Any income coming from sources outside your home country is called foreign income—and this could come from a job, investments in foreign stocks or bonds, or property overseas.
But here’s the thing, when you earn income in another country, that country usually taxes it. Meanwhile, your home country might also want its share, leading to something called double taxation.
To address this, countries enter into agreements called Double Taxation Avoidance Agreements (DTAA) to ensure taxpayers aren’t unfairly taxed in both countries.
Who can claim DTAA?
There could be two cases.
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Residents with foreign income:
If you’re an Indian resident with any kind of income coming from abroad.
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NRIs with Indian investments:
NRIs earning income from investments in India (like dividends, capital gains or rental income) can also benefit from DTAA by reducing tax liability in their country of residence.
How much tax relief can you claim?
There are two ways governments offer relief:
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Exemption Method:
The income is taxed in only one country, while the other country exempts it.
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Tax Credit Method:
If tax is already paid in one country, you can claim a credit for it in the other.
For instance, let’s say:
- You paid a tax of ₹50 in the foreign country.
- Your Indian tax liability for the same income is ₹70.
You can claim a tax credit of ₹50 while filing taxes in India and you’ll have to pay the remaining ₹20.
Note: The tax relief you can claim is lower of:
a) the amount between the tax paid in the foreign country, and
b) the tax you owe in India on that income.
In case the tax liability in India is lower than what you have paid abroad, you will not receive any refund.
How to claim DTAA benefits?
If you have foreign income, you’ll need to report it under Schedule FSI (Foreign Source Income) in your ITR.
Here, you’ll fill in the details of the income earned abroad and the taxes paid in the foreign country on that income.
This information is then used to calculate your tax relief. The tax relief amount is reflected in Schedule TR (Tax Relief), where you’ll see the net tax relief that you’re eligible to claim.
Apart from this, if you’re claiming tax relief, you need to file Form 67 on the income tax portal.
The form requires the following:
- Details of foreign income earned and taxes paid.
- Tax Residency Certificate (TRC) from the foreign country to prove your tax residency.
- Proof of taxes paid in the foreign country (such as tax receipts or statements).
Lastly, here’s a document from the Income Tax department that contains more details on DTAA. This might help you out.
Remember to keep all the necessary documents handy, such as proof of foreign income and tax paid, to avoid any issues while filing. For example, if you have investments in the US, 1042-S is a document you’d need.