Double Taxation Relief Methods for NRIs: The Exemption Method vs the Credit Method, and Why Which One Applies Decides Your Effective Rate

A 41-year-old engineering manager in London and a 41-year-old of identical income in Dubai both redeem the same Indian equity mutual fund in FY 2025-26 and book a long-term gain of Rs 20,00,000. They earn the same salary, hold the same fund, sell on the same day. The Londoner ends up paying tax on that gain. The Dubai resident, on the current tribunal reading, pays nothing on it anywhere. Same rupee of gain, same treaty network, wildly different result. The reason is not a loophole or a clever adviser. It is that double taxation is relieved in two fundamentally different ways, and the two NRIs fall under different ones.

The 30-second answer: Double taxation is relieved by one of two methods, and which applies decides your effective rate. Under the exemption method, income is taxed in only one country and left out of the other's base entirely, so it is taxed once, sometimes at zero where the assigned country does not tax that head (a UAE resident's Indian mutual fund gain). Under the credit method, both countries tax the income but the residence country credits the foreign tax paid, capped at its own tax on that slice, so you pay the higher of the two rates, once, and never reach zero. India's treaties (US, UK, UAE, Canada, Australia, Singapore) run mostly on the credit method through their elimination article, but use the exemption method through distributive articles for salary, some pensions, and the capital-gains residual clause. Treaty relief is claimed under Section 90; with no treaty, India gives unilateral credit relief under Section 91. Paperwork is the TRC, Form 10F and Form 67.

This guide assumes you already know roughly what a Double Taxation Avoidance Agreement is and what your residency status means. If those are shaky, start with DTAA relief for NRIs and NRI residency and the RNOR rules. What follows is the layer underneath the treaty rate tables: the two relief methods themselves, how the major treaties pick one or the other for employment, dividends, interest, capital gains and pensions, the difference between bilateral relief under Section 90 and unilateral relief under Section 91, and a worked example running the same Indian income through both methods so you can see the effective rate move. The mechanism you fall under is not a detail. It is the single fact that decides whether your income is taxed once at a low rate, once at a high rate, or not at all.

Two methods, one purpose, very different arithmetic

Every double taxation treaty exists to stop one slice of income being fully taxed twice. There are only two ways to achieve that, and the entire architecture of every treaty India has signed is built from these two bricks.

The exemption method says: this income belongs to one country, so the other country leaves it out of its tax base entirely. The income is taxed once, at the rate of the country that gets to tax it, and the second country acts as if the income did not exist. Salary for work physically done abroad is the textbook case. Most treaties make it taxable only in the country where the work happens, so for a non-resident, India simply does not tax it. There is no Indian tax to compute, no credit to claim, nothing to file in India for that income at all.

The credit method says: both countries may tax this income, but the residence country will subtract the tax already paid in the source country from its own bill on the same slice. The income is taxed in both, then one tax is netted against the other. The credit is capped at the residence-country tax on that income, so it can erase the source-country tax but never refund more than the home tax. The result is arithmetically clean: you pay the higher of the two rates, once. If the source country took less, you top up the gap at home. If the source country took more, the surplus is stranded, because the credit cannot exceed the home tax on that income.

The arithmetic difference is the whole point. Under the credit method, the floor is the higher of the two rates and the outcome is never zero on income both countries actually tax. Under the exemption method, the outcome is the rate of whichever single country gets the income, and if that country happens not to tax that head, the income is taxed nowhere. That is not a glitch. It is the designed consequence of assigning an income exclusively to one country that chooses not to tax it. The UAE's zero personal tax plus an exemption-method assignment equals zero tax on that income. The same exemption assignment to the UK, which does tax it, equals UK tax. Same method, opposite result, because the assigned country's domestic rate is what fills the gap.

Hold those two methods apart and most of the confusion in cross-border tax dissolves. The rest of this guide is really one question repeated across income types: for your country and your income, is relief coming through the exemption method or the credit method?

How a treaty actually picks the method, article by article

A common misreading is that a treaty as a whole is either an exemption treaty or a credit treaty. That is not how India's treaties work. A single treaty uses both methods at once, and it decides which one applies to a given income through two different sets of articles.

The distributive articles, the ones numbered roughly Articles 6 through 22 in most treaties, allocate the right to tax each income type. Some of them say an income is "taxable only in" one country. That phrasing is the exemption method in action: the other country is shut out, and it relieves double tax by simply not taxing. Other distributive articles say an income "may be taxed in" the source country, which leaves both countries with a claim and hands the problem to the credit method.

The elimination-of-double-taxation article, usually Article 24 in the India-UK and India-US treaties and Article 25 in the India-UAE treaty, is the catch-all. It tells the residence country how to relieve the double tax left over from every "may be taxed" allocation, and for India that mechanism is overwhelmingly the ordinary credit method: India credits the foreign tax against the Indian tax on the same income, limited to the Indian tax on that slice. So when people say "India uses the credit method," they are describing this article. They are right about the leftover income, but they are missing that the distributive articles have already carved out whole income types under the exemption method before the elimination article ever gets a turn.

The practical reading order, then, is: first ask which distributive article governs your income and whether it says "taxable only in" (exemption, taxed in one place) or "may be taxed" (credit, taxed in both and netted). Only if it is the latter do you go to the elimination article to compute the credit. Get that sequence right and you can read your own treaty and predict your result. Get it wrong, treat everything as a credit, and you will over-report exempt income and overpay.

Employment income: the cleanest exemption-method case

Salary for work physically performed abroad is where the exemption method does its most valuable and least appreciated work. Under the dependent-personal-services article (around Article 15 in most treaties), remuneration for employment exercised in the country of residence is generally taxable only in that country. For an NRI, that means salary earned for work done in the UK, the US, the UAE or Canada is taxable only there, and India, treating you as a non-resident, does not tax it at all.

This is exemption, not credit, and the distinction matters even though for a pure non-resident it can look academic. There is no Indian tax on that salary, so there is no Indian credit to claim and no Form 67 to file in India for it. The income is simply outside India's net. I see non-residents anxiously trying to "claim DTAA relief" on foreign salary in their Indian return when there is nothing to relieve, because the exemption article already removed it.

The flip side is salary for work done in India, even if paid abroad. That can be taxed in India under the source rule, and then both countries may reach for it, which throws it into the credit method. This is exactly the straddle-year problem a returning NRI hits: a final foreign paycheck partly attributable to work done in India after the move can fall into the Indian net, and the credit machinery, not the exemption, governs it. Equity compensation sits on this same fault line and has its own treatment in RSU and ESOP taxation for NRIs.

Interest and dividends: almost always the credit method, with a rate cap on top

Indian-source interest and dividends are where most NRIs first meet the credit method, and they show why the credit method and the rate cap are two separate things that work together.

NRO interest is Indian-source and taxable in India, full stop. The interest article (Article 11) does not assign it exclusively to one country; it says India "may tax" it but caps the rate. The domestic TDS rate on NRO interest for a non-resident is 30 per cent plus 4 per cent health and education cess, about 31.2 per cent, and the treaty cuts that to 15 per cent under the India-US, India-UK and India-Canada treaties and 12.5 per cent under the India-UAE treaty. That cap is one mechanism. The second mechanism, separate from it, is what the residence country does with the income: under the credit method it taxes the same interest and credits the Indian tax. NRE and FCNR interest is a different animal: it is exempt in India under Section 10 while you are a non-resident, so there is no Indian tax and no credit question on that, though your residence country may still tax it.

Dividends from Indian companies are taxable in the shareholder's hands since the 2020 abolition of the dividend distribution tax. Article 10 caps the rate, and the ceiling is not uniform: the India-US and India-Canada treaties set 25 per cent for an individual retail holder (the 15 per cent band is only for a company holding at least 10 per cent of the voting stock), the India-UK treaty caps at 15 per cent, and the India-UAE treaty at 10 per cent. In every case the income is taxed in both countries and the residence country gives a credit, so the credit method governs and the cap just sets how much India can take before the credit kicks in.

For a UAE resident there is no second tax to credit, so the entire value of the treaty on interest and dividends is the rate cap, and the credit method is irrelevant because there is nothing on the UAE side to net against. This is the recurring pattern: the credit method only bites when the residence country actually taxes the income. The detailed numbers by country and income live in DTAA relief for NRIs and, on dividends specifically, NRI dividend tax in India.

Capital gains: where the method choice swings the result the most

Capital gains is the income type where the exemption-versus-credit choice produces the most dramatic divergence, because the capital-gains article (Article 13) splits sharply by both treaty and asset.

Gains on shares of an Indian company are taxable in India under domestic law for residents of the US, UK and Canada, whose treaties leave India's source-based right intact under the "may be taxed" phrasing. That is the credit method: India taxes the gain, the residence country taxes it too and credits the Indian tax. There is no zero outcome here.

The exemption method enters through the residual clause of Article 13. Where a gain is on property other than the specifically listed categories, several treaties, including the India-UAE and India-Singapore treaties, assign the taxing right only to the country of residence. That is "taxable only in", the exemption method. And here is the swing: in Saket Kanoi v. DCIT (Delhi ITAT, October 2024) and Anushka Sanjay Shah v. ITO (Mumbai ITAT, March 2025), the tribunals held that Indian mutual fund units are trust securities, not shares of a company, so a fund-unit gain falls into the residual clause, gets assigned exclusively to the UAE or Singapore, and because those countries levy no capital gains tax, the gain is taxed nowhere.

This is the Londoner-versus-Dubai split from the opening. The UK treaty does not give a UK resident the residual-clause exemption on Indian fund gains in the way the UAE and Singapore treaties do for their residents, so the Londoner's gain runs through the credit method and gets taxed. The Dubai resident's identical gain runs through the exemption method into a zero-tax jurisdiction. Two honest cautions: these are tribunal rulings, not settled statute, and the tax department can contest them, so the position is claimed in ITR-2 with a TRC, Form 10F and a CA who will defend it, not assumed. And it covers fund units, not listed shares. The full computation, Section 115AD, the surcharge cap, the no-indexation property rule, sits in capital gains tax for NRIs on shares and mutual funds.

Property is the one asset with no exemption escape under any treaty. Rental income from Indian property and gains on selling it are taxable in India under every treaty, because the immovable-property article gives the country where the land sits the primary right. The residence country taxes the same income and credits the Indian tax, so the credit method always applies and there is no UAE-style zero outcome on real estate. See tax on Indian rental income for NRIs and selling property in India as an NRI.

Pensions: the method depends on the type of pension

Pensions split by type, and the method follows the split. Government pensions, paid for past government service, are usually taxable only in the paying country under the government-service article, which is the exemption method: the other country leaves them out. Private pensions and annuities often follow the residence country under the pensions article, again "taxable only in", exemption again but pointing the other way.

The genuinely unsettled corner is the US Roth IRA. Whether a Roth distribution is shielded by the pension article of the India-US treaty for an India-resident recipient is debated, with no clean authority either way. If you are moving back to India with a Roth, do not treat its tax-free US character as automatically surviving the move under an exemption reading; the position is contested and fact-specific. The fuller treatment is in NRI pension taxation and retirement planning across two countries.

The same method, six treaties: how the majors actually apply it

The method that governs a given income is set by that income's article in your specific treaty, so the same income can be relieved differently depending on where you live. Reading across the majors:

Treaty	Elimination article	Primary leftover method	Notable exemption-method carve-outs for the resident
India-US	Article 25	Credit (with US saving clause)	Salary for work in the US; government pensions
India-UK	Article 24	Credit (with tax-sparing clause)	Salary for work in the UK; government pensions
India-UAE	Article 25	Credit	Capital gains residual clause (fund units); salary for work in the UAE
India-Canada	Article 23	Credit	Salary for work in Canada; government pensions
India-Australia	Article 24	Credit	Salary for work in Australia; government pensions
India-Singapore	Article 25	Credit (with limitation-of-relief clause)	Capital gains residual clause (fund units, post-2017 share rules apply)

Three points hide inside that table. The US treaty carries a saving clause in Article 1 that lets the US tax its citizens and green-card holders on worldwide income regardless of the treaty, so a US-citizen NRI cannot use an exemption article to lift Indian income off the US return; the credit on Form 1116 is the only relief. The UK treaty carries a tax-sparing clause in Article 24, which I cover in the edge cases below. And the India-Singapore treaty carries a limitation-of-relief clause that can withdraw a benefit where income is not remitted to or received in Singapore, so the exemption is conditional, not automatic. The Singapore and Mauritius residual-clause protection on shares was also narrowed by the 2016-17 protocols, which introduced source-based taxation for shares acquired on or after 1 April 2017, with pre-2017 holdings grandfathered. The fund-unit residual-clause reading survives that change because units are not shares.

Section 90 versus Section 91: bilateral relief and the unilateral fallback

India delivers these methods through two domestic provisions, and which one you cite turns only on whether a treaty exists.

Section 90 is the bilateral, treaty route. Where India has a DTAA with the source country, the treaty's distributive and elimination articles govern, carrying both the exemption-method carve-outs and the credit-method computation, plus tie-breaker and limitation rules. All six countries here qualify: India has comprehensive treaties with the US, UK, UAE, Canada, Australia and Singapore, so an NRI in any of them is in Section 90 territory.

Section 91 is the unilateral, no-treaty route. Where India has no treaty with the country that taxed your income, Section 91 still grants relief on its own, and it is purely a credit method: there is no exemption mechanism in Section 91, because exemption requires a treaty to assign the income to one country, and with no treaty there is nothing doing the assigning. The Section 91 credit is the lower of the Indian rate or the foreign rate applied to the doubly-taxed income, on income that is genuinely doubly taxed and that has accrued or arisen abroad. It carries none of a treaty's tie-breaker or saving-clause machinery, and it cannot manufacture a zero outcome the way an exemption article can.

The practical consequence: if you ever earn income in a jurisdiction India has no treaty with, do not expect the exemption-method results you may have heard about. You get unilateral credit relief, the higher of the two rates once, and nothing more. One forward-looking note: under the Income-tax Act, 2025, in force from April 1, 2026, treaty relief moves to Section 159 and unilateral relief to Section 160, with the same logic. For AY 2026-27 you still cite Section 90 and 91, because the 1961 Act governs income up to March 31, 2026. The credit mechanics for income flowing into your Indian return are in foreign tax credit and Form 67.

Worked example: the same Rs income, both methods, two effective rates

Take a single slice of income and run it through each method to see the effective rate move. Assume an NRI has Rs 10,00,000 of income that, on the facts, could be characterised as falling under either an exemption-method article or a credit-method article depending on the country and income type. India's tax on this slice is at an effective 31.2 per cent (30 per cent plus 4 per cent cess, ignoring surcharge for clarity). The residence country's tax on the same slice is at an effective 20 per cent.

Under the credit method (the typical US, UK, Canada, Australia outcome on Indian-source income, or India's outcome on foreign income of a returning resident): both countries tax the Rs 10,00,000. Say India taxes first at 31.2 per cent, Rs 3,12,000. The residence country taxes at 20 per cent, Rs 2,00,000, then credits the foreign tax, capped at its own tax on that slice. Here the residence-country tax of Rs 2,00,000 is fully covered by the Indian Rs 3,12,000, so the residence country collects nil and the surplus Indian tax above Rs 2,00,000 is not refunded. Total tax across both countries: Rs 3,12,000, an effective 31.2 per cent, the higher of the two rates, applied once. Flip which country taxes first and the total is identical; the credit method always lands on the higher rate.

Now reverse the rates to show the cap biting the other way. Say the residence country is the one taxing at 31.2 per cent and India at 20 per cent on a slice of foreign income in a returning resident's Indian return. India taxes Rs 2,00,000, credits the foreign tax but only up to the Indian Rs 2,00,000, so the Indian tax becomes nil and the surplus foreign tax of Rs 1,12,000 is stranded, because India gives no carry-forward. Total: Rs 3,12,000 again, the higher rate, once.

Under the exemption method (the salary-abroad case, or the UAE and Singapore residual-clause fund-unit case): the income is assigned to one country only. If it is assigned to the residence country and that country taxes at 20 per cent, India does not tax it at all, and the total is Rs 2,00,000, an effective 20 per cent. The exemption method here delivers the lower of the two rates, not the higher, because only the lower-taxing country gets the income. And if the assigned country happens not to tax that head at all, as the UAE does not tax capital gains, the total is nil, an effective 0 per cent.

Put the three side by side on the same Rs 10,00,000:

Scenario	India's tax	Residence tax	Total tax	Effective rate
Credit method, India taxes higher (31.2%)	Rs 3,12,000	Nil (credit)	Rs 3,12,000	31.2%
Credit method, residence taxes higher (31.2%)	Nil (credit)	Rs 3,12,000	Rs 3,12,000	31.2%
Exemption method, assigned to residence (20%)	Nil (exempt)	Rs 2,00,000	Rs 2,00,000	20%
Exemption method, assigned to a no-tax country	Nil (exempt)	Nil	Nil	0%

The lesson is blunt. On the identical Rs 10,00,000, the credit method produces an effective 31.2 per cent and the exemption method produces 20 per cent or zero. The method is not paperwork. It is the rate. And you do not get to choose it; the relevant treaty article chooses it for you based on your income type and your country.

The paperwork the two methods demand

The two methods route through different forms, and confusing them is a common, avoidable error.

For exemption-method income that is Indian-source but assigned away from India, or for credit-method Indian-source income where you want India to deduct at the treaty rate, the documents are the Tax Residency Certificate (TRC) from your residence country (Form 6166 from the IRS, HMRC's certificate in the UK, the Federal Tax Authority's in the UAE, the CRA's in Canada) and Form 10F, now filed electronically on the Indian portal and, since late 2023, possible without an Indian PAN through the non-resident registration category. You hand these to the payer, the bank, dividend registrar, tenant or buyer, so they withhold at the treaty rate rather than 30-plus per cent. A PAN still earns its place: without one, Section 206AA can push withholding to 20 per cent or higher, and you need a PAN to file ITR-2 and reclaim excess TDS. The procedural walk-through is in DTAA mechanics, TRC and Form 10F and, on the banking side, how to reduce NRO TDS using the DTAA.

For credit-method relief inside your Indian return, where foreign income sits in the Indian net (a returning resident or RNOR on crossover income), the form is Form 67, mandatory under Rule 128(9), filed online by the end of the relevant assessment year, December 31, 2026 for AY 2026-27. From April 1, 2026 it is renumbered Form 44, and where your foreign tax for the year is Rs 1 lakh or more it must carry a chartered accountant's certificate. The credit is the lower of the foreign tax paid or the Indian tax on that slice, with no carry-forward of any surplus. The full treatment is in foreign tax credit and Form 67.

The thing NRIs miss most often is direction. A pure non-resident's foreign salary is exempt in India and needs no Indian form at all; filing Form 67 on it does nothing but invite questions. Indian-source income needs the TRC and Form 10F to capture the treaty rate at source, not Form 67. Match the form to the method and the country of the income, and most of the friction disappears.

Edge cases

Exemption with progression. Some treaties, and several residence-country regimes, exempt an income from tax but still count it to set the rate on your other income. The income is not taxed, but it pushes your remaining income into a higher bracket. This is "exemption with progression", and it means the exemption method is not always as clean as "ignore the income entirely". It matters most in residence countries with steep progressive brackets; for a UAE resident with no progressive personal tax it is a non-issue. Check whether your residence country applies progression before assuming an exempt slice has zero effect on your home tax bill.

No treaty: Section 91 unilateral relief. If your foreign income comes from a country India has no treaty with, you get Section 91 relief only: a credit at the lower of the Indian or foreign rate on the doubly-taxed income, no exemption mechanism, no tie-breaker, no zero outcomes. Plan for the higher-of-two-rates result and keep clean evidence of the foreign tax paid, because the unilateral route is less forgiving on documentation than a treaty claim.

Tax sparing. A handful of older treaties, including the India-UK treaty (Article 24), contain a tax-sparing clause. It lets the residence country give a credit for Indian tax that was notionally payable but spared under an Indian incentive, as if it had actually been paid. The idea was to stop an Indian tax holiday being clawed back by the residence country's credit system. These clauses are narrow, often time-limited (the India-UK sparing relief was restricted to a window of years from when it first accrued), and largely historical, but if you are relying on an Indian incentive and live in a tax-sparing treaty country, the clause can preserve a benefit the ordinary credit method would otherwise erase. Take advice on whether it still applies to your facts.

Underlying tax credit. Distinct from the ordinary credit for tax you paid directly, an underlying tax credit gives a corporate shareholder credit for the tax the company paid on the profits out of which a dividend was declared. It is a company-level relief in some treaties, not something an individual retail NRI shareholder claims, and the 2020 shift to taxing dividends in the shareholder's hands changed the landscape further. If you hold Indian dividends as an individual, this is not your mechanism; you are on the ordinary credit method with the Article 10 rate cap. It matters only if you hold through a corporate vehicle, where it becomes a specialist question.

Your position looks structured. After the CBDT's January 21, 2025 circular on the Principal Purpose Test, a TRC is no longer an unconditional shield where an arrangement looks designed mainly to grab a treaty benefit. For plain personal income, salary, a fixed deposit, a flat, a mutual fund, this is close to a non-event. For interposed entities and holding structures, expect the PPT to be raised and the exemption-method or rate-cap benefit to be challenged. Build substance, or take advice, before relying on a treaty for anything that is not ordinary personal income.

The closing read

The honest read is that "double taxation relief" is not one thing, it is two, and which one applies to your income decides your effective rate more than any rate table does. The credit method taxes you in both countries and nets one tax against the other, landing you on the higher of the two rates, once, with no zero outcome and, in India, no carry-forward of any surplus. The exemption method assigns the income to one country only, landing you on that country's rate, which can be the lower of the two or zero if the assigned country does not tax that head. The same Rs 10,00,000 is a 31.2 per cent bill under one method and a 20 per cent or nil bill under the other.

For most NRIs the split is predictable once you know your country and income. Salary for work done abroad is exempt in India, so do not file Indian forms on it. Indian-source interest, dividends and property run on the credit method with a rate cap, so the move that matters is filing Form 10F before the money is deducted to capture the treaty rate at source. The one place the exemption method delivers a genuine zero is the UAE and Singapore residual-clause reading on Indian mutual fund units, and that is a tribunal position to be claimed with a TRC, Form 10F and a CA who will defend it, not assumed. Where there is no treaty, you are on Section 91 unilateral credit relief and the higher-of-two-rates result, full stop. The two mistakes that recur are treating every relief as a credit (and overpaying on income an exemption article already removed) and treating the contested exemption positions as automatic (and getting caught when the registrar deducts or the department queries). Read the distributive article first, the elimination article second, and you will know which method you are on before you touch a form.

Related guides

• DTAA relief for NRIs
• Foreign tax credit and Form 67
• DTAA mechanics: TRC and Form 10F
• DTAA tie-breaker and dual residency
• NRI residency and RNOR rules
• Capital gains tax for NRIs on shares and mutual funds
• NRI dividend tax in India
• Tax on NRO interest
• Tax on Indian rental income for NRIs
• RSU and ESOP taxation for NRIs
• NRI pension taxation
• TDS for NRIs and how to claim refunds
• How to reduce NRO TDS using the DTAA
• Retirement planning across two countries
• All taxation guides

This guide is general information, not tax advice, and reflects rules as understood for AY 2026-27 (FY 2025-26) as of February 2026, including the transition to the Income-tax Act, 2025 from April 1, 2026. Treaty articles, the exemption and credit mechanics, the residual-clause mutual-fund position (which rests on tribunal rulings the tax department may contest), the Principal Purpose Test, and several positions noted here including the treatment of US retirement accounts are genuinely debated or evolving. Your residence-country treatment depends on rules outside India this guide does not fully cover. Confirm the current treaty text and consult a qualified cross-border tax adviser before acting.