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International Taxation: Relief From Double Taxation

When the same income of yours is taxed more than once, it creates double taxation. This can be done when a person is taxed in more than one country for the same income which he had earned, leads to double taxation.

Countries have started introducing Double Taxation Avoidance Agreements (DTAA) with other countries to resolve the issues of double taxation so as to ease out the tax burden of their taxpayers. This relief for taxes paid in foreign country is given to taxpayer while taxing the same income in the India is termed as FTC (Foreign Tax Credit).

A DTAA is a treaty of tax that India signs with another country. An individual can avoid being twice taxed by using the provisions of this treaty. Double Taxation Avoidance Agreement can either be comprehensive agreements, which cap all kinds of income, or specific treaties, targeting only few types of income.

For example, there is a DTAA between India & Singapore under which income is taxed on the basis of residential status of the individual. This streamlines the taxation flow and ensures that the individual is not twice taxed for the income earned outside India. Presently, India has DTAAs in place with more than 80 countries.

Way To Claim Tax Credit On Foreign Income Of A Resident:-

Have you worked outside India during the financial year and earned some money? Some tax may have been deducted abroad on such foreign income.

  1. If you are a residential Indian according to the income tax rules, the income earned anywhere in the world is taxable in India for you. But how should this income be included in ITR. Let’s find out.
  2. If you are an Indian Resident, income earned by you anywhere in the world shall be taxable in India and has to be included in your total income.
  3. Convert income earned from abroad into Indian currency – convert your income in foreign currency into Indian Rupees by using the SBI (state bank of India) telegraphic transfer buying rate which is also known as TTBR of the last day of the month before the month in which income is due, e.g. for converting salary income of June 2014, use the telegraphic transfer buying rate (TTBR) of the relevant currency for May 2014 and convert your salary into Indian Rupees.
  4. Now, include this income under the head to which it belongs, for instance, include salary income under the head ‘salaries’.
  5. You need to assume this income as any other income which is earned by you locally. Minimum exemption of INR 2,50,000 is allowed on your total income and remaining income is taxable as per income tax slab rates.
  6. On your income, if TDS has been deducted then you are allowed to take credit of such taxes. For this purpose, reference has to be made to the relevant DTAA of the country where such income has been earned. India has entered into Double Taxation Avoidance Agreements with many countries. DTAA makes sure that a taxpayer is not taxed double for the income earned outside the country of residence. Since income may be taxed at source that is from the place it generated and is also generally taxable in the country of residence, the DTAA makes sure that the taxpayer is not adversely impacted. The taxpayer is also allowed to take credit of deducted TDS.
  7. Taking advantages of a DTAA involves obtaining a TRC (Tax Residency Certificate) that helps identify and certify your tax residency status to make sure the correct DTAA has been applied. This is inline with the taxation laws in India.
  8. While go for TDS credit, you need to make sure that you are referring to the correct DTAA. Under DTAA, there are two kind of method for claiming tax relief – exemption method and tax credit method. Through exemption method, income is taxed in one country and exempted in another. In the method of tax credit, where the income is taxed in both countries, tax relief can be claimed in the country of residence.
  9. If no DTAA exists between two countries, you may still be able to get tax credit on foreign taxes paid. You may need an expert to assist you and with help of hem you can get the tax credit.
  10. In the latest ITR forms, several disclosures have been added for income on which DTAA advantages has been claimed.

If you have earned income from outside India on which TDS or any form of tax has been deducted, you may need help from an expert to obtain a Tax Residency Certificate and make sure correct DTAA is applied, so you can take credit for the foreign tax deducted.