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Direct and Indirect Taxation · Deductions, Rebate and Relief

Relief for Income Taxed Abroad and Other Reliefs

Updated 10 October 2026 · Fact-checked

Relief is a reduction in the tax computed, not in income. If a resident's foreign income is taxed abroad and in India, double taxation relief gives credit for the foreign tax, limited to the Indian tax on that income. If arrears or advance salary pushes you into a higher slab, a separate relief spreads it back over the years it belongs to.

Understand Relief for Income Taxed Abroad and Other Reliefs

Three words confuse students: deduction, rebate and relief. A deduction is subtracted from gross total income, so it reduces income before tax is worked out. A rebate and a relief are both subtracted from the tax itself. A rebate is a fixed-condition concession, such as the rebate for resident individuals with total income up to a limit. A relief is a targeted adjustment for a specific situation.

The first situation is double taxation. A resident of India is taxed on global income. If a resident earns income abroad, the other country may tax it at source, and India taxes it again. To avoid this, the law allows a credit for the foreign tax. Where India has a tax treaty (DTAA) with that country, the relief is as per the terms of the treaty. Where there is no treaty, India gives unilateral relief. In both cases, the credit can never exceed the Indian tax on that same income. India does not refund foreign tax in excess of Indian tax.

The second situation is salary received in arrears or in advance. Suppose you receive in one year salary that belongs to an earlier year. The whole amount is taxed in the year of receipt, and it may push you into a higher slab. The relief compares the extra tax you pay now with the extra tax you would have paid if the amount had been taxed in the year it belongs to. If the difference is positive, you get that amount as relief. The same logic applies to advance salary and to family pension arrears.

Both reliefs are claimed after tax on total income is computed, and both need supporting documents or a prescribed statement. Your job in the exam is to compute the tax first, then apply the relief with the correct limit.

Key rules to remember

Indian average rate of tax
Indian average rate = Tax on total income (before relief) ÷ Total income × 100
Used for unilateral relief. Compute on total income including the foreign income.
Foreign average rate of tax
Foreign rate = Foreign tax paid ÷ Foreign income doubly taxed × 100
Use the same income that India also taxes.
Unilateral relief (no DTAA)
Relief = Doubly taxed income × lower of (Indian average rate, Foreign average rate)
Applies only to a resident. The credit never exceeds the foreign tax actually paid.
Relief under a DTAA
Relief = as per the terms of the treaty, limited to the Indian tax on that income
Follow the treaty method given in the question. Do not apply the unilateral method by default. The credit still cannot exceed the Indian tax on that income.
Relief for arrears or advance salary
Relief = (Tax on current total income including arrears − Tax on current total income excluding arrears) − (Tax on earlier year's total income including arrears − Tax on earlier year's total income excluding arrears)
Relief is given only if the result is positive. Do this separately for each year to which arrears relate.
Deduction vs rebate vs relief
Deduction: reduces income. Rebate and relief: reduce tax.
A common one-line answer for the difference question.

How to solve Relief for Income Taxed Abroad and Other Reliefs questions

Use this order for any question on foreign tax credit or arrears relief. Always compute the normal tax first.

  1. 1Compute total income under all heads, including the foreign income or the arrears, and compute tax on it using the slab rates given.
  2. 2Identify the type of relief: foreign tax credit (check residence and whether a DTAA exists) or arrears or advance salary relief.
  3. 3For foreign tax: work out the doubly taxed income, the foreign tax paid, the Indian average rate and the foreign average rate.
  4. 4For unilateral relief, apply the lower-of rule: take the lower rate on the doubly taxed income, and cap the credit at the foreign tax paid. Under a DTAA, follow the treaty terms and cap the credit at the Indian tax on that income.
  5. 5For arrears: compute tax on current income with and without the arrears, then tax on the earlier year's income with and without them, using that year's slabs.
  6. 6Subtract the earlier-year increase from the current-year increase. If the result is zero or negative, no relief is allowed.
  7. 7Deduct the relief from the tax computed in step 1, then add surcharge and cess if the question asks for them. Show the final tax payable.

Quickest way: Lower-of check for relief

When to use it: Use this when time is short and the question gives rates or tax figures directly.

  1. For foreign tax, write three numbers: foreign tax paid, Indian tax on the same income at the Indian average rate, and the result of the lower rate times income. The smallest sensible figure is the relief.
  2. For arrears, write only two increments: current-year extra tax and earlier-year extra tax. The relief is the first minus the second, if positive.
  3. Deduct relief from the tax before cess. Add cess last.

Common mistakes in Relief for Income Taxed Abroad and Other Reliefs

  • Treating relief as a deduction from income

    The words deduction, rebate and relief sound alike.

    Fix: Remember that relief reduces tax, not income. Compute total income and tax first, then subtract relief.

  • Giving credit for the full foreign tax paid

    Students assume foreign tax is always fully creditable.

    Fix: Cap the credit at the Indian tax on that income. Any excess foreign tax is not refunded or carried forward.

  • Using the average rate on income excluding the foreign income

    Students compute the Indian rate on India-sourced income only.

    Fix: Compute tax and the average rate on total income including the foreign income.

  • Allowing foreign tax relief to a non-resident

    Students ignore the residence condition.

    Fix: Check residential status first. The credit is available to a resident, because only residents are taxed in India on global income.

  • Computing arrears relief using current-year slabs for the earlier year

    Students forget that the earlier year may have different rates.

    Fix: Use the rates and income of the year to which the arrears relate. If the question gives only one slab table, state that assumption.

  • Claiming relief when the computation gives a negative figure

    Students subtract mechanically and deduct the answer.

    Fix: If current increment is not more than the earlier-year increment, relief is nil. Never add a negative relief to the tax.

Worked examples

Example 1

Mr. Arjun Mehta, a resident individual, has total income of ₹20,00,000 for the tax year, which includes ₹4,00,000 earned in a country with which India has no tax agreement. He paid tax of ₹1,00,000 on that income abroad. Using these slab rates, compute the relief and net tax: nil up to ₹4,00,000; 5% on ₹4,00,001 to ₹8,00,000; 10% on ₹8,00,001 to ₹12,00,000; 15% on ₹12,00,001 to ₹16,00,000; 20% on ₹16,00,001 to ₹20,00,000. Ignore rebate, surcharge and cess.

Show the solution
  1. Tax on ₹20,00,000: 5% of ₹4,00,000 = ₹20,000; 10% of ₹4,00,000 = ₹40,000; 15% of ₹4,00,000 = ₹60,000; 20% of ₹4,00,000 = ₹80,000. Total = ₹2,00,000.
  2. Indian average rate = ₹2,00,000 ÷ ₹20,00,000 = 10%.
  3. Foreign average rate = ₹1,00,000 ÷ ₹4,00,000 = 25%.
  4. Lower rate = 10%. Relief = 10% of ₹4,00,000 = ₹40,000.
  5. Check the cap: ₹40,000 is below the foreign tax paid of ₹1,00,000, so the credit is ₹40,000.
  6. Net tax = ₹2,00,000 − ₹40,000 = ₹1,60,000.

Answer: Relief is ₹40,000 and net tax payable is ₹1,60,000. The excess foreign tax of ₹60,000 is not allowed as credit in India.

Example 2

Ms. Kavita Rao received arrears of salary of ₹3,00,000 in the current tax year, relating to an earlier year. Her current total income including the arrears is ₹14,00,000. Her total income of the earlier year, excluding the arrears, was ₹7,00,000. Use these slab rates for both years: nil up to ₹4,00,000; 5% on ₹4,00,001 to ₹8,00,000; 10% on ₹8,00,001 to ₹12,00,000; 15% on ₹12,00,001 to ₹16,00,000. Compute the relief and tax payable. Ignore rebate, surcharge and cess.

Show the solution
  1. Tax on ₹14,00,000: ₹20,000 + ₹40,000 + 15% of ₹2,00,000 (₹30,000) = ₹90,000.
  2. Current income excluding arrears = ₹11,00,000. Tax: ₹20,000 + 10% of ₹3,00,000 (₹30,000) = ₹50,000.
  3. Current-year increment = ₹90,000 − ₹50,000 = ₹40,000.
  4. Earlier year including arrears = ₹7,00,000 + ₹3,00,000 = ₹10,00,000. Tax: ₹20,000 + 10% of ₹2,00,000 (₹20,000) = ₹40,000.
  5. Earlier year excluding arrears = ₹7,00,000. Tax: 5% of ₹3,00,000 = ₹15,000.
  6. Earlier-year increment = ₹40,000 − ₹15,000 = ₹25,000.
  7. Relief = ₹40,000 − ₹25,000 = ₹15,000, which is positive, so it is allowed.
  8. Tax payable = ₹90,000 − ₹15,000 = ₹75,000.

Answer: Relief for arrears is ₹15,000 and tax payable is ₹75,000.

Exam tips

  • Write one line at the start: relief reduces tax, deduction reduces income. This secures marks in theory parts and the MCQ on the difference.
  • In foreign tax problems, always show the three figures: Indian rate, foreign rate and the lower rate, followed by the cap on foreign tax paid.
  • In arrears problems, lay out the four tax computations in a neat list. Step marks are given for each.
  • Check the question for residence and treaty status. A line saying the assessee is a resident earns marks and avoids errors.
  • In MCQs, test the options with the lower-of rule: the relief cannot exceed the foreign tax paid or the Indian tax on that income.

Practice questions from Deductions, Rebate and Relief

Relief for Income Taxed Abroad and Other Reliefs: frequently asked questions

What is the difference between deduction, rebate and relief?

A deduction reduces gross total income before tax is calculated. A rebate reduces the tax computed, subject to conditions such as the total income limit. A relief also reduces tax and applies to a specific situation, such as foreign tax credit or arrears of salary.

Who can claim relief for income taxed abroad?

Only a resident can claim it, because a resident is taxed in India on global income. The income must be taxed in both countries. The credit is limited to the Indian tax on that income.

How is relief on arrears of salary calculated?

Compute the extra tax caused by the arrears in the current year. Then compute the extra tax the arrears would have caused in the year they relate to. The relief is the first minus the second, and it is allowed only when positive.

What if the foreign tax is more than the Indian tax on the same income?

The credit is restricted to the Indian tax on that income. The excess foreign tax is not refunded and gives no relief in India.