What are the provisions for claiming double taxation relief?

Are you a small business owner with international clients or a salaried professional who has earned income abroad? You might be worried about paying taxes on the same income in two different countries. This common concern stems from a phenomenon known as double taxation. To address this issue and foster global economic activity, nations have established specific rules and agreements. This guide will break down the essential double taxation relief provisions available to Indian residents, ensuring you understand your rights and obligations. By learning about these regulations, you can confidently engage in international work and ensure you are not unfairly taxed, making the process of claiming double taxation relief for Indian residents straightforward and manageable. This article will provide a clear roadmap for obtaining tax relief on foreign income for Indians.

Understanding Double Taxation and DTAA

What is Double Taxation?

In simple terms, juridical double taxation occurs when the same income is taxed in the hands of the same person during the same period in more than one country. This typically happens when a country taxes its residents on their global income (country of residence) while another country taxes the same income because it was earned there (country of source). For instance, imagine an Indian resident who is an IT consultant providing services to a company based in the United Kingdom. The UK company deducts tax at source on the payment made to the consultant. However, as an Indian resident, that individual is also liable to pay tax on their global income, including the fee received from the UK, in India. This scenario results in the same income being taxed twice, creating a significant financial burden if not properly addressed through specific tax relief mechanisms.

The Role of a Double Taxation Avoidance Agreement (DTAA)

A Double Taxation Avoidance Agreement (DTAA) is a formal bilateral tax treaty signed between two countries to resolve issues of double taxation and promote economic cooperation. These agreements prevent fiscal evasion and allocate taxing rights between the two signatory nations to ensure that taxpayers are treated fairly. The double taxation agreement provisions India has established with other countries lay out specific rules for taxing different types of income, such as salaries, business profits, dividends, interest, and royalties. By clearly defining which country has the primary right to tax a particular income stream, or by providing a mechanism for tax credits, DTAAs eliminate the ambiguity and financial strain of double taxation. India has an extensive network of these treaties, with comprehensive DTAAs in place with over 90 countries worldwide. You can find the complete list on the Income Tax Department’s official website.

Key Double Taxation Relief Provisions in India

The legal framework for providing tax relief from double taxation in India is primarily governed by Sections 90, 90A, and 91 of the Income Tax Act, 1961. These sections form the core of the double taxation relief provisions India offers to its taxpayers. Depending on whether India has a formal tax treaty with the other country, different provisions come into play to ensure that your foreign income is taxed equitably. Understanding these sections is the first step toward effectively managing your international tax obligations and claiming the relief you are entitled to.

Relief under Section 90 & 90A (When a DTAA Exists)

When India has a Double Taxation Avoidance Agreement (DTAA) with another country, Sections 90 and 90A of the Income Tax Act become applicable. These sections empower the Central Government to enter into such agreements and provide relief to taxpayers. The relief under a DTAA is typically granted through one of two primary methods:

• Exemption Method: Under this method, one of the two countries agrees to completely exempt the income from tax. This gives the other country the exclusive right to tax that particular income. For example, a DTAA might specify that capital gains from a certain asset will only be taxed in the country of residence, thereby exempting it in the source country.
• Credit Method (More Common): This is the most widely used method. Here, both countries may tax the income, but the country of residence (in this case, India) allows the taxpayer to claim a credit for the taxes already paid in the source country. This is known as the Foreign Tax Credit (FTC). The credit effectively reduces the Indian tax liability on that foreign income.

To claim any benefits under a DTAA, it is essential to obtain a Tax Residency Certificate (TRC) from the tax authorities of the country you reside in.

Unilateral Relief under Section 91 (When No DTAA Exists)

What happens if you earn income from a country with which India does not have a DTAA? The Indian Income Tax Act has a provision for this scenario as well. Section 91 provides unilateral relief, meaning India offers income tax double taxation relief on its own, without a reciprocal agreement. Under this provision, an Indian resident can claim a credit for the foreign taxes they have paid. The relief is calculated on the doubly taxed income at the Indian tax rate or the tax rate of the foreign country, whichever is lower.

To be eligible for relief under Section 91, the following conditions must be met:

• The taxpayer must be a resident of India in the relevant financial year.
• The income must have accrued or arisen outside India.
• The income should not be deemed to accrue or arise in India.
• The taxpayer must have paid tax on this income in the foreign country.

How to Claim Double Taxation Relief in India: A Step-by-Step Guide

Navigating the process of claiming tax relief can seem daunting, but by following a structured approach, you can ensure compliance and maximize your claim. This practical guide breaks down the steps for claiming double taxation relief and provides clarity on how to claim double taxation relief in India.

Step 1: Determine Your Residential Status & Taxability

The very first and most crucial step is to determine your residential status for the financial year as per the Indian Income Tax Act. Your status—whether you are a Resident and Ordinarily Resident (ROR), a Resident but Not Ordinarily Resident (RNOR), or a Non-Resident (NR)—dictates the scope of your taxable income in India. An ROR is taxed on their global income, making double taxation relief extremely relevant. An RNOR or NR is taxed primarily on income earned or received in India, so the applicability of DTAA provisions will depend on the specific nature and source of the income.

Step 2: Gather All Necessary Documents

Proper documentation is the backbone of a successful tax relief claim. Before you begin filing, ensure you have the following documents ready:

• Tax Residency Certificate (TRC): This is a mandatory document to prove your residency in a particular country and is required to claim benefits under a DTAA.
• Form 10F: This is a self-declaration required from non-residents if certain details (like status, nationality, and tax identification number) are not included in their TRC.
• Proof of Income: This includes all relevant documents like invoices, client contracts, bank statements, or salary slips that clearly show the foreign income earned.
• Proof of Foreign Tax Paid: You must have official evidence that tax was paid in the foreign country. This can be in the form of tax payment receipts, challans, withholding tax certificates, or an official statement from the foreign tax authority.

Step 3: File Form 67 Online

Filing Form 67 is a mandatory prerequisite for anyone claiming double taxation relief for Indian residents in the form of a Foreign Tax Credit (FTC). This form is a statement of foreign income and the tax paid on it. It must be filed electronically on the income tax e-filing portal. A critical point to remember is the deadline: Form 67 must be filed on or before the due date of filing your Income Tax Return (ITR). Failure to file this form within the stipulated time can lead to the disallowance of your FTC claim. You can file this form on the official e-filing portal.

Step 4: Report Foreign Income and Claim Relief in ITR

After filing Form 67, the final step is to correctly report your foreign income and the claimed tax relief in your Income Tax Return. You must provide these details in specific schedules of the ITR form:

• Schedule FSI (Foreign Source Income): In this schedule, you must report the details of all income earned from sources outside India, broken down by country.
• Schedule TR (Tax Relief): This schedule is where you formally claim the tax relief. You will report the relief being claimed under Section 90, 90A (if a DTAA exists), or Section 91 (if no DTAA exists), referencing the details you provided in Form 67.

Case Study: Provisions for Double Taxation Australia India

To understand how these provisions work in a real-world scenario, let’s consider a case study.

Scenario:
Anjali, an Indian resident software developer, provides remote consulting services to an Australian company. She earns professional fees of AUD 50,000 during the financial year. The Australian company withholds tax at 10% (AUD 5,000) on this payment as per their domestic laws before remitting the balance to her.

Applying the Provisions:

1. DTAA Check: Anjali’s first step is to confirm that double taxation treaties India has signed include one with Australia. The India-Australia DTAA is indeed in force.
2. Taxability: According to the DTAA, both countries have a right to tax this income. Australia, as the source country where the services are utilized, can tax the income. India, as the country of residence, also has the right to tax Anjali’s global income.
3. Relief Mechanism: The provisions for double taxation Australia India DTAA follow the credit method. This means India will allow a credit for the tax Anjali has already paid in Australia.
4. Action: Anjali will pay AUD 5,000 in tax in Australia. When filing her ITR in India, she will declare her global income, including the AUD 50,000 (converted to INR). Before the ITR due date, she will file Form 67 online, providing proof of the Australian tax paid. In her ITR, she will report this income in Schedule FSI and claim a Foreign Tax Credit in Schedule TR. This credit will reduce her final Indian tax liability, ensuring she doesn’t pay tax on the same income twice.

Conclusion

Earning income from international sources is a great opportunity, but it comes with the responsibility of navigating cross-border tax laws. Understanding the double taxation relief provisions is crucial for any Indian resident with foreign income to ensure full compliance and avoid paying more tax than necessary. Whether through bilateral agreements under Section 90/90A or unilateral relief under Section 91, the Indian tax framework provides a clear path to mitigate the burden of double taxation. Remember, the procedural requirement of filing Form 67 on time is non-negotiable for claiming Foreign Tax Credit.

Navigating double taxation agreement provisions India can be complex, and the details can vary from one treaty to another. If you need expert guidance on claiming tax relief on foreign income for Indians, contact the specialists at TaxRobo today for a consultation.

Frequently Asked Questions (FAQs)

1. What is a Tax Residency Certificate (TRC) and is it mandatory?

A Tax Residency Certificate (TRC) is an official document issued by the tax authorities of a country to certify an individual’s resident status for tax purposes. If you want to claim the benefits available under a Double Taxation Avoidance Agreement (DTAA) that India has with another country, obtaining a TRC from your country of residence is mandatory.

2. What happens if I file my ITR but forget to file Form 67?

Filing Form 67 on or before the due date of filing your ITR is a mandatory condition for claiming Foreign Tax Credit (FTC). If you fail to file this form in time, the tax department has the right to disallow your claim for FTC. This could result in a higher tax demand, along with potential interest and penalties.

3. I am a freelancer earning from a US client. Can I claim this relief?

Yes, absolutely. The double taxation relief provisions are not limited to salaried income; they apply to all types of income, including professional fees earned from freelancing. You would first refer to the India-USA DTAA to understand the specific rules. Then, you would file Form 67 with proof of any US taxes paid or withheld and claim the corresponding credit in your Indian ITR to reduce your overall tax liability.

4. Is the entire foreign tax paid available as a credit in India?

Not necessarily. The amount of Foreign Tax Credit you can claim in India is limited to the lower of the following two amounts:

1. The actual tax paid in the foreign country on the foreign income.
2. The tax payable on that same foreign income under Indian tax laws.

This ensures that the credit does not offset the tax liability on your Indian-source income.