Foreign tax relief

Foreign Tax Relief Foreign Tax Relief is a mechanism provided under tax laws to avoid double taxation on the same income that is earned abroad and also taxable in the taxpayer’s home country. It ensures that individuals or businesses do not have to pay tax twice — once in the source country (where income is earned) and again in the residence country (where the taxpayer resides). Foreign tax relief can be granted in several ways, depending on domestic laws and international agreements such as Double Taxation Avoidance Agreements (DTAAs). The main forms include: Tax Credit: The amount of tax paid in the foreign country is allowed as a credit against the tax payable in the home country. Exemption: The income earned abroad is fully or partially exempted from taxation in the home country. Deduction: The foreign tax paid is allowed as a deduction while computing taxable income. This relief promotes cross-border trade and investment by ensuring fairness in international taxation and encouraging global economic participation.

Example: An Indian company earns income from operations in the UK and pays UK corporate tax on those profits. When filing taxes in India, the company can claim foreign tax credit under the India–UK DTAA, reducing its Indian tax liability by the amount of tax already paid in the UK