Double Taxation Relief & Foreign Tax Credit Under Income Tax Act 2025

When an individual earns income from a foreign country, one important tax question arises: Will the same income be taxed twice?

For a person who is resident in India, foreign-source income may be taxable in India while the same income may already have been taxed in the country where it was earned. Without any mechanism for relief, the taxpayer could end up paying tax twice on the same income.

This is where Double Taxation Relief and Foreign Tax Credit (FTC) come into play.

India provides relief through two broad mechanisms:

• Bilateral relief where India has entered into a Double Taxation Avoidance Agreement (DTAA) with the foreign country.
• Unilateral relief where no DTAA exists between India and the foreign country.

The provisions discussed below are as amended by the Finance Act, 2026.

What is Double Taxation Relief?

Double taxation occurs when the same income is taxed in two countries. For example, an Indian resident may earn interest from a foreign bank. Tax may be deducted in the foreign country, while the interest is also taxable in India.

To prevent this economic burden, the taxpayer may claim credit for eligible foreign taxes paid or deducted. This is commonly referred to as Foreign Tax Credit (FTC).

The manner in which relief is granted depends on whether India has a DTAA with the country where the income arose.

Double Taxation Relief Where a DTAA Exists - Section 159

Where an assessee has paid tax in a country or specified territory with which India has entered into a Double Taxation Avoidance Agreement (DTAA), relief is available under Section 159.

This is known as bilateral relief, because it operates under an agreement between India and the foreign country.

A DTAA generally determines:

• Which country has the right to tax particular income;
• The maximum rate at which certain income can be taxed;
• How double taxation is to be eliminated; and
• Other tax-related rights and obligations of residents of the two countries.

Which Provision Applies: Income-tax Act or DTAA?

Where India has entered into a DTAA with another country, the provisions of the Income-tax Act apply to the assessee only to the extent that they are more beneficial to the assessee.

In simple terms, the taxpayer can generally rely on the provision that provides the more beneficial tax treatment.

Therefore, if a DTAA provides a more favourable provision than the Income-tax Act, the DTAA provision may be applied. Conversely, where the domestic law is more beneficial, the more beneficial provision under the Income-tax Act may apply.

How are Terms Used in a DTAA Interpreted?

DTAAs contain several technical terms such as "resident", "permanent establishment", "business profits", "royalties" and "dividends".

A term used in a DTAA generally takes the meaning assigned to it under that agreement.

However, where a term is not defined in the DTAA, its meaning is determined through the applicable domestic legal framework.

Broadly, the following approach is followed:

1. If the term is defined in the Income-tax Act, it takes the meaning assigned under the Act, along with applicable explanations issued by the Government.
2. If it is not defined in the Act, its meaning may be taken from a notification issued by the Central Government, unless the context requires otherwise, provided that the meaning is not inconsistent with the Act or the agreement.
3. If the term is not defined either in the Act or in a notification, its meaning may be taken from the relevant Central Government tax law or, in other cases, another applicable law of the Central Government.

Such meaning is generally considered with reference to the date on which the agreement came into force.

What Does a Typical DTAA Contain?

Although the exact structure can vary between treaties, a DTAA generally contains provisions dealing with the following areas:

For taxpayers, Article 23 - Relief from Double Taxation is particularly important because it generally contains the mechanism for eliminating or reducing double taxation.

Documents Required to Claim DTAA Benefits

A taxpayer cannot simply claim DTAA benefits without supporting documentation.

Tax Residency Certificate

A non-resident seeking relief under an applicable DTAA must obtain a Tax Residency Certificate (TRC) from the government or tax authorities of the foreign country in which the person is resident.

Additional prescribed information is also required to be furnished electronically in Form No. 41.

Tax Residency Certificate for an Indian Resident

An Indian resident seeking a TRC for claiming relief under a DTAA with the source country can make an application to the Assessing Officer in Form No. 42.

The certificate is issued to the resident person in Form No. 43.

When Can Foreign Tax Credit Be Claimed?

A resident is generally allowed to claim credit for foreign tax in the year in which the corresponding foreign income is offered to tax or assessed to tax in India.

The important point is that the credit is linked to the year in which the related income is taxed in India, rather than simply the year in which the foreign tax was paid.

Where the income is offered to tax in India over more than one year, the corresponding foreign tax credit is allowed proportionately in those years.

How Much Foreign Tax Credit Can Be Claimed?

Foreign Tax Credit is not automatically equal to the entire amount of foreign tax paid.

The amount of credit is subject to prescribed limits.

FTC can generally be claimed only against:

• Income-tax;
• Surcharge; and
• Cess

payable under the Income-tax Act.

It cannot be claimed against amounts payable by way of:

• Interest;
• Fee; or
• Penalty.

FTC Where Tax Is Payable Under Normal Provisions

Foreign Tax Credit is calculated separately for each source of income arising from each foreign country.

For each source of foreign income, the credit available is generally the lower of:

1. Income-tax payable in India on that foreign income; or
2. Foreign tax paid on that income.

The total FTC is then determined by aggregating the eligible credits.

Example

Suppose an Indian resident earns ₹5 lakh from a foreign source.

• Indian tax attributable to the income: ₹60,000
• Foreign tax paid: ₹75,000

The FTC would generally be restricted to ₹60,000, subject to the applicable DTAA provisions.

The excess foreign tax of ₹15,000 would not qualify for credit merely because it was actually paid.

Further, where foreign tax paid exceeds the tax payable under the applicable DTAA, the excess foreign tax is ignored while computing the eligible credit.

Foreign Tax Credit Under MAT or AMT

Where an assessee is liable to pay tax under the provisions relating to Minimum Alternate Tax (MAT) or Alternate Minimum Tax (AMT), FTC is allowed in a manner similar to the credit available against tax payable under the normal provisions.

However, where the FTC available against MAT/AMT liability exceeds the credit that would have been available if tax had been computed under the normal provisions, the excess is ignored while determining the MAT/AMT credit.

What Happens When Foreign Tax Is Under Dispute?

A taxpayer cannot ordinarily claim FTC for foreign tax that is under dispute.

However, credit for such disputed foreign tax may subsequently be allowed when the corresponding income is offered to tax or assessed in India, provided the prescribed conditions are satisfied.

Within six months from the end of the month in which the dispute is finally settled, the assessee must:

• Furnish evidence that the dispute has been settled;
• Provide evidence that the foreign tax liability has been discharged;
• Furnish Form No. 45 along with the prescribed evidence; and
• Provide an undertaking that no refund of the foreign tax has been claimed or will be claimed, directly or indirectly.

This ensures that FTC is ultimately available only for foreign tax that is actually borne by the taxpayer.

What Exchange Rate Is Used for Foreign Tax Credit?

Foreign tax is often paid in a currency other than Indian rupees. Therefore, the foreign tax has to be converted into Indian currency for calculating FTC.

The conversion is made using the Telegraphic Transfer Buying Rate (TT buying rate) applicable on the last day of the month immediately preceding the month in which the foreign tax was paid or deducted.

The TT buying rate refers to the exchange rate adopted by the State Bank of India for buying the relevant foreign currency through telegraphic transfer, having regard to applicable RBI guidelines.

Documents Required to Claim Foreign Tax Credit

A taxpayer claiming FTC needs to maintain and furnish supporting documents.

1. Form No. 44

The assessee must furnish a statement specifying:

• Income offered to tax in the foreign country for the relevant tax year; and
• Foreign tax deducted or paid on that income.

This statement is furnished in Form No. 44.

Form No. 44 is required to be verified by an accountant where:

• The assessee is a company; or
• The foreign tax paid for a tax year is ₹1 lakh or more.

2. Foreign Tax Certificate or Statement

The taxpayer must also furnish a certificate or statement specifying:

• The nature of the income; and
• The amount of foreign tax deducted or paid.

This should be obtained from the foreign tax authority or the person responsible for deducting the tax.

Where tax has been paid directly by the assessee, supporting evidence such as an online payment acknowledgement, bank counterfoil or challan is required.

Where tax has been deducted, proof of such deduction must be furnished.

Time Limit for Furnishing FTC Documents

The prescribed documents are required to be furnished electronically within 12 months from the end of the relevant tax year in which the corresponding income has been offered to tax or assessed to tax in India.

The return of income for that tax year must also have been furnished within the prescribed time.

Where an updated return is furnished, documents relating to income included in that updated return are required to be furnished on or before the date of filing the updated return.

What If Foreign Tax Is Refunded?

Sometimes foreign tax for which FTC has already been claimed in India may subsequently be refunded.

This could happen because of:

• Carry-back of a loss;
• Revision of a foreign tax return or similar statement; or
• Any other provision of the foreign country's tax law.

In such cases, Form No. 44 is required to be furnished to intimate the Income-tax Department about the refund.

This is important because FTC is intended to cover foreign tax that is ultimately borne by the taxpayer. If the taxpayer receives a refund, the amount of FTC available in India may need to be reduced or adjusted.

Unilateral Relief Where No DTAA Exists - Section 160

What happens when India does not have a DTAA with the country where the foreign income was earned?

The taxpayer may still be eligible for unilateral relief under Section 160.

This provision provides relief in respect of doubly taxed foreign income even where there is no DTAA between India and the foreign country.

Conditions for Claiming Relief Under Section 160

The following conditions need to be satisfied:

• The assessee must be resident in India.
• The income must have accrued or arisen outside India during the relevant tax year and must not be deemed to accrue or arise in India.
• Tax must have been paid in the foreign country on such income, either through deduction or otherwise.

Rate of Unilateral Relief

The relief is allowed by way of deduction from the Indian income-tax payable.

Where the tax rates in India and the foreign country are different, relief is available at the lower of:

• The Indian rate of tax; or
• The rate of tax applicable in the foreign country.

Where the rates are the same, the Indian rate of tax is considered.

Indian Rate of Tax

The Indian rate of tax is determined broadly by dividing the Indian income-tax after the relevant relief but before relief under Section 159 by the total income.

Rate of Tax of the Foreign Country

The foreign country's tax rate is determined broadly by comparing the income-tax and super-tax paid in that country, after allowing relevant relief other than double taxation relief, with the total income assessed in that country.

For this purpose, the term income-tax includes certain excess profit tax or business profit tax charged on profits by the government or a local authority of the foreign country.

Bilateral vs Unilateral Relief: Key Difference

Key Takeaways on Double Taxation Relief

Foreign income can create complex tax implications for Indian residents, particularly when the same income is taxed in both India and another country.

The key points to remember are:

• Section 159 provides relief where India has a DTAA with the foreign country.
• Section 160 provides unilateral relief where no DTAA exists.
• A taxpayer may generally rely on the more beneficial provisions where the DTAA and domestic law differ.
• A Tax Residency Certificate (TRC) is an important document for claiming DTAA benefits.
• FTC is generally allowed in the year in which the corresponding foreign income is offered to tax or assessed in India.
• FTC is generally restricted to the lower of Indian tax on the foreign income and eligible foreign tax, subject to DTAA limitations.
• FTC cannot be claimed against interest, fee or penalty.
• Foreign tax must be converted using the prescribed Telegraphic Transfer Buying Rate.
• Form No. 44 and supporting evidence are important for claiming FTC.
• Disputed foreign tax is subject to specific conditions before credit can be allowed.
• Any subsequent refund of foreign tax for which FTC was claimed needs to be reported.

For professionals and taxpayers dealing with foreign income, understanding the interaction between the Income-tax Act, DTAA provisions and Foreign Tax Credit rules is essential to avoid both double taxation and incorrect FTC claims.

FAQs on Double Taxation Relief

1. Under which section is relief available where a DTAA exists?

Where tax has been paid in a country with which India has entered into a DTAA, relief is available under Section 159.

2. Which section provides unilateral relief?

Unilateral relief for foreign taxes paid in a country with which India has no DTAA is provided under Section 160.

3. Which provision applies if the DTAA is more beneficial than the Income-tax Act?

Where applicable, the more beneficial provision can be relied upon by the assessee.

4. What document is required by a non-resident to claim DTAA benefits?

A non-resident generally needs to obtain a Tax Residency Certificate (TRC) from the government or tax authority of the foreign country and furnish the prescribed additional information.

5. In which year can a resident claim FTC?

FTC is generally allowed in the year in which the corresponding foreign income is offered to tax or assessed to tax in India.

6. What is the maximum FTC that can generally be claimed?

For each source of foreign income, the credit is generally restricted to the lower of the Indian tax payable on that income or the foreign tax paid, subject to applicable DTAA provisions.

7. Can FTC be claimed against interest or penalty?

No. FTC is available against eligible income-tax, surcharge and cess, but not against interest, fee or penalty.

8. Which form is used to furnish the statement for claiming FTC?

The prescribed statement is furnished in Form No. 44, along with the required supporting documents.

9. Which form is used when disputed foreign tax is subsequently claimed as FTC?

The prescribed intimation is furnished in Form No. 45, along with evidence of settlement and payment of the foreign tax and the required undertaking.

10. What exchange rate is used for converting foreign tax?

The foreign tax is converted using the Telegraphic Transfer Buying Rate on the last day of the month immediately preceding the month in which the foreign tax was paid or deducted.