Sections 90, 90A, and 91 of the Income Tax Act

Indian taxpayers with foreign income can claim tax relief under Sections 90, 90A, and 91 of the Income Tax Act of 1961, as per the Double Taxation Avoidance Agreement (DTAA).

With growing global business, many individuals in India earn income from foreign sources, leading to the possibility of double taxation. Both the source and resident countries may tax the same income. To prevent this, India has signed DTAA with over 94 countries, ensuring individuals don’t pay taxes twice on the same earnings.

Sections 90, 90A, and 91 of the IT Act define tax relief provisions to mitigate the risk of double taxation.

Types of Double Taxation Relief

There are two types of relief to avoid double taxation:

1. Bilateral Relief: Available when there is a DTAA between two countries, using either the exemption or credit method.
2. Unilateral Relief: If no DTAA exists, the home country offers relief under Section 91, preventing double taxation.

Section 90: DTAA-Based Relief

Section 90 is relevant when India has a DTAA with another country. It ensures an individual isn’t taxed twice on the same income. For instance, if an Indian resident works abroad, the DTAA will prevent both governments from taxing the income simultaneously, using either a tax credit or exemption method.

Section 90A: Relief for Specified Associations

Section 90A applies when specific associations or institutions in two countries sign a DTAA. It functions similarly to Section 90, but the agreement is between organizations rather than countries.

Section 91: Relief Without a DTAA

Section 91 offers tax relief in cases where no DTAA exists between India and another country. In such situations, individuals can claim the lower of the tax rates between the two countries as a relief. This unilateral method helps prevent double taxation even in the absence of an agreement.

Example for Section 91:
If an individual pays 35% tax in a foreign country and the tax rate in India is 25%, they can claim a relief of 25% in India.

Difference Between Double Taxation Relief and Avoidance

• Double Taxation Relief: This is achieved via bilateral or unilateral methods, ensuring tax is only paid once. Relief is offered either through the credit or exemption method.
• Double Taxation Avoidance: Applies when India signs an agreement with another country to prevent double taxation by agreeing not to tax the same income twice. Sections 90 and 90A govern this.

Calculation of Foreign Tax Credit

The foreign tax credit is calculated separately for each source of income. The credit will be the lower of:

• Tax payable under the Indian Income Tax Act.
• Taxes paid in the foreign country.

Example for Section 90 Relief Calculation:

If Mr. A earns ₹2,00,000 in India and ₹3,00,000 from the USA (where ₹20,000 is paid in taxes), his total income is ₹5,00,000. The tax relief will be the lower of taxes paid in India (₹7,500) or in the USA (₹20,000). Thus, the relief is ₹7,500.

Penalties for Non-Disclosure of Foreign Income

Non-disclosure of foreign income can result in several penalties:

• Default in tax payment: A penalty up to the unpaid tax amount.
• Under-reporting of income: 50% of the tax due on the under-reported amount.
• Failure to maintain documents: ₹25,000 penalty or 2% of international transaction value if foreign transactions are involved.
• Fake documents: A penalty equal to the amount of omitted or false transactions.
• Non-filing of Income Tax Return: ₹5,000 penalty.

Conclusion

Sections 90, 90A, and 91 of the Income Tax Act are crucial for preventing double taxation on foreign income. Taxpayers can claim relief through tax credits or exemptions based on the existence of DTAA, ensuring they aren’t taxed twice.

FAQs

What are Sections 90 and 90A of the Income Tax Act?
These sections offer tax relief under the DTAA, ensuring taxpayers don’t pay taxes twice on income earned in multiple jurisdictions.

What is the difference between Section 90 and 90A?
Section 90 refers to agreements between governments, while Section 90A involves agreements between institutions. Both allow tax relief, but Section 90A only offers tax credits.

What is Form 10F under Section 90?
Non-residents need to file Form 10F to claim relief under the DTAA.