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How to claim Foreign Tax Credit?

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Divya Singhvi

DTAA
Foreign tax credit
Income Tax
Income Tax for NRI

If you are a resident of India, income earned by you anywhere in the world shall be taxable in India. In such cases, you would end up paying taxes on the same income twice. DTAA makes sure that a taxpayer is not doubly taxed for the income earned outside the country of residence. Since income may be taxed at source i.e. from the place it originated and is also usually taxable in the country of residence, the DTAA makes sure that the taxpayer is not adversely impacted. It allows the taxpayer to claim Foreign Tax Credit for the taxes paid outside India.

What is Foreign Tax Credit?

If you have paid taxes in one country, you can claim the credit of the tax paid in the country of your residence when both the countries have DTAA. There are two rules to it which are as follows:

  1. Source Rule: This rule holds that income is to be taxed in the country in which it arises irrespective of whether the income arises to a resident or non-resident.
  2. Residence Rule: This rule holds that the power to tax should rest with the country of residence.

If both rules apply simultaneously to an assessee there will be double taxation. Double taxation means taxing the same income twice in the hands of the assessee. Section 90 aims at handling scenarios where India has signed a DTAA with the other country. While Section 91 handles scenarios where India hasn’t signed any such agreements with another country.

Residential Status Calculator
Residential Status Calculator for Income Tax. Taxability in India depends on residential status. Know your residential status from Resident, NRI, Resident but Not Ordinarily Resident(RNOR)
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Residential Status Calculator
Residential Status Calculator for Income Tax. Taxability in India depends on residential status. Know your residential status from Resident, NRI, Resident but Not Ordinarily Resident(RNOR)
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Rule 128 of Income Tax Rules

With the introduction of Rule 128 and Form 67, most of the confusion around claiming tax credit has been resolved. Foreign Tax credit (FTC) in India is governed by Rule 128 of Income Tax Rules and Applicable from 01.04.2017. The rule covers the following conditions:

Documents required to claim Foreign Tax Credit

In order to claim FTC, the assessee shall be required to furnish the following documents. Such documents shall be furnished on or before the due date return of income under section 139(1) of the Act :

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How to claim Tax Credit on Foreign Income?

If you are a Resident, income earned by you anywhere in the world has to be included in your total income.

  1. Convert income earned outside India into Indian currency as per the reference rates

    Convert your income earned in foreign currency into Indian Rupees by using the State Bank of India telegraphic transfer buying rate (TTBR) of the last day of the month before the month in which income is due.
    For example, for converting foreign income of May 2020, use the TTBR of the relevant currency for April 2020 and convert your foreign income into Indian Rupees.

  2. Now, include this income under the respective income head, for example, include salary income under the head ‘salaries’.

    Treat this income as any other income which is earned by you locally. Basic exemption limit of INR 2,50,000 is allowed on your total income and remaining income is taxable as per income tax slab rates.

  3. If TDS has been deducted from your income you are allowed to take credit for such taxes.

    For this purpose, reference has to be made to the relevant Double Tax Avoidance Agreement (DTAA) of the country where such income has been earned. India has entered into DTAAs with several countries. Further, the taxpayer is also allowed to take credit of TDS deducted.

  4. Obtain TRC Certificate

    Taking the benefit of a DTAA involves obtaining a Tax Residency Certificate (TRC) that helps identify and certify your tax residency status to make sure the correct DTAA has been applied. This is in line with the tax laws in India.

  5. While taking TDS credit, make sure the correct DTAA is applied, so you can take credit for the foreign tax deducted.

    Resident in India earning a foreign income should report such income and foreign assets in the Income Tax Return.

  6. The taxpayer should add details of foreign income i.e. income earned outside India in Schedule FSI of ITR

    Enter the following details with respect to Foreign Income:
    a. Country Code – Select the country in which income is earned
    b. Taxpayer Identification Number
    c. Income outside India – enter the amount of income earned outside India
    d. Taxes paid outside India – tax paid on income earned outside India
    e. Tax payable in India – tax payable in India on income earned outside India
    f. Tax Relief available = tax paid outside India or tax payable in India whichever is lower
    g. Relevant DTAA Article – enter details of the relevant article of DTAA under which the taxpayer claims the tax relief

  7. Once the taxpayer adds details of Foreign Income in Schedule FSI, the details in Schedule TR (Tax Relief) get populated.

    The double taxation relief is reduced from the tax calculation.

ITR for Residents with Foreign Income
CA Assisted Income Tax Return filing plan for resident individuals having foreign income.
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ITR for Residents with Foreign Income
CA Assisted Income Tax Return filing plan for resident individuals having foreign income.
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FAQ

How many methods are there to claim DTAA tax relief?

There are two methods to claim DTAA tax relief – exemption method and tax credit method.
– By exemption method, income is taxed in one country and exempted in another.
– In the tax credit method, where the income is taxed in both countries, tax relief can be claimed in the country of residence.

When and how do I file a foreign tax credit form 67?

You should file Form 67 before filing your tax returns. Further, you can prepare and submit Form 67 online on your Income Tax Portal. Once you login navigate to E-file > Select other Forms > Select Form 67 and assessment year from the drop-down

Can anyone claim Foreign Tax Credit?

Only resident Indians can claim for the tax credits, only if they have paid taxes in another country.

Got Questions? Ask Away!

  1. Hi @Dixita

    If you are a resident in the financial year, you must report such foreign income in the ITR in India. As per the DTAA agreement between India and the USA, the same income is not taxable in both countries. Thus, if you have paid tax on such income in USA, you can claim the credit of such tax paid by filing Form 67. Tax relief shall be lower of tax paid in USA or tax payable in India and can be reduced from total tax liability in India.

    You can refer to the below article for detailed provision of DTAA between India and the USA: DTAA between India and USA | Learn by Quicko
    Form 67 : Claiming Foreign Tax Credit | Learn by Quicko

    Hope this helps :slightly_smiling_face: