Foreign Tax Credit (FTC): Importance, Meaning & How to Claim in India

What is Foreign Tax Credit (FTC)?

Foreign Tax Credit (FTC) is a tax relief that helps taxpayers avoid paying tax twice on the same income. If an Indian resident earns income from another country and pays tax there, they may also have to pay tax on the same income in India. FTC allows them to claim credit for the tax already paid outside India, reducing their tax liability in India.

Simple Example

Suppose an Indian resident earns interest income from another country.

• Tax is deducted in the country where the income is earned.
• The same income is also taxable in India because the person is an Indian resident.
• Without Foreign Tax Credit, the same income would be taxed twice.
• By claiming FTC, the taxpayer can reduce the tax payable in India by the amount of eligible foreign tax already paid.

Why is Foreign Tax Credit Important?

Prevents Double Taxation

The biggest benefit of Foreign Tax Credit is that it helps taxpayers avoid paying tax twice on the same income earned outside India.

Encourages Global Business and Employment

FTC makes it easier for people and businesses to work, invest, or earn income in other countries without worrying about being taxed twice.

Supports Fair Tax Compliance

FTC encourages taxpayers to report their foreign income correctly and pay taxes according to the applicable laws.

Promotes Transparency

To claim FTC, taxpayers need to maintain proper records and submit the required documents. This improves transparency and helps ensure accurate tax reporting.

How Does Foreign Tax Credit Work in India?

The Income Tax Act allows eligible resident taxpayers to claim credit for taxes paid in another country against the tax payable in India on the same income.

If India has a Double Taxation Avoidance Agreement (DTAA) with the foreign country, the credit is generally claimed under the applicable tax treaty. If there is no tax treaty, relief may still be available under the relevant provisions of the Income Tax Act, subject to the prescribed conditions.

Rules for Claiming Foreign Tax Credit

To claim Foreign Tax Credit in India, the following conditions generally apply:

• Only resident taxpayers can claim Foreign Tax Credit.
• The credit can be claimed only in the year in which the foreign income is taxed in India.
• The credit is allowed only for the tax paid on the foreign income.
• Interest, penalties, or similar charges paid to a foreign tax authority cannot be claimed as Foreign Tax Credit.
• If a DTAA exists, the credit is available only for the taxes covered under that agreement.
• Tax amounts that are under dispute generally cannot be claimed until the dispute is resolved and the required conditions are fulfilled.
• Foreign Tax Credit is calculated separately for each country and for each source of income.
• The amount of credit is limited to the lower of:
  • Tax paid in the foreign country, or
  • Tax payable in India on the same foreign income.
• Eligible taxpayers may also claim Foreign Tax Credit while calculating tax under the applicable alternate tax provisions, subject to the prescribed rules.
• If foreign tax is paid in another currency, it must be converted into Indian Rupees using the exchange rate prescribed under the Income Tax Rules before calculating the credit.

Foreign Tax Credit helps taxpayers with foreign income reduce their tax burden while ensuring compliance with Indian tax laws. Filing the required forms, maintaining proper records, and reporting foreign income correctly are essential for claiming this benefit.

Steps to Claim Foreign Tax Credit (FTC) in India

If you are an Indian resident and earn income from another country, you can claim Foreign Tax Credit by following these simple steps:

1. Convert Your Foreign Income

Convert your foreign income into Indian Rupees (INR) using the exchange rate prescribed under the Income Tax Rules.

2. Classify Your Income

Report your foreign income under the correct income category, such as:

• Salary
• Interest
• Dividend
• Capital Gains
• Other Income

3. Claim Credit for Tax Paid Abroad

If tax has already been deducted or paid in the foreign country, you can claim credit for that tax while filing your income tax return in India, subject to the applicable rules.

4. Obtain a Tax Residency Certificate (TRC)

If required, obtain a Tax Residency Certificate (TRC). This document helps establish your tax residency and supports your claim under the applicable tax treaty.

5. Fill in Schedule FSI

While filing your income tax return, provide details of your foreign income in Schedule FSI. This generally includes:

• Country where the income was earned
• Taxpayer Identification Number (if applicable)
• Foreign income earned
• Tax paid in the foreign country
• Tax payable in India on the same income
• Foreign Tax Credit claimed

6. File Form 67

Submit Form 67 before claiming Foreign Tax Credit in your income tax return. Also keep the required documents and proof of foreign tax paid or deducted ready.

7. Calculate the Foreign Tax Credit

The Foreign Tax Credit is generally the lower of:

• Tax paid in the foreign country, or
• Tax payable in India on the same foreign income.

8. Provide Tax Treaty Details (If Applicable)

If India has a Double Taxation Avoidance Agreement (DTAA) with the foreign country, provide the relevant details while claiming the credit.

By following these steps and maintaining the necessary documents, eligible taxpayers can claim Foreign Tax Credit and avoid paying tax twice on the same foreign income.

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