Progressive Tax Systems: Marginal Vs. Effective Rates Demystified - Part IV

7. Foreign Earned Income Exclusion (FEIE) and Tax-Treaty Relief for Indian Taxpayers

1. Using the FEIE to shield U.S.-source taxation

Indians who have acquired U.S. tax-resident status (e.g., green-card holders working for an Indian MNC’s foreign affiliate) can invoke the Foreign Earned Income Exclusion to keep a slice of their overseas salary out of Uncle Sam’s reach. For the 2025 tax year the ceiling rises to USD 130 000, up from USD 126 500 in 2024 and USD 120 000 in 2023 ^[28]^[29].

Eligibility hinges on either (1) spending at least 330 days outside the United States in any 12-month window or (2) meeting the “bona-fide residence” test by maintaining a full-year tax home abroad ^[30]. The exclusion is claimed on Form 2555, but electing it disqualifies taxpayers from taking a foreign-tax credit on the same income ^[31].

From an Indian perspective, salary earned for duties performed outside India is usually tax-free once an individual’s physical presence in India falls below 182 days, so combining Non-Resident Indian status with the FEIE can all but eliminate double taxation. Where Indian tax is still due, relief is available under Sections 90/91 of the Income-tax Act through credits for U.S. tax actually paid ^[32].

2. Leveraging DTAAs to prevent income being taxed twice

India has built one of the world’s largest treaty networks, with more than 94 comprehensive Double Taxation Avoidance Agreements (DTAAs) and eight limited accords now in force ^[33]. Article 23 of most treaties follows the OECD model by letting the residence state (India) either exempt foreign-source income or grant a tax credit equal to the foreign tax paid, capped at the Indian liability on the same income ^[34].

The India–U.S. convention, effective 18 December 1990, adds a “limitation-of-benefits” article to curb treaty shopping yet still allows Indian software engineers seconded to Silicon Valley to credit U.S. federal tax against their Indian return ^[35]. Recent amendments show the network’s dynamism: the Mauritius protocol of April 2024 inserted a Principal Purpose Test and tightened capital-gains relief, while social-security totalisation clauses are being negotiated into new FTAs with the U.K.

and EU ^[36]^[37]. Together, FEIE and DTAA credits form a two-layer safety net: one anchored in U.S. law, the other in treaty and Indian statute, ensuring that globally mobile Indians are taxed just once on the same rupee (or dollar) of income.

1. Fun fact

India’s first comprehensive DTAA with a major economy—the United States—predates the commercial launch of the World Wide Web by almost three years, underscoring how long the two countries have coordinated on cross-border tax issues! .

8. Annual planning: bunching deductions, timing income, and carry-forwards

1. Bunching deductions for Section VI-A fire-power

When the ceiling on popular deductions such as Section 80C (₹1.5 lakh) and Section 80D (₹25,000–₹1,00,000) feels cramped, “bunching” lets you time large outlays so they fall in the same financial year and deliver a one-time tax windfall. For example, the rules treat tuition fees as deductible only in the year the cash is actually paid, even if the payment covers several academic terms.^[38] A parent who clears the April 2026 and April 2027 fee instalments together in March 2026 can unlock the full ₹1.5 lakh 80C limit in FY 2025-26 and rely on the “standard deduction + new regime” the following year.

Likewise, insurers routinely give 5–10 % discounts on multi-year health policies.

Since Budget 2018, a single premium that covers multiple years is still deductible, but the law forces you to spread the claim evenly over each covered year, preserving the bunching advantage without breaching annual caps.^[39]^[40] By front-loading payments you not only harvest bigger deductions but also lock today’s prices against future premium hikes—an inflation hedge that pure investment products rarely match.

2. Timing income: cash, accrual, and tactical delays

Income timing is the mirror image of deduction bunching. Under Section 145 you may compute “Profits and Gains of Business or Profession” or “Income from Other Sources” on a cash or mercantile (accrual) basis—provided you follow the chosen method consistently.^[41] Freelancers who bill in March but opt for the cash method can legitimately raise invoices on 1 April and push the tax hit to the next assessment year, a 12-month interest-free float.^[42] Beware of income streams the law forces into the accrual bucket: CBDT Circular 371 requires interest on cumulative deposits to be offered to tax every year, even though you receive the cash only at maturity.^[43] A similar rule applies to bank FDs, where accrued interest is reported in AIS and taxed annually.^[44] The practical takeaway is to match your accounting method with the cash-flow profile of your business while respecting statutory overrides—doing so can shift income across slab-rate boundaries and save thousands without crossing any red lines.

3. Carry-forward losses: eight years, four years—or forever

Loss carry-forwards are a safety-net for years when markets or business cycles turn hostile. Capital losses—long- or short-term—survive for eight assessment years, while non-speculative business losses share the same horizon. Speculative business losses expire sooner, after just four years.^[45] Miss an ITR deadline and the entire stock of losses vanishes, making on-time filing the single biggest “return on effort” metric in tax planning.^[46] There are exceptions worth celebrating. Losses from “specified business” under Section 35AD can be carried forward indefinitely, a privilege few regimes worldwide allow.^[47] Looking ahead, the Income-tax Bill 2025 offers a one-time bonanza: long-term capital losses incurred up to 31 March 2026 may be set off against short-term gains in FY 2026-27, breaking the long-standing like-to-like rule.^[48] Investors with dormant LTCL ledgers should therefore avoid hastily realising STCG in 2025-26; postponing sales by a few weeks could wipe out the bill entirely.

4. Calcily amortization tables and after-tax cash-flows

Using Calcily's loan amortization table helps in projecting after-tax cash flows, crucial for long-term financial planning.

By keying in moratorium periods, disbursement tranches, and lump-sum pre-payments, the tool spits out a month-by-month schedule of principal and interest, a level of granularity most bank statements never provide.^[49] When you overlay this schedule with the Section 24 deduction on housing-loan interest or the 80E deduction on education-loan interest, you can see exactly when the tax shield peaks and how aggressive pre-payments shrink it.

The visual payoff is immediate: a ₹50,000 pre-payment in year 3 of a 15-year loan can chop off seven EMIs and reduce total interest by almost 6 %, yet the corresponding tax deduction drops by only 2 %—a trade-off many borrowers are happy to accept. Calcily also exports the table to CSV, making it easy to plug numbers into your cash-flow workbook and test scenarios such as rising rates or a switch to the new tax regime.

1. Forever losses? Yes!

Losses from “specified business” (cold-chain, warehousing, cross-country pipelines, etc.) can be carried forward without any time limit—an open-ended tax asset most people overlook.

2. Multi-year health policies pay twice

Paying a three-year premium today not only wins an insurer’s discount but also locks in deduction limits for each covered year—even if Section 80D caps change later.

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