16 January 2017
FTC rules say that the credit shall be the lower of the tax payable under the Act on such income and the foreign paid on such income : If DTAA exists and we want to apply ordinary tax credit method please clarify if we would use average rate of tax for the purpose of calculation tax credit or subtract basic exemption limit from such foreign amount and calculate the tax thereon. Query has been explained with the help of following illustration:
Individual; Indian Income : 3L Foreign Income(DTAA Exists) : 3L ; Tax thereon : 25000/- Total tax on income : 46,350 (including cess) Now for the purpose of FTC which of the following approach shall be followed ?
1. Avg Rate of Tax: 46,350/6,00,000*100= 7.725% Tax on such foreign Income: 3,00,000 * 7.725% = 23,175 So credit is lower of 25,000 or 23,175 i:e 23,175
2. Tax On 2,50,000(Basic Exemption Limit)+300,000(Foreign Inc.) (assuming no other income)= 36,050(including Cess) So credit will be lower of 25000 or 36,050 i:e; 25,000
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