Understanding Double Taxation and Its Impact on Global Traders

In a world where capital flows freely across borders, investors and traders increasingly engage in international markets. An Indian investor may trade U.S. equities, hold European bonds, or participate in cryptocurrency exchanges registered overseas. While this global diversification provides greater opportunities, it also brings with it a major challenge: double taxation.

Double taxation occurs when the same income is taxed by two or more countries. For global traders, especially Indian residents who must declare their worldwide income, this can significantly reduce profitability. Understanding how double taxation works, the tax rules in India, and the mechanisms available to mitigate its impact is crucial for anyone trading internationally.

This article explores double taxation from an Indian taxation perspective, how it affects global traders, the role of treaties like Double Taxation Avoidance Agreements (DTAAs), and the strategies investors can use to stay compliant while maximizing returns.

What Is Double Taxation?

Double taxation is the imposition of tax by two jurisdictions on the same income. For Indian traders, this typically arises when:

1. Source Country Taxation – The country where the income is generated (e.g., the U.S. on stock dividends) levies a tax.

2. Residence Country Taxation – India taxes residents on their global income, which means the same dividend is taxed again in India.

This overlapping tax liability leads to double taxation. Without relief, traders may face an effective tax rate far higher than expected, cutting into profits.

How Double Taxation Affects Indian Global Traders

1. Reduced Investment Returns

When the same income is taxed twice, net returns diminish. For example, if U.S. dividends are taxed at 25% abroad and again at the Indian slab rate (say 30%), the effective tax burden could be over 45%.

2. Higher Compliance Burden

Indian traders must report all foreign income in their ITR under the Schedule FSI (Foreign Source Income) and claim relief under Schedule TR (Tax Relief) if eligible. For traders with multiple jurisdictions, this becomes highly complex.

3. Crypto and Digital Asset Traders

Cryptocurrency presents new challenges. Suppose an Indian resident trades on a foreign exchange. The profits may be taxed abroad, while India taxes it at a flat 30% on Virtual Digital Assets (VDAs) plus surcharge and cess. Without treaty clarity, double taxation becomes a real possibility.

4. Increased Record-Keeping Requirements

Global traders must maintain details such as transaction reports, tax deducted at source (TDS) abroad, and foreign tax credit (FTC) documents to ensure compliance.

Double Taxation in Practice: An Indian Example

Imagine an Indian trader who invests in U.S. equities:

• Dividend declared: $1,000

• U.S. withholding tax: 25% ($250 deducted)

• Amount received: $750

Now, in India:

• The full $1,000 must be reported as income.

• Taxed as per slab rate (say 30% = $300).

• Relief: Under India-U.S. DTAA, the $250 paid in the U.S. can be claimed as a foreign tax credit.

• Net Indian tax payable: $50 (i.e., $300 – $250).

Without DTAA relief, the trader would have paid $550 in taxes on $1,000 income, a huge reduction in returns.

Mechanisms to Avoid Double Taxation in India

India has entered into over 90 DTAAs with countries worldwide, including the U.S., U.K., Singapore, and UAE. These treaties provide two main methods to avoid double taxation:

1. Exemption Method

Income taxed in the foreign country is exempt in India. However, this method is less common in India’s treaties.

2. Tax Credit Method

Income is taxed in both countries, but India allows a credit for the tax already paid abroad. This is the most widely used method under Indian DTAAs.

For example, if 20% tax is withheld in the foreign country and the Indian tax rate is 30%, the taxpayer pays the balance 10% in India.

The Role of Foreign Tax Credit (FTC)

The CBDT (Central Board of Direct Taxes) has issued detailed rules for claiming Foreign Tax Credit under Rule 128 of the Income Tax Rules. Key requirements include:

• FTC can only be claimed if tax has actually been paid abroad.

• Supporting documents such as Form 67 must be filed before the due date of ITR.

• FTC is available against income tax, surcharge, and cess, but not against interest or penalty.

This ensures traders are not taxed twice unfairly, but compliance requires careful documentation.

Double Taxation and Crypto Traders

The rise of digital assets complicates double taxation further. Many foreign exchanges deduct tax at source or require traders to declare residency for compliance. Meanwhile, India’s taxation of crypto is stringent, with:

• 30% flat tax on gains

• 1% TDS on transactions

• No offset of losses

If a crypto trader faces withholding tax abroad and then pays India’s flat tax, the effective burden could be overwhelming. Clearer treaty frameworks are needed to address this emerging challenge.

Common Mistakes Indian Traders Make

1. Not Reporting Foreign Income – Even if tax has been paid abroad, not declaring it in India can attract penalties.

2. Filing Wrong ITR Forms – Traders with capital gains must use ITR-2, while those with business income (e.g., frequent trading) must use ITR-3.

3. Ignoring Form 67 – Without filing this, FTC cannot be claimed.

4. Not Understanding DTAA Provisions – Each treaty has different terms; misinterpretation can lead to excess tax or non-compliance.

5. Neglecting Currency Conversion – Income must be converted to INR using prescribed RBI rates.

Strategies to Minimize the Impact of Double Taxation

• Choose Investment Destinations Wisely: Prefer countries with favorable DTAAs with India.

• Use AI and Automation Tools: Advanced platforms help track income, taxes, and ensure accurate filing.

• Consult Professionals: Chartered accountants specializing in international taxation can guide on complex cases.

• File on Time: Delayed ITR filing may lead to disallowance of FTC claims.

• Diversify Smartly: Allocate assets considering not just returns but also tax implications.

Why Education on Double Taxation Matters

For aspiring traders and students of finance, learning about double taxation is as important as mastering trading strategies. Without tax awareness, even the best investment decisions can result in lower net returns.

This is why platforms like Druvaxio are emphasizing financial literacy, ensuring that traders and students understand taxation alongside investment techniques. Knowledge about double taxation is not just an academic exercise—it directly impacts profitability and compliance.

The Future of Double Taxation in India

As global trade and digital assets expand, India’s tax system is evolving. Possible future developments include:

• Digital Taxation Rules: More clarity on cross-border digital asset transactions.

• Simplified FTC Rules: Streamlining Form 67 and easing compliance for retail investors.

• Bilateral Revisions: Updating DTAAs to account for new asset classes like crypto and NFTs.

• Global Consensus: Efforts like OECD’s framework for international tax reform may reduce disputes.

For global traders, staying updated on these changes is essential.

Conclusion

Double taxation remains one of the biggest challenges for Indian traders operating in international markets. It erodes returns, complicates compliance, and creates confusion around reporting obligations. However, with proper knowledge of DTAAs, effective use of Foreign Tax Credit, and careful compliance, the burden can be reduced significantly.

For Indian investors, the key lies in planning: selecting countries with favorable treaties, maintaining accurate records, and filing returns correctly. Platforms like druvaxio.it remind us that financial education is the backbone of sustainable trading. By understanding how double taxation works and how to navigate it, global traders can protect their profits and achieve long-term success.