Double-Taxation-Relief

How to Claim Double Taxation Relief in Absence of DTAA?

How to Claim Double Taxation Relief in Absence of DTAA?

Imagine a situation wherein you own a residential property in a foreign country that you have rented out. The rental income that you earn on the property will be taxable in such a country due to source-based taxation. But since you are a resident in India, your rental income will be taxable in India also. This is because as per the domestic tax laws of India a resident is taxed on his global income irrespective of where it is earned. Thus, you will end up paying tax twice on the same income. This scenario is termed as “Double Taxation”.

To provide relief to the taxpayers from such double taxation India has entered into double tax avoidance agreements (DTAAs) with many countries. Section 90 of the Income Tax Act, 1961 empowers the Central Government to enter into such agreements. To understand how double taxation relief is provided under Section 90 when an agreement exists with a foreign country you may click here.

In this article, we are going to discuss how double taxation relief can be availed if the source country (i.e. the country in which your origin of income is located) doesn’t have a DTAA with India. Section 91 of the Income Tax Act, 1961 guides as to how an Indian resident can claim double taxation relief when the country in which tax is paid doesn’t have a DTAA with India.

Conditions for Claiming Relief

A resident can claim relief by way of foreign tax credit under section 91 in case the following conditions are fulfilled.

  • The resident has earned an income from a source located outside India.
  • Such income is not deemed to accrue or arise in India.
  • The tax has been paid on such income by the resident in that other country. The tax can either be paid by way of tax withholding or otherwise.
  • Such another country doesn’t have a DTAA with India.

How to Calculate Relief

An eligible resident is allowed a deduction from the Income Tax payable by him on his Total Income in India and such deduction is calculated by multiplying lower of the below tax rates by the doubly taxed income:

  • Indian rate of tax to be calculated as a percentage by dividing the tax on total income in India by the Total Income in India. The total income shall be computed after including the foreign income and considering the reliefs and deductions (such as Chapter VI-A deductions, set-off of losses) that are available under the Income Tax Act except for relief available under this section.
  • Rate of tax of the foreign country to be calculated by dividing the tax paid in the foreign country by the Total Income assessed in such a country.

In case the tax rate rates of both countries come out to be equal, the Indian tax rate shall be taken into account.

Example of Relief Under Section 91

Let us take an example where Mr. X is a resident in India. For AY 2020-21, he earned some income from a country “Y” with which India doesn’t have any DTAA. His details for income earned by him in India and the country “Y” are as follows:

ParticularsAmount in INR
Income from business carried out in India6,00,000
Rental income earned from property situated in country “Y”2,00,000
Interest income earned on fixed deposits in India50,000
Amount invested by Mr. X in tax saver FDs eligible under Section 80C80,000

The tax rate in the country “Y” is 10%.

Now, let us understand how we can calculate double taxation relief as per Section 90 of the Income Tax Act.

Let us first calculate the Total Income of Mr. X.

ParticularsAmount in INR

Income from House Property

Gross Annual Value

Less: Standard Deduction @ 30%

Income from House Property

 

2,00,000

60,000

1,40,000

Profits and Gains from Business or Profession6,00,000

Income from Other Sources

Interest income earned on fixed deposits in India

 

50,000

Gross Total Income7,90,000

Less: Deductions under Chapter VI-A

Section 80C

80,000
Total Income7,10,000

Now, following the income tax slab rates for individual residents for AY 2020-21, the total tax comes out to be Rs. 56,680. Let us calculate the tax relief available to Mr. X.

  • Tax Rate in India = 7.98% (i.e. Rs. 56,680/ Rs. 7,10,000 * 100)
  • Tax Rate in country Y = 10%.
  • Doubly Taxed Income = Rs. 1,40,000 (Income from House Property)
  • The tax rate to be considered for calculating tax relief is 7.98% being lower of the two tax rates.
  • Tax Relief = Rs. 1,40,000 * 7.98% = Rs. 11,176

This means that out of the total tax payable by Mr. Y of Rs. 56,680 a relief of Rs. 11,176 can be claimed as a deduction under Section 91 of the Income Tax Act. Hence, the final tax liability of Mr. Y will be Rs. 45,504 (i.e. Rs. 56,680 – Rs. 45,504).

For understanding the procedural aspects relating to claims of foreign tax credit click here.

Post by Niti Gupta

Niti Gupta is a Chartered Accountant who has experience working with different industries. She loves to write about anything and everything, but majorly research and write about finance and taxation.