Residence vs source: the master frame

5 min · For educational purposes only

Every cross-border income event is taxed twice in principle — once where it's earned (source) and once where you live (residence). Treaties exist to prevent that double hit.

An Indian resident buying a US stock generates US-source dividend income. The US says: that's our income, we'll withhold. India says: you're our resident, your worldwide income is ours. Without a treaty, both rules apply and you pay twice.

The India-US Double Taxation Avoidance Agreement (DTAA) reconciles this. The US gets to withhold dividends at a treaty rate (25% for individuals, 15% in some structures). India taxes the same dividend as part of your global income but gives you a Foreign Tax Credit for the US withholding. Net effect: you pay the higher of the two rates, not the sum.

Foreign Tax Credit (FTC)

The FTC mechanism in section 90 of the Income Tax Act lets you offset foreign tax paid against your Indian liability on the same income. You must file Form 67 before filing your ITR — miss the form and you forfeit the credit.

Key takeaways

Source taxes first (usually via withholding), then residence taxes the same income with credit.
Without a treaty position, you can be taxed twice on the same dollar.
Form 67 is the operational key to claiming Foreign Tax Credit in India.