Section 91 of Income Tax Act

For Indian residents earning income from foreign sources, the risk of being taxed twice — once in the country where the income is earned and again in India — is a genuine concern. Section 91 of the Income Tax Act, 1961 addresses this challenge by providing unilateral tax relief to Indian taxpayers who have paid taxes in a foreign country with which India has no Double Taxation Avoidance Agreement (DTAA). Understanding this provision is essential for professionals, consultants, and businesses with international income exposure, as it ensures that the absence of a bilateral treaty does not result in an unfair and excessive tax burden.

Section 91 of the Income Tax Act, 1961 provides relief from double taxation on income earned in a foreign country when India does not have a DTAA with that country. Under this section, an Indian resident who has paid tax in a foreign jurisdiction on income that is also taxable in India is entitled to a deduction from their Indian tax liability. The relief is calculated as a credit equal to the lower of the Indian tax rate or the foreign tax rate applicable to the doubly taxed income. This unilateral relief mechanism ensures that taxpayers are not penalised simply because India lacks a formal tax treaty with a particular country.

Consider Ramesh, an Indian resident who provides consultancy services to a company based in Country X, with which India has no DTAA. Ramesh earns Rs. 10 lakh from this engagement. Country X deducts tax at 20% on this income, amounting to Rs. 2 lakh. In India, the same income is taxable at 30%, resulting in a liability of Rs. 3 lakh. Under Section 91, Ramesh is entitled to a foreign tax credit equal to the lower of the two tax rates — 20%. His net Indian tax liability is therefore reduced by Rs. 2 lakh, and he pays only Rs. 1 lakh in India, effectively avoiding double taxation on the same income.

• Section 91 — Unilateral relief: Applies when India has no DTAA with the country where the income was earned. Relief is granted by India unilaterally, based on the lower of the Indian tax rate or the foreign tax rate on the doubly taxed income. No reciprocal obligation exists from the foreign country.
• Section 90 — Bilateral relief under DTAA: Applies when India has a DTAA with the foreign country. Both countries agree to either exempt certain income from tax or allow tax credits, providing a more comprehensive and structured form of relief.
• Section 90A — Relief under agreements with specified associations: Similar to Section 90 but applies to agreements entered into by specified associations rather than sovereign governments — for example, agreements between trade bodies.
• Key distinction: Section 90 and 90A provide avoidance through a negotiated bilateral framework, while Section 91 provides relief after double taxation has already occurred — it reduces the tax burden but does not prevent double taxation from arising in the first place.
• Scope of relief: Under DTAAs, taxpayers may benefit from reduced withholding tax rates, exemptions, and more comprehensive provisions. Under Section 91, the benefit is strictly limited to a credit for the lower of the two applicable tax rates.

Calculating Foreign Tax Credit (FTC) under Section 91 involves a structured methodology. Here is a step-by-step guide:

• Step 1 — Determine the doubly taxed income: Identify the specific income that has been taxed both in the foreign country and in India. Only income that is subject to tax in both jurisdictions qualifies for relief under Section 91.
• Step 2 — Calculate gross Indian tax liability: Compute your total Indian tax liability on your global income — including both Indian and foreign income — as per the applicable income tax slabs or rates for the relevant assessment year.
• Step 3 — Calculate the average Indian tax rate: Divide your total Indian tax liability by your total global income (before any FTC) and multiply by 100. This gives you your average rate of Indian income tax. Formula: Average Indian Tax Rate = (Total Indian Tax Payable / Total Gross Income) × 100
• Step 4 — Identify the foreign tax rate: Determine the rate at which tax was levied on the doubly taxed income in the foreign country. This is the actual rate applied to that specific income, not an average across all income.
• Step 5 — Determine the lower rate: Compare the average Indian tax rate (from Step 3) with the foreign tax rate (from Step 4). The FTC is calculated at the lower of the two rates.
• Step 6 — Apply the lower rate to doubly taxed income: Multiply the lower rate by the amount of doubly taxed income to arrive at the FTC amount. Formula: FTC = Lower of (Average Indian Tax Rate or Foreign Tax Rate) × Doubly Taxed Income
• Step 7 — Deduct FTC from Indian tax liability: Subtract the FTC calculated in Step 6 from your total Indian tax liability. The result is your net tax payable in India after Section 91 relief.
• Step 8 — Claim in ITR and file Form 67: To claim FTC, you must file Form 67 on the Income Tax e-filing portal before or along with filing your Income Tax Return (ITR). Form 67 requires details of the foreign income, the country of source, the tax paid abroad, and supporting documents such as foreign tax payment receipts or certificates issued by the foreign tax authority.
• Important note: Section 91 relief is available only if the income has actually been taxed in the foreign country — not merely remitted or received there. Documentary evidence of foreign tax paid is mandatory for the claim to be accepted.

Disclaimer: The above methodology is for educational purposes only. Tax calculations should be verified with a qualified chartered accountant or tax advisor for accuracy.

Failing to disclose foreign income in your Indian tax return can attract severe penalties under the Income Tax Act and the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. Here is what you need to know:

• Penalty under the Black Money Act: Undisclosed foreign income or assets are taxed at a flat rate of 30%, and a penalty equal to 90% of the undisclosed amount is levied — totalling an effective burden of 120% of the concealed income.
• Prosecution under the Black Money Act: Wilful non-disclosure of foreign income can result in imprisonment ranging from 3 to 10 years, in addition to financial penalties.
• Penalty under Section 270A of the Income Tax Act: Where foreign income is under-reported, a penalty of 50% of the tax payable on the under-reported income applies. For cases involving misrepresentation or concealment, the penalty rises to 200% of the tax due.
• Interest under Sections 234A, 234B, and 234C: Failure to file returns on time or pay advance tax on foreign income attracts interest charges, compounding the financial burden.
• Prosecution under Section 276C: Wilful attempts to evade tax on foreign income can attract imprisonment of 6 months to 7 years along with a fine.
• Loss of DTAA benefits: Failure to disclose foreign income may disqualify the taxpayer from claiming treaty benefits or FTC under Sections 90, 90A, or 91, resulting in the full double tax burden being applied.
• Best practice: Disclose all foreign income accurately in your ITR every year, file Form 67 to claim FTC where applicable, and maintain all supporting documents including foreign tax payment receipts and certificates from foreign tax authorities.

Section 91 of the Income Tax Act plays a vital role in India's international taxation framework by ensuring that Indian residents with income from non-treaty countries are not subjected to an inequitable double tax burden. While it does not prevent double taxation from arising — unlike the more comprehensive DTAA framework under Sections 90 and 90A — it provides meaningful relief by allowing a credit for the lower of the two applicable tax rates. For taxpayers earning foreign income from countries with which India has no bilateral treaty, understanding and correctly claiming Section 91 relief can result in significant tax savings. Accurate disclosure, proper documentation, and timely filing of Form 67 are the cornerstones of a compliant and tax-efficient approach to managing foreign income.