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

Mr. Arjun, a resident in India, earned foreign income from a country with which India has no agreement under section 159. Indian rate of tax on the doubly taxed income is 30% and the rate of tax of that country is 20%. The doubly taxed income is ₹5,00,000 and tax actually paid abroad is ₹1,00,000. What is the deduction from Indian income-tax under section 160?

The deduction is ₹1,00,000. Section 160 grants relief on the doubly taxed income at the lower of the Indian rate and the foreign rate. The lower rate is 20%, and 20% of ₹5,00,000 is ₹1,00,000.

  1. A₹1,50,000
  2. B₹1,00,000Correct
  3. C₹2,50,000
  4. D₹50,000

Explanation

The deduction is computed on the doubly taxed income at the lower of the Indian rate (30%) and the foreign rate (20%). 20% of ₹5,00,000 equals ₹1,00,000. Using the Indian rate gives ₹1,50,000, which is wrong because the higher rate is not allowed.

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