Income Tax Act 1961 Section 87
Income Tax Act, 1961 Section 87 provides relief for double taxation to avoid taxing the same income twice.
Income Tax Act Section 87 deals with relief from double taxation. It ensures that income taxed in India and another country is not taxed twice. This section is crucial for taxpayers earning income from foreign sources or cross-border transactions. Professionals, businesses, and individuals must understand it to claim tax relief and avoid paying excess tax.
This provision applies when a taxpayer has paid tax both in India and abroad on the same income. It helps in reducing the overall tax burden by allowing credit or exemption for foreign taxes paid. Understanding this section is essential for compliance and effective tax planning.
Income Tax Act Section 87 – Exact Provision
This section provides a mechanism to avoid double taxation by granting relief through deduction or credit. The relief is limited to the lower of the foreign tax paid or the Indian tax payable on the same income. This ensures fairness and prevents excessive taxation on cross-border income.
Applies to income taxed both in India and abroad.
Allows deduction of foreign tax paid from Indian tax liability.
Relief limited to the lesser of foreign tax or Indian tax on the income.
Helps avoid double taxation and reduce tax burden.
Essential for taxpayers with foreign income or investments.
Explanation of Income Tax Act Section 87
This section states that tax paid outside India on income also taxable in India can be deducted from Indian tax liability.
Applies to individuals, firms, companies, and other assessees.
Relevant when income is taxable in both India and a foreign country.
Foreign tax must be actually paid to claim relief.
Relief is given only for the tax on the same income.
Prevents double taxation on cross-border income.
Purpose and Rationale of Income Tax Act Section 87
The section aims to provide relief from double taxation, promoting fairness and encouraging international trade and investment.
Ensures fair taxation by avoiding taxing the same income twice.
Prevents tax evasion by clarifying tax credits.
Encourages compliance and cross-border economic activity.
Supports government revenue while protecting taxpayers.
When Income Tax Act Section 87 Applies
This section applies during the assessment year when income is taxable both in India and abroad.
Relevant for financial years with foreign income.
Applies when foreign tax is paid on income also taxable in India.
Depends on residential status and source of income.
Exceptions may apply if no double taxation treaty exists.
Tax Treatment and Legal Effect under Income Tax Act Section 87
Income taxed abroad and in India can get relief by deducting foreign tax from Indian tax payable. This reduces total tax liability and avoids double taxation. The section interacts with Double Taxation Avoidance Agreements (DTAAs) and other provisions for tax credits.
Foreign tax credit reduces Indian tax liability.
Relief limited to the lower of foreign or Indian tax.
Ensures correct computation of total income and tax.
Nature of Obligation or Benefit under Income Tax Act Section 87
This section provides a conditional benefit of tax relief. Taxpayers who pay foreign tax can claim deduction from Indian tax. It creates a compliance duty to prove foreign tax paid and claim relief properly.
Creates a tax relief benefit, not a liability.
Applies to taxpayers with foreign tax payments.
Mandatory to claim relief with proper documentation.
Conditional on actual foreign tax payment.
Stage of Tax Process Where Section Applies
The section applies mainly at the assessment stage when tax returns are filed and tax liability is computed.
Income accrual or receipt triggers tax liability.
Foreign tax payment must be documented.
Relief claimed during return filing and assessment.
May be reviewed during reassessment or appeal.
Penalties, Interest, or Consequences under Income Tax Act Section 87
Failure to claim relief properly can lead to higher tax liability. Incorrect claims may attract penalties or interest. However, the section itself does not impose penalties but non-compliance consequences apply under general tax laws.
Interest on unpaid tax if relief not claimed timely.
Penalties for incorrect or fraudulent claims.
Possible reassessment or scrutiny if discrepancies found.
No direct prosecution under this section.
Example of Income Tax Act Section 87 in Practical Use
Assessee X, an Indian resident, earns dividend income from Company Y in the UK. The UK tax authority deducts tax on the dividend. Assessee X pays tax on the same dividend income in India. Under Section 87, Assessee X claims relief for the UK tax paid, reducing Indian tax liability.
Prevents double taxation on foreign dividend income.
Ensures fair tax treatment for cross-border income.
Historical Background of Income Tax Act Section 87
Originally introduced to address double taxation issues for foreign income, Section 87 has evolved with amendments and judicial interpretations. Finance Acts have refined its scope and interaction with DTAAs.
Introduced to avoid double taxation on foreign income.
Amended to incorporate foreign tax credit principles.
Judicial rulings clarified scope and application.
Modern Relevance of Income Tax Act Section 87
In 2026, with increasing globalization, Section 87 remains vital. Digital filings and AIS facilitate claiming foreign tax credits. Faceless assessments ensure transparency. It benefits individuals and businesses with international income.
Supports digital tax compliance and foreign tax credit claims.
Relevant for taxpayers with cross-border transactions.
Aligns with international tax treaties and policies.
Related Sections
Income Tax Act Section 4 – Charging section.
Income Tax Act Section 5 – Scope of total income.
Income Tax Act Section 90 – Agreements with foreign countries.
Income Tax Act Section 91 – Relief in absence of DTAA.
Income Tax Act Section 139 – Filing of returns.
Income Tax Act Section 143 – Assessment.
Case References under Income Tax Act Section 87
- Commissioner of Income Tax v. P.V.A.L. Kulandagan Chettiar (1965) 56 ITR 745 (SC)
– Established principles on relief for double taxation under Indian law.
- Union of India v. Azadi Bachao Andolan (2003) 263 ITR 706 (SC)
– Clarified scope of foreign tax credit and treaty benefits.
Key Facts Summary for Income Tax Act Section 87
Section: 87
Title: Relief for Double Taxation
Category: Relief, Double Taxation Avoidance
Applies To: Individuals, Firms, Companies, Assessees with foreign income
Tax Impact: Reduces Indian tax liability by foreign tax paid
Compliance Requirement: Proof of foreign tax payment, claim in return
Related Forms/Returns: Income Tax Return, Form 67 for foreign tax credit
Conclusion on Income Tax Act Section 87
Section 87 is a critical provision that protects taxpayers from being taxed twice on the same income. It promotes fairness and encourages international business and investment by providing relief through foreign tax credits.
Understanding and correctly applying this section helps taxpayers reduce their overall tax burden. It also aligns Indian tax laws with global standards, ensuring compliance and facilitating cross-border economic activities.
FAQs on Income Tax Act Section 87
What is the main purpose of Section 87?
Section 87 aims to provide relief from double taxation by allowing deduction of foreign tax paid from Indian tax liability on the same income.
Who can claim relief under Section 87?
Individuals, firms, companies, and other assessees who pay tax abroad on income also taxable in India can claim relief under this section.
Is relief under Section 87 automatic?
No, taxpayers must claim relief by providing proof of foreign tax paid and filing the claim in their income tax returns.
Does Section 87 apply if there is no Double Taxation Avoidance Agreement?
Yes, relief can be claimed under Section 87 even without a DTAA, but Section 91 specifically deals with such cases.
What documents are needed to claim relief under Section 87?
Taxpayers need to submit proof of foreign tax payment, such as tax payment certificates, and file Form 67 along with their income tax return.