed more than 182 days in India that financial year), his global income was taxable in India — including the salary he had already earned and taxed in the US.

His Indian tax liability on this income came to Rs. 17 lakhs. If he had to pay this in full, along with Rs 15.5 lakhs already paid in the US, he would pay Rs. 32.5 lakhs in taxes on the same income.

“Isn’t this double taxation?” he wondered.

DTAA to the Saving of Double Tax

Fortunately, India has signed a DTAA with the USA. The purpose of this treaty is simple: to ensure that people like Samit are not taxed twice on the same income.

Under the DTAA, while both countries have the right to tax Samit’s income. India (as his country of residence) provides relief for the taxes he already paid US. This relief comes in the form of a Foreign Tax Credit (FTC).

How the Foreign Tax Credit Works

Here’s how Samit’s problem was resolved:

• Indian tax on Samit’s US salary = Rs 17 lakhs
• Tax already paid in the US = 15.5 lakhs
• FTC available in India = Rs. 15.5 lakhs (limited to the lower of the two amounts)
• Net tax payable in India = Rs. 17 lakhs – Rs. 15.5 lakhs = Rs. 1.5 lakhs

Instead of paying 32.5 lakhs in total, Samit ended up paying just Rs. 17 lakhs overall — the same as if he had earned the income entirely in India.

DTAA and FTC in the Indian Income Tax Act

India’s approach to international taxation is anchored in its domestic law. The key provisions are:

1. Section 90 of the Income Tax Act is applicable in the presence of the Double Taxation Avoidance Agreement (DTAA). It ensures that no individual pays income tax twice while working for a foreign company
2. Section 90A is applicable if the DTAA agreement has been signed between specified associations of two countries. This section follows a process similar to Section 90; the only difference is that the agreement is between two institutional bodies instead of two countries. 
3. Under Section 91 of the Income Tax Act, an individual is eligible to claim tax relief if a DTAA is absent between India and another country. Since the individual is paying taxes in two different countries, the lowest payable tax rate can be claimed as tax relief.  

Rule 128 of the Income-tax Rules, 1962

• Lays down the procedure for claiming Foreign Tax Credit (FTC).
• Requires taxpayers to furnish Form 67 before filing their return.
• Limits FTC to the amount of Indian tax payable on the foreign income.

Together, these provisions ensure that taxpayers like Samit are fairly treated, whether or not a treaty is in place.

Pay attention:

DTAAs and FTC are important in today’s globalized economy. They:

1. Prevent hardship for professionals working across borders
2. Provide clarity on how income will be taxed
3. Encourage international trade, investment, and employment opportunities
4. Ensure fairness by avoiding double taxation

Closing Memo

To prevent double taxation, Sections 90, 90A and 91 establish some clauses allowing taxpayers to claim benefits and pay tax only once on their foreign tax earnings. So, the next time you, like Samit, take up an overseas assignment or receive income from abroad, remember: treaties are working silently in the background to protect you from the burden of double taxation.