What is Double Taxation and Why Does it Matter?
Double taxation simply means being taxed twice on the same income — once in the country where the income is earned, and again in the country where the taxpayer resides. For example, if you’re an Indian resident earning income from the U.S., both countries might want a slice of the same pie. That’s where Double Taxation Relief (DTR) comes in. The Government of India offers relief to ensure you’re not unfairly taxed in both places, making international income compliance smoother and more equitable. Without DTR, global working professionals and businesses would lose a big chunk of their income to overlapping tax systems.
What Does the Indian Income Tax Act Say About Double Taxation?
As per Section 90 and Section 91 of the Income Tax Act, 1961, India provides two types of relief:
- Section 90: Applies when India has entered into a Double Taxation Avoidance Agreement (DTAA) with another country. Under this, relief is given by exemption or tax credit, depending on the terms of the agreement.
- Section 91: Provides unilateral relief if there is no DTAA with the foreign country. In this case, India allows a deduction or credit on tax paid abroad to reduce the burden.
These sections ensure that Indian residents earning foreign income are not taxed more than necessary, thus promoting cross-border trade, investment, and employment opportunities.
How Double Taxation Relief Works in Real Life
Let’s say you’re an Indian software engineer freelancing for a US-based company. The US government deducts tax on your payment. When you declare this income in India, the Indian tax authority could, in theory, tax the same income again. But thanks to DTR under DTAA, you can either get full exemption for US income (exemption method) or get a credit for tax already paid in the US (credit method). This makes international income reporting fair and transparent — and helps avoid unnecessary headaches during tax season.
Mnemonic :
Mnemonic to Remember: “DUET – DTAA, Unilateral, Exemption, Tax credit”
Here’s an easy way to remember how Double Taxation Relief works:
- D – DTAA (Section 90 – Bilateral Relief)
- U – Unilateral Relief (Section 91)
- E – Exemption Method
- T – Tax Credit Method
