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nism-series-xb-dtaa-foreign-tax-credit-ftc-section-90-rules[ INVESTMENT ADVISER (LEVEL 2) ]

Under Section 90 of the Income Tax Act and bilateral Double Taxation Avoidance Agreements (DTAA), how does a Resident Indian taxpayer avoid double taxation on foreign dividend or capital gains income taxed abroad?

[ A ]Foreign income is 100% exempt from Indian income tax without filing returns.

[ B ]The Indian government refunds all foreign taxes in physical cash.

[ C ]Foreign income is taxed at double the standard rate in India.

[ D ]By claiming a Foreign Tax Credit (FTC) in India for the foreign taxes paid, capped at the Indian tax liability payable on that doubly taxed foreign income (by filing Form 67).[ CORRECT ]

Takeaway

Option D is correct: By claiming a Foreign Tax Credit (FTC) in India for the foreign taxes paid, capped at the Indian tax liability payable on that doubly taxed foreign income (by filing Form 67).

Derivation

A Resident Indian's global income is taxable in India regardless of where it was earned, creating a genuine risk of the same rupee being taxed twice — once abroad at source and again in India on the full return. Section 90, operating through bilateral DTAAs, resolves this by letting the taxpayer claim a Foreign Tax Credit for tax already paid overseas, offsetting it against their Indian liability on that same income. The credit is capped: it cannot exceed the Indian tax that would otherwise be payable on that foreign income, so a high foreign tax rate cannot generate a net refund against unrelated domestic income. Claiming it requires filing Form 67, documenting the foreign tax paid and treaty basis.

Why the others fail

A — Foreign income is 100% exempt from Indian income tax without filing returns.

Global income of a Resident Indian remains taxable in India; DTAA relief works through a tax credit mechanism, not a blanket exemption from filing or reporting.

B — The Indian government refunds all foreign taxes in physical cash.

Foreign Tax Credit offsets the taxpayer's own Indian liability on the doubly taxed income; it is not disbursed to the taxpayer as a cash refund from the government.

C — Foreign income is taxed at double the standard rate in India.

DTAA relief exists specifically to prevent punitive double taxation through a credit mechanism, not to impose tax at double the normal domestic rate.