Resident Indian Paying Taxes Overseas? Don't Loose Out on Foreign Tax Credit (FTC)

The Foreign Tax Credit (FTC) is a type of tax relief facility introduced by governments globally.It allows a resident taxpayer to claim a credit for income tax paid on income earned in a foreign country.This crucial mechanism preventsdouble taxationof the same income.

This article details the tax on foreign income for Indian residents and explains how to claim the Foreign Tax Credit in India.

What is Foreign Tax Credit (FTC) and Why is it Important?

The Foreign Tax Credit (FTC) is a system that permits Indian residents who paid taxes on their foreign income in another country to reduce the tax liability in India. Basically, the main purpose of the FTC is to prevent the same income from being taxed by both the foreign countries where it was earned.

To claim the FTC in India, taxpayers must report their foreign income and to corresponding foreign taxes paid on their Indian tax return.

How Does Foreign Tax Credit Work in India?

A resident taxpayer is generally subject to income tax on their money earned in a foreign country in both the country of residence (India) and the source country.The FTC allows the taxpayer to claim a deduction for the tax already paid in the foreign country.

Example:Suppose Mr. A, an Indian resident, earns interest income in the United States.

• The U.S. (Source State) withholds a percentage of the amount as tax.
• Mr. A also has to pay taxes on his U.S. income in India.
• This results in double taxation.

The Foreign Tax Credit (FTC) facility helps people like Mr. A avoid paying double tax on the same income.

What is Form 67?

Form 67 of the Income Tax Act is a mandatory form for every assessee who wishes to claim the Foreign Tax Credit.A foreign tax credit can be claimed by any assessee who earns money outside India and is liable to pay tax in both countries.

• Purpose:Form 67 is used to declare foreign income and estimate the taxation on foreign income in India.It is a crucial document to claim a deduction of foreign tax paid in the home country.
• Filing Deadline (AY 2025-26):As per Income Tax Rules, Form 67 should be furnished by the end of the assessment yearbeforefiling the original return or belated tax return.
• Crucial Date:It is crucial to file Form 67 before the 31st of December 2024 to claim the tax credit.

Eligibility for Foreign Tax Credit:

Rule 128 is the Foreign Tax Credit Rule in India that governs the FTC. The rules for claiming FTC in India on foreign income tax are:

• Only aresident assesseecan claim the credit on tax paid in a foreign country or specified territory.
• FTC is allowed only in the year in which the foreign income is levied to tax in the resident country (India).
• Only aproportionof the income on which tax is paid or levied can be allowed as a tax credit.
• FTC isnotallowed on money paid as interest, fees, or penalties.
• If aDTAA(Double Tax Avoidance Agreement) exists between the countries, only taxes covered under the DTAA will be eligible.
• The credit allowed is thelowerof the tax payable in the resident country (India) and the foreign tax paid.
• The credit is also available under Section 115JB (minimum alternate tax).

How to Calculate Foreign Tax Credit in India?

The FTC amount is the lower of the two values:

1. Tax paid in the foreign country.
2. Tax payable on that foreign income in India.

The foreign tax paid should be converted into INR using the Telegraphic Transfer Buying Rate (TTBR) on the last day of the month preceding the month in which the tax is supposed to be paid.

For eg:You are an Indian tax resident and receive a $2,000 dividend from a U.S. company.The U.S. deducts 25% tax at source, so you receive $1,500.As an Indian resident, the full $2,000 must be reported on your Indian tax return.

The FTC claimed (₹41,500) is the actual tax paid in the U.S, which, in this case, is lower than the tax payable in India (₹51,792) on that income.This credit is usually claimed under Section 90/91.

How to Claim Foreign Tax Credit in India?

If you are an Indian resident with a foreign source of income, follow these steps:

1. Convert Foreign Income:Convert your foreign income into INR using the TTBR on the last day of the month preceding the month the income is due.
2. Classify Income:Treat the foreign income as domestic income and classify it into the relevant head (e.g., salaries, interest).
3. Claim TDS Credit:Refer to the DTAA and claim credit for the TDS deducted in the source country.
4. Get TRC Certificate:Obtain a Tax Residency Certificate (TRC) to clarify your tax residency status and ensure the correct DTAA application.
5. Fill in Schedule FSI:Enter the details of your foreign income inSchedule FSIof the ITR, including:
   • Country code.
   • Taxpayer Identification Number.
   • Amount of income earned outside India.
   • Tax paid outside India.
   • Tax payable on foreign income in India.
   • The tax relief amount (lower of the foreign tax paid or tax payable in India).
   • The relevant article of the DTAA.
6. Submit Form 67:Form 67 must be submitted using the Income Tax Portal.

Documents Required for Claiming Foreign Tax Credit:

You must submitForm 67and a certificate or statement describing the nature of the income and the amount of tax deducted or paid. This statement can be obtained from:

• The foreign country's tax authority.
• The person responsible for deducting the tax.

Or, if signed by the assessee, it must be accompanied by:

• Proof of payment (online payment acknowledgment, bank counterfoil, or challan) if the assessee made the payment.
• Proof of deduction, where the tax has been deducted.

Foreign Income Reporting for Indian Taxpayers:

• Resident Indians:All income earned from foreign sources must be reported inSchedule FSIof ITR Form 2.
• Non-Resident Indians (NRIs):Income generated outside India generally does not need to be reported in an Indian ITR.However, an exception is if the foreign income is taxable in both countries and the NRI claims tax relief in India, they must then fileSchedule FSI and Schedule TR.

Conclusion:

For Indian residents earning income abroad, claiming the Foreign Tax Credit in India is very crucial. By filing Form 67 on time, reporting foreign income correctly, and ensuring documentation, you can significantly reduce your Indian tax liability.

At KDP Accountants, with decades of experience in international taxation, FEMA, and cross-border compliance, our team assists individuals and businesses in claiming FTC, filing Form 67, and managing all tax-related matters with accuracy and confidence. Connect with us at enquire@kdpaccountants.com .

Kirtan
Author

Kirtan is a Chartered Accountant specializing in Income Tax and Indirect Taxation (GST), advising businesses on statutory compliance and tax advisory matters. He has extensive experience in Income Tax return filings, tax planning support, and ongoing regulatory compliance.