📚 PASS Investment Adviser (Level 2) Difficulty: Beginner ℹ️ Info   ~5 min read
📌 Chapter 7.15 — Double Tax Avoidance Agreement

Imagine you are drafting an advisory report for a high-net-worth client who is a ‘Resident and Ordinarily Resident’ (ROR) in India. The client has earned significant dividend income from a technology stock listed on the NASDAQ, which has already been subjected to a 15% withholding tax in the United States. Your task is to calculate the client’s net post-tax return while ensuring their Indian income tax filing is compliant.

If you fail to account for the Foreign Tax Credit (FTC), you risk double-counting this income, leading to an artificially deflated yield and a poor investment recommendation.

Under India’s Income Tax Act, an ROR is liable to pay tax on their worldwide income. However, Section 90 or 91 provides relief to prevent this punitive double taxation. The reconciliation process requires the taxpayer to report the gross foreign income in their Indian tax return and then claim a credit for the tax already paid abroad.

This credit is not a flat deduction; it is generally limited to the lower of the tax paid in the source country or the tax payable on that same income in India. Practically, this ensures that the investor pays only the higher of the two applicable tax rates rather than both.

From a valuation perspective, ignoring the nuances of these credits can lead to significant errors in modeling net-of-tax cash flows for cross-border investments. When projecting future returns for a portfolio containing international assets, the analyst must adjust the effective tax rate based on the specific Double Taxation Avoidance Agreement (DTAA) between India and the host country.

If a DTAA is absent, the relief is governed by Section 91, which may offer less favorable terms than those provided under a formal treaty. Accurate modeling requires identifying whether the tax paid abroad is eligible for full credit or if it must be treated as a deductible expense instead.

Consider an Indian investor receiving ₹100 in dividends from a country with a 10% treaty rate. If the Indian marginal tax rate is 30%, the investor must disclose the ₹100 in their Indian return but receives a credit for the ₹10 already paid. The net Indian tax liability effectively becomes ₹20, bringing the total tax burden to ₹30, which aligns with their domestic tax bracket. Properly documenting these credits is essential for maintaining the integrity of an investor’s long-term wealth accumulation strategy and avoiding unnecessary scrutiny from tax authorities.1

Nuance

⚠️ Nuance
A common professional misconception is that a foreign tax credit equates to a direct refund of the total tax paid abroad. In reality, the FTC only mitigates the tax liability up to the extent of the Indian tax component attributable to that foreign income. Analysts often fail to account for the timing difference between filing taxes in India and the foreign jurisdiction, which can create temporary cash flow mismatches that impact an investor’s liquidity planning.

Check Your Understanding

Practice Question 1

An ROR individual in India earns interest income from a country that does not have a DTAA with India. How should the individual handle the tax already paid in the foreign country?

Practice Question 2

When calculating the Foreign Tax Credit for an ROR investor, what is the primary ceiling for the credit amount?

This is a companion read for Section 7.15 — Double Tax Avoidance Agreement from PASS Investment Adviser (Level 2) by Akhilesh Gururani, available on Amazon Kindle.

Copyright © 2026 Akhilesh Gururani. All rights reserved.

  1. The Foreign Tax Credit (FTC) is claimed by filing Form 67 in India. Failure to file this form before the due date of the return can result in the denial of the tax credit. ↩︎