Income Tax Benefits in Special Cases of Foreign Income

The Income Tax Act, 1961 has several provisions that help assessees (tax-payers) to claim deductions and save on their tax payments while filing their returns. The tax slabs and deduction limits are revised periodically, typically during each annual budget to identify and charge taxable income groups. These slabs and benefits, however, do not apply to foreign income or international transactions.   

Indian Law: The Case of Double Taxation

The case of double taxation arises when an individual pays two or more taxes on the same income or financial transaction in multiple countries. Such a scenario arises typically as a reason of overlapping income tax laws of the countries.

 The Indian government has created the Double Taxation Avoidance Agreement (DTAA) in collaboration with 65 countries, to protect Indian assesses from this unjust practice. The collaborating partners of the DTAA include USA, UK, Canada, Japan, Australia, Germany and UAE.

Additionally, the Income Tax Act offers “Unilateral Relief” to assessees earning foreign income, under Section 91, irrespective of whether their income arises from a country associated to the DTAA. To be eligible for unilateral relief on the foreign income, the assessee should have been a normal resident in India during the previous assessment year. A normal resident is a person or an entity present in India for either:

• 182 during the previous assessment year or
• 60 days during the previous assessment year and at least 365 days during the previous four years.

Indian Law: The Case of Prominent Individuals

Foreign income earned by Indian residents is subject to tax deductions under section 80 RR of the Income Tax Act. Individuals eligible under this category, which include prominent people like as athletes, actors and musicians, can claim as much as 75% of their income as deductions.  The duration for claiming income tax deduction under section 80 RR is 6 months within the receipt of income. This duration may be extended in special cases, according to the discretion of the Chief Commissioner of the Income Tax Department.