If you are a resident taxpayer in India and earn income from another country, you may have to pay tax both in the foreign country and in India. To reduce the impact of double taxation, India allows eligible taxpayers to claim a Foreign Tax Credit (FTC) for certain taxes paid outside India.

What Is Foreign Tax Credit?

Foreign Tax Credit (FTC) is a tax relief available to eligible taxpayers who have paid tax on income earned outside India.

For example, suppose you earn income from the United States and pay tax there. If the same income is taxable in India, you may be able to claim credit for the foreign tax paid while calculating your Indian tax liability.

Who Can Claim Foreign Tax Credit in India?

A taxpayer may be eligible to claim FTC if:

• The taxpayer has taxable foreign income.
• Tax has been paid or deducted in the foreign country.
• The foreign tax relates to income that is also taxable in India.
• The taxpayer satisfies the applicable conditions under Indian tax law or the relevant Double Taxation Avoidance Agreement (DTAA).

Foreign tax credit rules can differ depending on the taxpayer’s residential status, type of income, foreign country, and applicable tax treaty.

How Does Foreign Tax Credit Work?

Consider a simple example.

Suppose:

• Foreign income = ₹5,00,000
• Tax paid in the foreign country = ₹80,000
• Indian tax payable on the same income = ₹1,00,000

If the foreign tax is eligible for credit, the taxpayer may claim FTC against the Indian tax liability, subject to the applicable rules and limits.

The credit is generally restricted to the amount of Indian tax payable on the corresponding foreign income or the foreign tax paid, whichever is lower.

Foreign Tax Credit Under DTAA

India has Double Taxation Avoidance Agreements with several countries.

A DTAA generally provides mechanisms to prevent the same income from being taxed twice.

Depending on the applicable treaty, relief may be available through:

• Foreign Tax Credit method
• Exemption method
• Other treaty-specific provisions

When claiming FTC, taxpayers should check both Indian income tax provisions and the relevant DTAA.

Foreign Tax Credit Rules in India

The rules for claiming FTC are primarily governed by Rule 128 of the Income-tax Rules, 1962.

Some important principles include:

Credit Is Generally Available for Foreign Tax Paid

The foreign tax should relate to income that is also taxable in India.

Credit Is Subject to Limits

FTC is generally restricted to the lower of:

• The foreign tax paid on the relevant income, or
• The Indian tax payable on that income

Foreign Tax Must Be Eligible

Not every payment made to a foreign government automatically qualifies as FTC. The tax should meet the conditions prescribed under the applicable provisions.

Credit Is Calculated Separately

The credit is generally determined with reference to the relevant foreign income and corresponding Indian tax liability.

What Is Form 67?

Form 67 is an important form used by eligible taxpayers to claim foreign tax credit in India.

Taxpayers generally need to provide details such as:

• Foreign income
• Foreign country
• Foreign tax paid
• Nature of foreign income
• Tax identification details, where applicable
• Relevant supporting information

The form should be completed carefully because errors or missing information can affect the FTC claim.

Documents Required to Claim Foreign Tax Credit

Taxpayers should keep appropriate evidence of the foreign income and tax paid.

Common documents may include:

• Foreign tax payment certificate
• Tax deduction certificate
• Foreign income statement
• Foreign tax return
• Bank statement
• Salary statement
• Dividend statement
• Investment statement
• Tax residency-related documents
• Form 67
• Other documents required under the applicable rules

The exact documents depend on the country and nature of the foreign income.

How to Claim Foreign Tax Credit in India

The general process involves the following steps.

Step 1: Identify Your Foreign Income

List all income earned outside India that is taxable in India.

This may include:

• Salary
• Interest
• Dividends
• Rental income
• Capital gains
• Business income
• Other foreign-source income

Step 2: Determine Foreign Tax Paid

Identify the amount of tax paid or deducted in the foreign country.

Keep documentary evidence supporting the amount.

Step 3: Check the Applicable DTAA

Check whether India has a DTAA with the relevant country and determine which provisions apply to your income.

Step 4: Calculate Eligible FTC

Calculate the credit available under the applicable provisions and ensure that the credit does not exceed the prescribed limit.

Step 5: File Form 67

Provide the required foreign income and tax details in Form 67.

Step 6: Report Foreign Income in the ITR

Foreign income and foreign tax credit should be reported correctly in the applicable income tax return.

Step 7: Keep Supporting Documents

Maintain copies of foreign tax certificates, statements, Form 67, and other evidence for your records.

Foreign Tax Credit Calculation Example

Suppose an Indian resident earns:

Foreign income: ₹10,00,000

Tax paid abroad: ₹1,50,000

Suppose the Indian tax payable on the corresponding foreign income is ₹1,20,000.

The eligible FTC would generally be limited to the lower amount, subject to the applicable rules and DTAA provisions.

Therefore:

Foreign tax paid: ₹1,50,000
Indian tax on corresponding income: ₹1,20,000
Potential FTC: ₹1,20,000

The remaining foreign tax may not automatically be available as a credit in India.

Foreign Tax Credit for Different Types of Foreign Income

FTC on Foreign Salary

If you work outside India or receive salary from a foreign employer and the income is taxable in India, you may be eligible to claim credit for eligible foreign taxes paid.

FTC on Foreign Dividends

Dividends received from foreign companies may be taxable in India. If foreign tax has been deducted, eligible FTC may be available.

FTC on Foreign Interest Income

Interest earned from foreign bank accounts or investments may also qualify for FTC where the applicable conditions are satisfied.

FTC on Foreign Capital Gains

Capital gains from foreign investments may be taxable in India depending on the taxpayer’s residential status and applicable provisions. Foreign tax paid on such gains may qualify for credit where permitted.

Common Mistakes While Claiming Foreign Tax Credit

Taxpayers should avoid the following mistakes:

• Not reporting foreign income
• Not maintaining proof of foreign tax paid
• Incorrectly calculating the credit
• Ignoring the applicable DTAA
• Filing incorrect foreign tax details
• Missing Form 67 requirements
• Claiming credit for ineligible taxes
• Reporting foreign income under the wrong category

Such errors can result in rejection or reduction of the FTC claim.

Foreign Tax Credit vs Foreign Tax Deduction

Foreign tax credit and foreign tax deduction are different concepts.

Foreign Tax Credit:
The eligible foreign tax is generally adjusted against the Indian tax liability on the corresponding foreign income.

Foreign Tax Deduction:
The foreign tax may be treated as an expense or deduction while computing taxable income, where permitted.

FTC is generally more beneficial where the applicable conditions are satisfied because it directly reduces tax payable rather than merely reducing taxable income.

What Happens If Foreign Tax Credit Is Not Claimed?

If eligible FTC is not claimed correctly, the taxpayer may end up paying more tax in India than necessary.

Therefore, taxpayers earning foreign income should review their foreign tax payments and applicable treaty provisions before filing their Indian income tax return.

Conclusion

Foreign Tax Credit provides important relief to Indian taxpayers earning income from outside India. By allowing eligible foreign taxes to be credited against Indian tax liability, it helps reduce the impact of double taxation.

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