How to claim tax relief for doubly taxed USA income using DTAA deduction method?
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Whenever there is case of double taxation , one must figure out what is the method by which the resident country offers tax relief with the source country - whether it is tax relief by credit , exemption or deduction ( we presume mostly that Bilateral agreements are signed )...when bilateral agreements are not signed , then the unilateral method of applying tax relief by lower of average tax rates of resident and source country on the doubly taxed income under section 91 applies ,
In the case of USA , we studied the comprehensive bilateral agreement and discovered that the tax relief for a indian resident who has suffered double taxation on american income both in america and India can use deduction method to seek tax relief on such doubly taxed american income,
Under deduction method , the amount of eligible tax paid overseas can be reduced from the total income fro the corresponding head
In USA , one pays federal taxes and states taxes
Under Federal taxes , again there is fed tax , medicare and Old age insurance heads towards which tax gets deducted
Of all this eligible heads for tax relief are only federal head and under federal also the medicare , medicare additional and the fed tax
Here , say assesse stays 9 months in India and 3 months in america . So he is a resident and therefore the american incoe bvecomes taxable in India as well . He has already paid taxes ( Federal and state ) on that american income in America He earn 10 lakhs in america and say pay 2 lakhs towards Fed tax and 1 lakh towards medicare , we can claim deduction benefit of 3 lakhs from the salary income
Also since we are considering now the 10 lakhs in resident scope so tax benefits under allowances like HRA apply ..Say HRA exemption is further 2 lakhs
So taxable income from America will now reduce to 10 - 3 -1 = 6 lakhs
Say the resident earnt 5 lakhs ( net ) in india during his stay in india
So now his gross total income is 6 + 5 lakhs = 11 lakhs only
Assuming saving 1 lakh . his taxable total income is 10 lakhs
On this 10 lakhs therefore his indian tax liability as per slabs arise
In case More TDS has been deducted , he will be eligible for refund
In our case we discovered , that for the assesse , the deductor while giving tax relief correctly using deduction method failed to give rebate for the fed taxes and had considered only the medical and the rent rebate !
So at the time of filing return , we reduce the american income further the fed tax component and thereby reducing total income and thereby tax liability
Since the deductor had however already deducted TDS on earlier bigger amount ( not considering the eligible Fed tax ) into account , so clearly the TDS deducted exceeds tax liability as per slabs qualifying the case for a refund
And that's it - all that ends well is well !
The case for tax filing AY 2015 16 ends here!
Was fantastic learning for me and i hope you too !
Thanks Deepak , without your willingness to share critical; data , it would not have been possible for me to ever explain tax releif using deduction method on a live case
I can easily guarantee that no book , no tutorial has dared to attempt this
But finally this is what you people face , i dont understand why we people hide things ...until more people like you , me come up and take this mission forward only ignorance shall thrive !
Hope to carry the friendship forward!
Cheers ,
Amlan Dutta
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