Income Tax Calculator for FY 2025-26
14 Jun, 2025
By Online Legal India
Published On 10 Nov 2021
Updated On 09 Jun 2025
Category Taxation
In today's interconnected global economy, individuals and businesses frequently engage in cross-border activities. This leads to complex tax implications. One significant challenge in this realm is the potential for the same income to be taxed by multiple jurisdictions, which can impact financial planning and investment decisions. Understanding the mechanisms and agreements in place to address these challenges is crucial for effective international operations and compliance.
Understanding the mechanisms that lead to double taxation and the strategies available to mitigate its impact is crucial for effective financial planning and compliance. In this article, you will learn about double tax and possible ways to avoid it.
Double taxation refers to the scenario where the same income is subjected to tax more than once, either by different tax authorities or at different levels within the same jurisdiction. This phenomenon can occur in various contexts, such as when a corporation's profits are taxed at the corporate level and then again at the shareholder level upon distribution as dividends.
It can also arise in international settings, where an individual's or entity's income is taxed by both the country where the income is earned and the country of residence. This overlapping of tax obligations can lead to a higher overall tax burden, which makes it a significant consideration for cross-border investments and multinational operations.
Double taxation can manifest in various forms, each presenting unique challenges for taxpayers. The most common types are:
Corporate double taxation occurs when the same income is taxed twice. Initially, at the corporate level, followed by the shareholder level. Initially, a corporation pays taxes on its profits. Subsequently, when these after-tax profits are distributed to shareholders as dividends, the shareholders are taxed again on this income through their personal income tax returns. As a result, the same income is subject to taxation twice.
For instance, if a company earns Rs.1,00,000 in profit, it pays corporate tax on that amount. When the remaining profit is distributed as a dividend to shareholders, the shareholders are taxed on the dividend income. This results in the same income being taxed twice. First at the corporate level, and then again at the shareholder level.
International double taxation occurs when the same income is taxed by two different countries, typically due to overlapping tax jurisdictions. This situation often arises when one country taxes income based on where it is earned, while another taxes income based on the taxpayer's residence. As a result, individuals or businesses engaged in cross-border activities may find themselves paying taxes on the same income in both countries.
For example, if an Indian resident earns income in the United States, both India and the U.S. may claim taxing rights on that income. India taxes its residents on their global income, while the U.S. taxes income earned within its jurisdiction. Without relief mechanisms, this could lead to the same income being taxed in both countries.
Double taxation arises due to conflicting tax rules, which lead to the same income being taxed more than once. This situation commonly occurs in two scenarios:
Double taxation often arises from differing tax principles between countries. Two primary approaches are:
In India, individuals classified as "Resident and Ordinarily Resident" are subject to tax on their worldwide income, irrespective of where it is earned. This means that if an Indian resident earns income abroad, it must be reported and is taxable in India.
However, to prevent double taxation, India offers relief mechanisms such as tax credits for taxes paid in foreign countries, provided there is a Double Taxation Avoidance Agreement in place. For instance, under the India-U.S. DTAA, an Indian resident working in the U.S. can claim a credit for U.S. taxes paid against their Indian tax liability on the same income.
Source-based taxation allows countries to tax income generated within their borders, regardless of the taxpayer's residence. For example, if an Indian citizen earns income in the United States, the U.S. may tax that income based on its source within its territory. This principle ensures that countries can levy taxes on economic activities occurring within their jurisdiction, even if the taxpayer resides elsewhere.
To prevent double taxation, countries often enter into Double Taxation Avoidance Agreements, which allocate taxing rights between the source and residence countries and provide mechanisms for relief, such as tax credits or exemptions.
Each country has its tax laws, which can differ significantly. These differences can lead to situations where income is taxed in multiple jurisdictions. For example, one country may tax certain types of income, while another may not, or they may apply different tax rates to the same income.
In the absence of Double Taxation Avoidance Agreements, countries may not coordinate their tax policies effectively. This lack of coordination can result in income being taxed by multiple countries without relief for the taxpayer. Even when treaties exist, their provisions may not always align perfectly. It leads to gaps or overlaps in taxation.
Understanding these causes is crucial for individuals and businesses engaged in international activities, as it helps in identification of potential tax liabilities and exploring avenues for relief.
Double taxation occurs when the same income is taxed by two or more jurisdictions, leading to several adverse effects:
Being taxed multiple times on the same income reduces the overall return for individuals and businesses. This additional tax burden can diminish profitability and disposable income, which makes it more challenging to achieve financial goals.
High tax burdens resulting from double taxation can make a country less attractive to foreign investors. Investors may seek jurisdictions with more favorable tax policies. It leads to reduced foreign direct investment and potentially slower economic growth.
Navigating the tax laws of multiple jurisdictions can be complex and time-consuming. Individuals and businesses may face increased administrative costs, the need for specialized tax advice, and the risk of legal disputes over tax obligations.
To mitigate these issues, many countries enter into Double Taxation Avoidance Agreements, which allocate taxing rights between countries and provide mechanisms for relief, such as tax credits or exemptions. These agreements aim to reduce the adverse effects of double taxation and promote cross-border economic activities.
Double taxation can significantly impact individuals and businesses engaged in cross-border activities. To mitigate this, several mechanisms are available under Indian tax laws:
India has established Double Taxation Avoidance Agreements (DTAAs) with over 90 countries, including the USA, UK, and UAE, to prevent the same income from being taxed in both countries. These agreements offer several benefits:
DTAAs often lower tax rates on dividends, interest, and royalties. This makes cross-border investments more attractive.
Indian residents earning income abroad can claim credit for taxes paid in the foreign country against their Indian tax liability, as per Sections 90 and 91 of the Income Tax Act.
Certain incomes may be exempt from tax in one of the countries. For instance, under the India-UAE DTAA, Non-Resident Indians (NRIs) residing in the UAE can benefit from tax-free capital gains on Indian mutual fund investments, as the UAE does not levy capital gains tax.
These provisions help in reducing the overall tax burden and encourage international investments by providing clarity and relief from double taxation.
Indian residents earning income abroad may face the challenge of double taxation, where the same income is taxed both in the foreign country and in India. To alleviate this burden, the Indian Income Tax Act provides mechanisms under Sections 90, 90A, and 91 to claim relief through the Foreign Tax Credit.
Section 90 applies when India has a Double Taxation Avoidance Agreement with a foreign country. Under this provision, taxpayers can claim credit for taxes paid abroad against their Indian tax liability on the same income.
Section 91 offers unilateral relief in cases where no DTAA exists, which allows residents to claim credit for foreign taxes paid, ensuring they are not doubly taxed.
To claim the FTC, taxpayers must submit Form 67 electronically through the Income Tax Department's e-filing portal. This form should be filed on or before the due date for furnishing the return of income under Section 139(1) of the Income Tax Act. Form 67 requires details such as the amount of foreign income, taxes paid abroad, and supporting documents like tax payment receipts or certificates from foreign tax authorities.
Under India's Double Taxation Avoidance Agreements, two primary methods are employed to prevent the same income from being taxed in both India and the foreign country:
If the income is taxed in the source country, it is exempted from taxation in the resident country. For example, if an Indian resident earns income in the United Arab Emirates, and the UAE taxes that income, India may exempt it from taxation under the DTAA provisions. This method ensures that the income is taxed only once.
The income is taxed in both the source and the resident countries. However, the resident country allows the taxpayer to claim a credit for the tax paid in the source country against their Indian tax liability on the same income. This method ensures that the taxpayer does not pay tax twice on the same income.
The specific method applicable depends on the provisions outlined in the DTAA between India and the respective foreign country. Taxpayers should refer to the relevant DTAA to determine which method applies to their situation.
Effective tax planning is essential to avoid double taxation. Choosing the right business structure, such as a Limited Liability Partnership, can offer tax advantages over private limited companies. LLPs are taxed at a flat rate of 30% without additional surcharges, making them a cost-effective option for many businesses.
Adhering to transfer pricing regulations is also crucial. Indian laws require that transactions between related entities be conducted at arm's length prices to ensure fair taxation. Consulting with international tax advisors can provide tailored strategies to navigate complex tax laws and ensure compliance. This helps to minimize tax liabilities and avoid penalties.
If you're an NRI or an Indian resident earning income abroad, understanding India's tax rules is crucial to avoid double taxation. Here is a simplified guide to help you navigate this:
As an NRI, you are typically taxed in India only on income that is earned or received within the country. Income earned abroad is generally not taxable in India unless you qualify as a Resident and Ordinarily Resident. Your residency status depends on factors like the number of days you spend in India during a financial year.
If you are an Indian resident who has paid taxes on foreign income, you can avoid double taxation by claiming a Foreign Tax Credit. To do this, you must submit Form 67 before filing your Income Tax Return. This form details your foreign income and the taxes paid abroad, which allows you to offset this against your Indian tax liability.
Indian residents are required to disclose foreign income and assets in their tax returns. This includes filling out Schedule FA and Schedule FSI in ITR Forms 2 or 3. Accurate reporting ensures compliance with Indian tax laws and helps avoid penalties.
To effectively manage and prevent double taxation, especially for Non-Resident Indians (NRIs) and Indian residents with foreign income, it is essential to be familiar with certain key documents and forms:
If you have paid taxes on income earned abroad and are also liable to pay tax on the same income in India, you can claim a Foreign Tax Credit to avoid being taxed twice. To do this, you must file Form 67 online through the Income Tax Department's e-filing portal before submission of your Income Tax Return. This form requires details of your foreign income and the taxes paid abroad. Supporting documents, such as proof of tax payment in the foreign country, should be attached.
A Tax Residency Certificate is an official document issued by the tax authorities of your country of residence. It certifies that you are a tax resident of that country for a specific period. This certificate is crucial when claiming benefits under the Double Taxation Avoidance Agreement between India and your country of residence. By providing a TRC, you can avail of reduced tax rates or exemptions on certain income types in India.
When filing your ITR in India, it is important to disclose any foreign income and the taxes paid abroad. This involves filling out specific schedules in the ITR forms, such as Schedule Foreign Source Income and Schedule Tax Relief. Proper disclosure ensures transparency and allows you to claim relief under the applicable DTAA provisions.
Conclusion
Double taxation can significantly affect individuals and businesses involved in international transactions, leading to higher tax burdens and compliance challenges. However, with proper planning and using provisions like DTAAs, tax credits, and exemptions, it is possible to reduce or eliminate this burden.
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