Direct Tax Laws and International Taxation · Double Taxation Avoidance Agreements (DTAA)

Double Taxation and Methods of Relief for CMA Final

Updated 11 October 2026 · Fact-checked

Double taxation means the same income is taxed twice, in two countries or in two hands. Relief comes through the exemption, credit or deduction method. Under the Income-tax Act, 2025, section 159 covers relief under treaties, and section 160 gives unilateral credit where no treaty exists. Solve by finding the tax in both countries and applying the method.

Understand Double Taxation and Methods of Relief

Double taxation arises when the same income is taxed more than once. It happens because countries tax on two bases. One country taxes on residence (all your world income). Another taxes on source (income arising within it). When both claim the same income, you pay twice.

There are two kinds. Juridical double taxation means the same person is taxed on the same income in two countries. Example: an Indian resident earns royalty from a US customer. The US taxes it at source, and India taxes it as world income. Economic double taxation means the same income is taxed in the hands of two different persons. Example: a company's profit is taxed in the company, and the dividend is taxed again in the shareholder's hands.

Relief can be bilateral or unilateral. Bilateral relief comes from a treaty (a DTAA) between two countries. Under section 159, the Central Government may enter into an agreement with another country or a notified specified territory. Its purposes include relief for income taxed in both places, avoidance of double taxation without creating room for non-taxation or treaty-shopping, exchange of information, and recovery of tax. Unilateral relief is given by one country under its own law when no treaty exists. In India this is section 160.

There are three general methods of relief. Under the exemption method, the residence country does not tax the foreign income at all. Under the credit method, the residence country taxes the income but allows the foreign tax as a credit against its own tax. Under the deduction method, the foreign tax is only deducted from the income as an expense, and the balance is taxed. How much each method helps depends on the rates and on any cap on the credit. Deduction only lowers the income, so it does not cancel the foreign tax rupee for rupee. Section 160 is a specific statutory rule for countries with no agreement. It is not the same as the general credit model.

Where a treaty applies, section 159(4) says the provisions of the Act apply to the extent they are more beneficial to that assessee. But section 159(6) says the provisions of Chapter XI apply to the assessee even if they are not beneficial to him. A non-resident can claim treaty relief only with a residency certificate from the other government and the prescribed documents and information (section 159(8)).

Key rules to remember

Section 160 relief (no treaty): Relief = doubly taxed income × lower of (Indian rate, foreign rate); If both rates are equal, the Indian rate applies. Available to a person resident in India who paid foreign income-tax on income accruing outside India. This is the statutory rule for countries with no agreement.
Indian rate of tax: Indian income-tax (after reliefs under the Act, before section 160 relief) ÷ total income; This is the average rate, not the slab or marginal rate.
Rate of tax of the said country: Tax actually paid in that country (after its reliefs, before its double-tax relief) ÷ income as assessed in that country; Again an average rate on the foreign assessed income.
Exemption method: Tax payable on foreign income in residence country = 0; Foreign income may still be used to decide the rate on other income (exemption with progression), depending on the treaty.
Credit method (general model, not the section 160 rule): Credit = lower of (foreign tax paid, residence-country tax on that income); This is a generic model of ordinary credit, used to explain the method. Section 160 works differently: it applies the lower of the two average rates to the doubly taxed income. Use the section 160 formula for no-treaty problems.
Deduction method: Taxable income = total income − foreign tax paid; Tax is then computed on the reduced income.

How to solve Double Taxation and Methods of Relief questions

Use this order for any theory or numerical question on double taxation relief.

1Identify the type of double taxation: same person in two countries (juridical) or two persons on the same income (economic).
2Check whether a treaty exists with the other country. If yes, section 159 and the treaty apply. If no, section 160 applies.
3For section 160, confirm the assessee is resident in India and the income accrued outside India and is not deemed to accrue in India.
4Name the method asked or given: exemption, credit or deduction.
5Compute the Indian average rate (Indian tax ÷ total income) and the foreign average rate (foreign tax ÷ foreign assessed income).
6Take the lower of the two rates and apply it to the doubly taxed income to get relief.
7Deduct relief from Indian tax payable. State the net tax and give a short conclusion.

Quickest way: Lower-rate shortcut

When to use it: Use for numerical questions on credit of foreign tax where no treaty exists.

Write Indian tax before relief and total income, and find the Indian average rate.
Write foreign tax paid and foreign income, and find the foreign average rate.
Pick the lower rate. Multiply by the foreign income.
Subtract from Indian tax. Check that relief does not exceed foreign tax actually paid on that income, which is a sanity check.

Common mistakes in Double Taxation and Methods of Relief

Mixing up juridical and economic double taxation.
Both involve the same income taxed twice, so the difference in who is taxed is missed.
Fix: Ask: same taxpayer or different taxpayers? Same taxpayer is juridical. Different taxpayers (company and shareholder) is economic.
Using the marginal or slab rate as the Indian rate in section 160.
Students use the highest slab rate they know.
Fix: Use the average rate: Indian tax after Act reliefs divided by total income.
Allowing the full foreign tax as credit.
Students think credit equals tax paid abroad.
Fix: Under section 160 relief is on doubly taxed income at the lower of the two rates, so it can be less than the foreign tax paid.
Applying section 160 where a treaty exists.
Both sections deal with relief, so they get confused.
Fix: Section 160 applies only for countries with which there is no agreement under section 159. Check the treaty first.
Confusing exemption with deduction method.
Both reduce Indian tax, so they sound alike.
Fix: Exemption removes the foreign income from tax. Deduction only lowers the income by the foreign tax amount, and the rest is still taxed.
Giving a non-resident treaty relief without the residency certificate.
Students focus on the rate and forget the condition.
Fix: State that section 159(8) needs a residency certificate from the other government plus prescribed documents and information.

Worked examples

Example 1

Mr. Rohan Mehta, resident in India, has total income of ₹20,00,000 including ₹4,00,000 earned in a country with no agreement with India. Indian tax on total income (after Act reliefs) is ₹3,00,000. He paid ₹80,000 tax in that country on the ₹4,00,000 income. Compute the relief and net Indian tax.

Show the solution

No agreement exists, so section 160 applies. He is a resident and the income accrued outside India.
Indian rate = 3,00,000 ÷ 20,00,000 = 15%.
Foreign rate = 80,000 ÷ 4,00,000 = 20%.
Lower rate = 15%.
Relief = 15% × 4,00,000 = ₹60,000.
Net Indian tax = 3,00,000 − 60,000 = ₹2,40,000.

Answer: Relief under section 160 is ₹60,000 and net Indian tax payable is ₹2,40,000.

Example 2

Priya Textiles Ltd, resident in India, earns ₹10,00,000 from a country with no treaty, on which it paid foreign tax of ₹1,00,000. Indian tax on total income of ₹50,00,000 is ₹12,50,000 after Act reliefs. Find the relief and net tax under section 160. For comparison with the deduction method, assume tax at a flat 25% on total income reduced by the foreign tax.

Show the solution

Section 160 applies as no agreement exists.
Indian rate = 12,50,000 ÷ 50,00,000 = 25%.
Foreign rate = 1,00,000 ÷ 10,00,000 = 10%.
Lower rate = 10%.
Relief = 10% × 10,00,000 = ₹1,00,000.
Net Indian tax = 12,50,000 − 1,00,000 = ₹11,50,000.
Deduction method for comparison (flat 25% assumed): income = 50,00,000 − 1,00,000 = 49,00,000. Tax at 25% = ₹12,25,000.
On these figures, relief under section 160 leaves lower tax (₹11,50,000) than the deduction method (₹12,25,000). Relief of ₹1,00,000 reduces tax rupee for rupee, while deduction saves only 25% of ₹1,00,000 = ₹25,000.

Answer: Relief is ₹1,00,000 and net Indian tax is ₹11,50,000. Under the deduction method, with a flat 25% assumed, tax would be ₹12,25,000, so the section 160 relief gives the lower tax here.

Exam tips

Start every answer by stating whether a treaty exists. It decides between section 159 and section 160.
In numericals, show both average rates in separate lines. Marks are given for each rate and the lower-rate choice.
For theory, give one real example for each type: royalty taxed in two countries for juridical, company profit and dividend for economic.
In case-based answers, quote section 159(8) for non-residents (residency certificate and prescribed documents). Also note that under section 159(6) Chapter XI applies even if its provisions are not beneficial.
Compare exemption, credit and deduction in a short list with one line each. It scores well in 5 to 7 mark questions.

Practice questions from Double Taxation Avoidance Agreements (DTAA)

Double Taxation and Methods of Relief in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Double Taxation and Methods of Relief: frequently asked questions

What is the difference between juridical and economic double taxation?

Juridical double taxation taxes the same person on the same income in two countries. Economic double taxation taxes the same income in the hands of two different persons, such as company profit and the dividend paid out of it.

What is the difference between the exemption method and the credit method?

Under the exemption method, the residence country does not tax the foreign income. Under the credit method, it taxes that income but allows the foreign tax paid as a credit against its own tax.

What are unilateral and bilateral relief?

Bilateral relief comes from a treaty between two countries, which in India is covered by section 159 of the Income-tax Act, 2025. Unilateral relief is given under a country's own law when no treaty exists, which in India is section 160.

When can a non-resident claim treaty relief in India?

Under section 159(8), only when the non-resident obtains a certificate of residence from the government of the other country or specified territory and provides the prescribed documents and information. Without these, the relief cannot be claimed.