What is DTAA? How Indian taxpayers can avoid paying tax twice on foreign income

With increasing cross-border employment, foreign investment, and global freelance income, Indian taxpayers often face situations where the same income is taxable in two countries. India addresses this through the Double Taxation Avoidance Agreement (DTAA) framework.

DTAA is not designed to eliminate tax liability altogether. Instead, it ensures that taxpayers do not pay tax twice on the same income by either allocating taxing rights between countries or allowing tax paid abroad to be adjusted against tax payable in India.

A Double Taxation Avoidance Agreement (DTAA) is a bilateral tax treaty signed between India and another country. Its purpose is to define how different types of income earned across borders will be taxed and to provide relief where the same income may otherwise be taxed in both countries.

India has signed DTAA treaties with more than 94 countries. These agreements typically cover income such as salary, interest, dividends, capital gains, rental income, royalties, and pension income. DTAA works on the principle that income should not be taxed twice without relief, particularly when a taxpayer qualifies as a tax resident in India and earns income in a foreign jurisdiction.

DTAA treaties generally provide relief through two mechanisms:

Under this method, income is taxed in only one country. The treaty specifies which country gets the taxing right, and the other country exempts the income.

Under this method, income is taxed in both countries. However, tax paid in a foreign country is allowed as a credit against the Indian tax liability. This prevents double taxation by reducing the Indian tax payable.

India primarily follows the credit method in most of its treaties.

Foreign Tax Credit (FTC) is the mechanism through which DTAA relief is implemented in India when income is taxed abroad. FTC is governed by Rule 128 of the Income-tax Rules, 1962.

This ensures that relief is restricted to avoid excess credit claims.

To claim the Foreign Tax Credit in India, taxpayers must submit Form 67 under Rule 128 of the Income-tax Rules, 1962, along with supporting documentation as prescribed under the FTC framework.

As per the compliance structure outlined in Form 67 requirements:

Additionally, where DTAA benefits are claimed under Section 90, a Tax Residency Certificate (TRC) may be required to meet the treaty eligibility conditions, according to Cleartax.

Form 67 is a mandatory compliance requirement for claiming the Foreign Tax Credit in India.

Without Form 67, a foreign tax credit cannot be claimed even if tax has been paid in a foreign country.