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Tax relief under Section 90 and Section 91 of the Income Tax Act

Updated on: 04 Mar, 2024 02:33 PM

Income is said to be earned by a person in the country (source country):

  • where he either renders his services or
  • where he receives any income arising from an asset that is located in that country.

However, he may be based in a different country (country of residence). You may have incomes from more than one country. Such incomes may be taxable in both countries due to their domestic laws even though you are a tax resident in only one of those countries. Thus, to avoid paying such double taxes on the same income in both the source country and country of residence, double taxation avoidance agreements (“DTAA”) (otherwise known as tax treaties) are entered between various countries.

For example, an Indian company ABC Limited operating in Singapore has to pay tax in Singapore on income earned there and has to also pay tax here in India on its income earned across the globe. Thus, it will be required to discharge its tax liability on income earned in Singapore as well. However, if the India-Singapore treaty exists, then tax relief may be claimed as per section 90. Else, relief may be claimed under section 91.

Generally, the tax laws of various resident countries allow a deduction from the total tax liability in their country in respect of taxes paid in the source country.

This mechanism of claiming a deduction or credit of taxes paid in the source country against tax liability in the country of residence is called a Foreign Tax Credit.

Read on to understand the provisions of Indian tax law for claiming foreign tax credit and how the same can be claimed.

Impact of Double Taxation on Taxpayers with Foreign Income

Double taxation arises when the same income is taxed in two different jurisdictions, a significant issue for individuals and companies with foreign income sources. This can pose a substantial burden on taxpayers and potentially hinder international economic activity.

Recognizing this challenge, India has entered into Double Taxation Avoidance Agreements (DTAAs) with 85 countries. These agreements provide clarity and eliminate ambiguity regarding the taxation of various income sources earned in both countries. They allow taxpayers to claim a credit for taxes paid abroad against their Indian tax liability on the same income, ensuring a balanced approach for those earning across borders. This mechanism, outlined in Section 90 of the Income Tax Act, promotes fair treatment for international income earners.

In cases where India does not have a DTAA with a specific country, Section 91 of the Income Tax Act offers a potential solution through unilateral relief. However, this relief is granted only under certain conditions:

  • The income must have been earned in the previous financial year.
  • The income must be subject to taxation in both India and the foreign country.
  • The foreign country's tax system must be comparable to India's.
  • The taxpayer must have paid taxes in the foreign country.

The amount of unilateral relief is the lesser of the Indian or foreign tax rate applied to the foreign income. This amount is then deducted from the taxpayer's overall Indian tax liability.

To claim either bilateral relief under a DTAA or unilateral relief under Section 91, taxpayers must file an Indian income tax return and submit a tax payment or deduction certificate from the relevant foreign tax authority. Additionally, adhering to the guidelines issued by the Central Board of Direct Taxes (CBDT) is essential for securing the foreign tax credit.

Need help filing income tax return and stay compliant with the tax laws? Get CA-assisted NRI filing now!

Types of Relief Under Section 90 and Section 91

Double taxation, where the same income gets taxed twice in different countries, can bite individuals and companies with international income sources. This unwelcome situation typically arises when someone earns in one country but resides in another.

Section 90

This applies when a Double Taxation Avoidance Agreement (DTAA) exists between India and the other country. These agreements detail how income would be taxed in both nations and prevent double taxation. Two methods are used:

Exemption Method

Here, the income is taxed only in one country and exempted in the other. For instance, if an Indian resident earns interest from a US source under a DTAA, the interest would be exempt from Indian tax.

Credit Method

While income gets taxed in both countries, the taxpayer can claim a credit for the tax paid in the other country against their Indian tax liability. If an Indian resident earning UK salary. As per the DTAA, though taxed in both countries, they can claim credit for UK tax against their Indian tax.

Section 91

This section kicks in when no DTAA exists. Relief is then granted unilaterally by India, the taxpayer's residence country. The amount of relief is the lower of:

  • Tax paid on the double-taxed income in the other country
  • Tax payable on the double-taxed income in India

For example, an Indian resident with rental income from Brazil (no DTAA) can claim Section 91 relief, receiving the lower amount of tax paid in Brazil or owed in India on the rental income.

Relief under Section 90 and 90A

Relief under this section may be claimed only by an Indian resident if India has entered into a DTAA with the other country or specified association from where you have earned income. If there is a DTAA with such country, then tax relief can be claimed u/s 90, and if the DTAA is with the specified associations, then tax relief can be claimed u/s 90A.

Under such DTAAs, the Indian government may agree on any or all of the following terms with the foreign governments:

  • for providing relief regarding the income on which tax is paid under the Income Tax Act and tax law prevalent in such other countries.
  • for avoiding double taxation of income under the tax laws of both countries
  • for exchange of information and data:
    a. to prevent tax evasion or avoidance under the tax laws of either of the countries or
    b. for investigation of such tax evasion or avoidance or
    c. for recovery of income tax under the tax laws of both countries

Suppose a bilateral agreement has been entered into with a foreign country. The taxpayer has an option to either be taxed as per the agreement (DTAA) or as per the normal provisions of the Income Tax Act, whichever is more beneficial to such taxpayer.

Relief Under Section 91

Relief under this section may be claimed by an Indian resident only if there is no DTAA with the other country from where you have earned income. Such relief is given voluntarily by India in case of unilateral agreements.

Manner of Computation

The foreign tax credit shall be computed separately for each source of income. It shall be computed as lower of:

  • - Tax payable on such income under the Income Tax Act and
  • - Foreign tax paid;

The foreign tax credit shall be determined by conversion of the foreign currency at the Telegraphic Transfer Buying Rate (TTBR) on the last day of the month immediately preceding the month in which the foreign tax has been paid or deducted.

Note that the foreign tax credit shall be the total of credit computed separately for each source of income arising from a particular country.

Computing double taxation relief under section 90:

  • Step 1: Compute Global Income, i.e., the aggregate of Indian income and Foreign income;
  • Step 2: Compute tax on such global income under Income tax;
  • Step 3: Compute the average rate of tax (amount of tax divided by global income);
  • Step 4: Compute an amount by multiplying such average rate of tax with foreign income;
  • Step 5: Compute tax paid in a foreign country

The amount of relief shall be lower of step 4 and step 5

E.g., Mr. A, an Indian resident, earned an income of INR 2,00,000 in India. He also earned income from the USA equivalent to INR 3,00,000 (Tax paid in foreign country INR 20,000). The tax relief Mr A can claim and the tax he shall be required to pay is computed as follows:

  • Step 1: Global income is INR 5,00,000 (INR 2,00,000 + INR 3,00,000)
  • Step 2: Tax on global income INR 12,500
  • Step 3: Average rate of tax INR 2.5% (12,500/5,00,000*100)
  • Step 4: Tax required to be paid INR 7,500 (3,00,000*2.5/100)
  • Step 5: Tax paid in foreign country is INR 20,000

The amount of relief shall be lower of step 4 and step 5, i.e., INR 7,500

Computing relief under section 91:

  • Step 1: Calculate the tax payable in India
  • Step 2: Compare the Indian tax rate and foreign tax rate
  • Step 3: Multiply the lower tax rate with the doubly taxed income. This will be the amount of relief under section 91.

E.g., Mr. X has doubly taxed foreign income of INR 2,00,000. Tax payable in India is at the rate of 30%. The foreign tax rate is 20%. The relief shall be calculated as follows:

  • Step 1: Tax payable in India will be INR 60,000 (2,00,000*30%)
  • Step 2: Lower of the Indian rate of tax (30%) and foreign tax rate (20%) is 20%.
  • Step 3: The relief will be INR 40,000 (2,00,000*20%)

The amount of relief will be as computed in Step 3, i.e. INR 40,000.

Rules for Claiming the Foreign Tax Credit

Rules for claiming the foreign tax credit are notified under Rule 128 of Income Tax Rules. Certain significant rules are enumerated below:

  • The foreign tax credit shall be claimed by an Indian resident only if he has paid any tax in a foreign country or specified territory outside India. Such credit can be claimed in the year in which the income corresponding to such tax has been assessed to tax or offered to tax in India. However, if such income is offered/assessed to tax in more than one year, then foreign tax credit can be claimed across those years in proportion to the income offered/ assessed to tax in India;
  • The foreign tax credit shall be available only against the amount of tax (including tax paid as per MAT/AMT), surcharge, and cess payable under the Indian tax laws and not against interest, penalty, or fee;
  • The foreign tax credit shall not be available on the foreign tax which the taxpayer disputes. Such tax credit shall be available only after the dispute is settled if the taxpayer provides the following within 6 months from the end of the month in which the dispute was finally settled:
    • - evidence for the settlement of the dispute
    • - evidence for payment of the disputed tax
    • - a declaration that no refund of such amount is claimed or will be claimed, whether directly or indirectly
  • Documents required to be provided for claiming the foreign tax credit: For claiming the foreign tax credit, the taxpayer shall be required to provide the following documents:
    • statement in Form No. 67
    • certificate or statement indicating the nature of income and the amount of tax deducted or paid by the taxpayer
      • from the tax authority of a foreign nation; or
      • from the person who is responsible for deduction of such tax; or
      • a statement signed by the taxpayer accompanied by the following documents:
        - where tax has been paid: an acknowledgment or challan for online payment or bank counterfoil
        - where the tax has been deducted: proof of deduction

Such documents shall be furnished on or before the due date of filing an income tax return as per section 139(1) of the Income Tax Act.

Penalties for Tax Evasion or Avoidance

A) Default in making payment of tax

The tax authorities shall determine the penalty amount leviable. However, such a penalty amount will not exceed the amount of tax payable.

B) Under-reporting of income

The penalty shall be 50% of the tax payable on under-reported income, i.e., income declared by the taxpayer is less than the income determined by the tax authorities.

The penalty shall be increased to 200% of the tax payable if under-reporting is due to misreported income.

C) Failure to maintain relevant documents and books of accounts

The penalty leviable is Rs.25,000 generally.

However, if the taxpayer has entered into any international transaction, then the penalty will be 2% of the value of such international transactions or specified domestic transactions.

D) Penalty for fake documents such as counterfeit invoices

In case the income tax authorities find that the books of accounts provided by the taxpayer contain the following:

  • forged or counterfeit documents such as a fake invoice or any fake documentary evidence
  • a sales invoice or purchase invoice without actual supply or receipt of goods or services.
  • a sales invoice or purchase invoice received from a person who does not exist
  • an omission of any entry that is significant for the computation of taxable income.

Regarding the above cases, the assessee might have to pay the penalty equivalent to the sum of such false or omitted entries.

E) Undisclosed income

a. In case of undisclosed income, a penalty @10% is payable.

b. Where search proceeding has been initiated on or after 1/7/2012 but before 15/12/2016:
- If undisclosed income is admitted during search and the taxpayer pays the tax along with interest and files ITR, then a penalty @ 10% of such undisclosed income shall be levied.
- If undisclosed income is not admitted during the search, but the same is furnished in the ITR filed after such search, then a penalty of 20% of such undisclosed income shall be levied. - In all other cases, a penalty shall be levied @ 60%

c. Where Search has been initiated on/ after 15/12/2016
- If undisclosed income is admitted during search and the taxpayer pays the tax along with interest and files ITR, then a penalty @ 30% of such undisclosed income shall be levied.
- In all other cases, a penalty shall be levied @ 60%

F) Penalty for not Filing Income Tax Return

In case the Income Tax Return is not furnished in full compliance with the relevant provisions of the Act, then the Assessing Officer can penalize the taxpayer with a penalty of INR 5,000.

If you are someone having a foreign source of income, then it is important for you to understand the provisions for tax relief under sections 90 and 91. The income tax law has introduced these sections to relieve taxpayers from paying double taxes on the same income. This article must have shed some light on the existing provisions for relief under the income tax act. However, as a layman, it can be difficult to keep track of potential tax relief options. Therefore, it is a good idea to get professional help.

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CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.