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Concept of tax credit

An Indian resident can obtain tax credit in India on tax paid on the income earned abroad (called Doubly Taxed Income or DTI) in accordance with the DTAA between India and that country (tax credit is known as Foreign Tax Credit or FTC). Similarly, a non-resident investor is entitled to tax credit in his home jurisdiction as per the DTAA, with respect to any tax paid in India on the DTI. The amount of tax credit permitted cannot exceed the maximum amount of tax payable in the home state (of which the tax payer is the ‘resident’).
For example, assume that ABC Ltd., an Indian company earns USD 80,000 from employment in USA. If tax rate in India is 30% whereas in USA taxes have been paid at 40%, the maximum credit in India on such income will be restricted to USD 24,000 (30% of USD 80,000). However, where the tax paid in USA is only at 20%, tax credit would be limited to USD 16,000 (20% of USD 80,000). Hence, India will only provide tax credit up to a maximum of 30%.
Detailed provisions on the method of computing foreign tax credit and maximum limit on the foreign tax credit will depend on the provisions of the DTAA.
The next topic discusses capital gains tax under Indian tax laws. 

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