How to claim Foreign Tax Credit?

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.

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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:

  • Only a resident assessee will be eligible to claim FTC if any tax has been paid by him in a country or specified territory outside India.
  • Grant of FTC shall be allowed only in the year in which the income corresponding to such tax has been offered to tax or assessed to tax in India.
  • Income on which foreign tax has been paid or deducted is offered to tax. And credit proportionate to Income offered to tax in that year shall be allowed.
  • Foreign Tax Credit will not be allowed in respect of any sum payable by way of interest or penalty.
  • Where a DTAA has been entered between India and the foreign country, eligible foreign tax shall be the taxes covered under the respective DTAA.
  • No credit shall be available in respect of any amount of foreign tax or part thereof which is disputed in any manner by the assessee.
  • Provided that the credit of such disputed tax shall be allowed for the year in which such income is offered to tax or assessed to tax in India if the assessee within six months from the end of the month in which the dispute is finally settled, furnishes evidence of settlement of dispute and evidence to the effect that the liability for payment of such foreign tax has been discharged by him and furnishes an undertaking that no refund in respect of such amount has directly or indirectly been claimed or shall be claimed
  • Further, the credit of foreign tax shall be the aggregate of the amounts of credit computed separately for each source of income arising from a particular country.
  • The credit allowable shall be the lower of the tax payable under the Act on such income and the foreign tax paid on such income.

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 :

  • Certificate or statement specifying the nature of income and the amount of tax deducted therefrom or paid by the assessee:
    1. from the tax authority of foreign country; or
    2. from the person responsible for deduction of such tax; or
    3. signed by the assessee:
  • Provided that the statement furnished by the assessee in clause (3) above shall be valid if it is accompanied by:
    • an acknowledgment of online payment or bank counterfoil, or challan for payment of tax where the payment has been made by the assessee;
    • proof of deduction where the tax has been deducted.
  • Form 67 to be filed on Income Tax Portal
  • Form No. 67 shall also be furnished in the case where the carry backward of loss of the current year, results in a refund of foreign tax for which credit has been claimed in any earlier previous year or years.

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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.

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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.

DTAA between India and USA

In the case of a Non-Resident Indian (NRI), income earned outside India is not taxable. If a resident has income earned outside India, it is taxable in India and must be reported in ITR. In most cases, the foreign country also imposes a tax on such foreign income. To avoid the same income getting taxed in two different countries, the taxpayer can avail the benefit of DTAA. Double Taxation Avoidance Agreement is an agreement between two countries to avoid double taxation for the taxpayer. Under this article, we shall read more about the DTAA between India and the USA to avoid double taxation in India and USA.

Example

Rahul, a resident of India works in the USA and pays Federal Income Tax levied by the USA government. Since he is a resident in India, such foreign income would be taxable in India too. To avoid double taxation of the same income in two different countries, India has entered into DTAA with USA.

The government of both countries entered into a DTAA with the intention of providing either of the following:

  • Exemption of income earned outside India
  • Providing credit of tax paid on foreign income in the foreign country

Applicability of DTAA between India and USA

DTAA between India and USA is applicable to individual, trust, partnership firm, company or other entity having income in both countries. The DTAA covers the following taxes:

  • Federal Income Tax imposed by Internal Revenue Code in the USA i.e. the USA Income Tax.
  • Income Tax in India including surcharge and surtax.

Residential Status

For any taxpayer having source of income in two countries, it is important to determine residential status in each country.

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A resident is a person who as per the relevant law of each country is liable to pay tax because of residence, citizenship, domicile, place of management, place of incorporation, or similar criteria. If a taxpayer is a resident of both the countries i.e. India & USA, residence should be determined as follows:

  • The taxpayer would be a resident of the country in which a permanent home is available. If there is a permanent home at both places, taxpayer would be resident of the country in which their personal and economic relations are closer.
  • If the taxpayer does not have a permanent home in either of the countries, the taxpayer would be a resident of the country in which he/she has the habitual abode.
  • In case, the taxpayer has a habitual abode in both the countries or neither of them, the taxpayer would be a resident of the country in which he/she is a national.
  • If the taxpayer is a national in both the countries or neither of them, the competent authority of both countries would mutually decide the residential status.

DTAA between India and USA – Tax on Income

Income from Immovable Property

If a resident has earned income from immovable property, they should pay tax in the country in which such immovable property is located. Following are the types of income from immovable property:

  • Income from let out of immovable property
  • Agricultural or forestry income
  • Income from immovable property used to perform independent personal services
  • Income of an enterprise from immovable property

Dividend

If a resident company pays a dividend to a resident of another country, the dividend income is taxable in the country in which it is received.

For example: If a US company pays a dividend to a shareholder who is an Indian resident, such a dividend would be taxable in India.

However, the dividend may also be taxed in the paying country and if the taxpayer is a resident of receiving country, then the tax on the dividend cannot exceed the following:

  • 15% of the gross amount – If the dividend recipient is a company that owns at least 10% of the voting stock of the company paying the dividend
  • 25% of the gross amount – in any other case

For example: The dividend paid by an Indian company to a USA resident is taxable in the USA. If such dividend is received in India, it is taxable in India too. However, the tax on such dividends should not exceed the above-specified limits.

Interest

If interest income arises in a country and is paid to a resident of another country, it is taxable in the country in which the receiver is a resident.

For example: If a US resident earns interest income in India, it is taxable in the USA.

However, the interest may also be taxed in the country in which it arises and if the taxpayer is a resident of receiving country, then the tax on the dividend cannot exceed the following:

  • 10% of the gross amount – If the interest is paid on a loan granted by a bank or a financial institution.
  • 15% of the gross amount – in any other case.

For example: If such interest income is taxable in India also, then the tax in India should not exceed the above-mentioned limits.

Income of professors, teachers, and research scholars

The income of a professor, teacher or research scholar who moves to another country is exempt from tax if they fulfill the following conditions:

  • The engagement is for a period not exceeding two years, AND
  • Before the visit, the individual should be resident of the first country

For example: Shreya (resident in India) moves to the USA for an exchange program as a teacher in a recognized college. The income she earns in the USA would be exempt from tax up to 2 years.

DTAA between India and USA – Tax Relief

DTAA Relief in India

If a resident in India earns an income that is taxed in the USA, the taxpayer can claim a deduction of an amount equal to income tax paid in the USA. However, such deduction should not exceed income tax in India on such foreign income. Thus, the resident earning foreign income can claim relief of the tax paid on foreign income.

DTAA Relief in USA

Resident in USA can claim credit against the USA tax for the amount of:

  • Income tax paid to India by or on behalf of such resident
  • Income tax received by the Indian Government from the Indian Company on dividend paid to USA Company that holds at least 10% of the voting stock of the Indian Company

DTAA between India and USA – Reporting in ITR

Non-Resident in India need to report and pay tax on any income earned outside India i.e. foreign income.

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

Schedule FSI (Foreign Source of Income)

The taxpayer should add details of foreign income i.e. income earned outside India. Enter the following details:

  • Country Code – Select the country in which income is earned
  • Taxpayer Identification Number
  • Income outside India – enter the amount of income earned outside India
  • Taxes paid outside India – tax paid on income earned outside India
  • Tax payable in India – tax payable in India on income earned outside India
  • Tax Relief available = tax paid outside India or tax payable in India whichever is lower
  • Relevant DTAA Article – enter details of the relevant article of DTAA under which the taxpayer claims the tax relief

Schedule TR (Tax Relief)

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.

Schedule FA (Foreign Assets)

If the taxpayer holds any foreign assets outside India, they must report it under Schedule FA i.e. Foreign Assets.

Form 67

To claim the foreign tax credit, the taxpayer should file Form 67 online on the income tax website before filing the Income Tax Return. Form 67 comprises details of foreign income and tax relief on such income.

FAQs

I am an Indian working in USA. Should I pay tax on such income in India?

You should first determine your residential status as per the Income Tax Act. If you hold the status of a Non-Resident, income earned outside India is not taxable in India. However, 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 is lower of tax paid in USA or tax payable in India and can be reduced from total tax liability in India.

DTAA – Double Taxation Avoidance Agreement : Definition, Types, and Benefits

For NRIs who are working in other countries, the DTAA (Double Taxation Avoidance Agreement) helps to avoid paying double taxes on income earned in both their country of residence and India. Its key objective is that tax-payers in these countries can avoid taxation for the same income twice. India has 85 active agreements. The basic objective of DTAA is to promote and foster economic trade and investment between two Countries by avoiding double taxation. You can check the DTAA entered into by India with other countries from the income tax department’s website through this link Notification of Government.

What is DTAA?

DTAA means a Tax Treaty between two or more countries to avoid taxing the same income twice. When a person is residing in one country and earning income in some other country they are covered under DTAA. This means that involved countries have agreed upon tax rates and jurisdictions for income arising from their country.

For example, Mr. Arjun is an Indian residing in the UK. He has made investments in India on which he earns returns. Now, this Income can be taxable in both India and the UK. But because of DTAA, Mr. Arjun will not be taxed in both countries for the same income.

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Types of DTAA

Relief from Double Taxation can be provided in two ways:

  • Bilateral Treaties: When there is an agreement of DTAA between the Two countries relief is calculated according to mutual agreement between such two countries. Bilateral relief can be granted by either of the following methods:
    • Exemption method: Under this method, income is taxed in only one country
    • Tax credit:  Income is taxed in both countries. Relief is granted in the country in which the taxpayer is the resident.
  • Unilateral Relief: The home nation provides relief when there is no mutual agreement between the countries 

Nature of DTAA

  • Comprehensive: Comprehensive DTAA’s are those which cover almost all types of incomes covered by any model convention. Many a time a treaty covers wealth tax, gift tax, surtax. Etc. too.
  • Limited: Limited DTAA’s are those which are limited to certain types of incomes only.

Advantages of DTAA

  • The intent behind a Double Tax Avoidance Agreement is to make a country appear as an attractive investment destination by providing relief on dual taxation.
  • This relief is provided by exempting income earned in a foreign country from tax in the resident nation or offering credit to the extent taxes have been paid abroad.
  • Reducing the possibility of tax evasion in both or either of the signatory countries
  • Tax rate concessions
  • Lower Withholding Tax: Lower withholding tax is a plus for taxpayers as they can pay lower TDS on their interest, royalty, or dividend incomes in India.

Treatment of Double Taxation Avoidance Agreement

There are two ways of implementing DTAA:

  1. By either exempting the income earned abroad in its entirety
  2. By providing credit to the extent of tax already paid in the other country

Continuing the example, as Mr. Arjun is covered under DTAA. And the agreement states that the UK will exempt his entire income earned on investments made in India then he has to pay taxes only in India and not the UK. Only one particular country will charge his income.

Now, let’s say that the agreement states that India and the UK both will charge taxes on that income. In that case, Mr. Arjun will get a credit of the taxes paid by him in the UK which will be deducted while paying taxes in India. So he will end up paying taxes in both countries but at lowered rates.

The Governments of different countries enter into Double Taxation Avoidance Agreements to provide reliefs to the tax-payers and encourage more investments.

How can NRI claim benefit of DTAA?

Non resident Indians residing in any of the DTAA countries can avail of tax benefits provided under DTAA by timely submission of the following documents every financial year within the due dates:

  • TRC (Tax Residency Certificate): You need to submit TRC to claim benefits under DTAA. To obtain a TRC, you can approach the tax/government authorities of your current residence country, where you would get TRC certified, upon downloading form 10F.
  • Form 10F: You need to submit form 10F to avail benefits under DTAA.
  • PAN number: You also need to submit your PAN (Permanent Account Number) along with the above documents to get tax benefits.
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How to apply for DTAA?

The process of application of DTAA involves a series of steps, involving the different types of provisions.

  • Determine whether the issue is within the scope of the convention.
  • Check that the treaty applies to the tax in issue – is it a tax listed in Article 2 (or a tax substantially similar to such a tax).
  • Thirdly, check that the treaty is in force for the taxable period in issue.

How is Double Taxation Avoidance Agreement relief calculated?

In case there is DTAA with the Country, then Tax Relief can be claimed u/s 90. Steps to compute Double Taxation relief:

  1. Calculate Global Income i.e. aggregate of Indian income and Foreign income;
  2. Compute tax on such global income as per the slab rates applicable;
  3. Calculate the average rate of tax (i.e. Global income divided by the amount of tax);
  4. Compute an amount by multiplying Foreign income with such average rate of tax;
  5. Compute Tax paid in Foreign country

The amount of relief shall be lower of (4) and (5).

In case there is No DTAA, then Tax Relief can be claimed u/s 91. Steps to compute relief:

  1. Compute tax payable in India
  2. Compute lower of Indian rate of tax and rate of tax in Foreign country
  3. Multiply the rate obtained in Step 3 by the doubly taxed income.

Relief will be the amount as computed in Step 3.

List of countries that have DTAA with India

India has signed a Double Tax Avoidance Agreement with most major nations where Indians reside. Following is the list of some of the major countries:

Country DTAA TDS rate
United States of America 15%
United Kingdom 15%
Canada 15%
Australia 15%
Germany 10%
South Africa 10%
New Zealand 10%
Singapore 15%
Mauritius 7.5% to 10%
Malaysia 10%
UAE 12.5%
Qatar 10%
Oman 10%
Thailand 25%
Sri Lanka 10%
Russia 10%
Kenya 10%

FAQ

Who is covered under DTAA?

Individuals who are residing in one country and earning any income from another country are covered under the Double Taxation Avoidance Agreement (DTAA).

How do I take DTAA benefits?

Individuals who are NRIs are covered under DTAA. They are required to submit their “Tax Residency Certificate (TRC)” to the deductor (Bank) along with Form-10F & PAN No.

How many countries have DTAA with India?

India has Double Taxation Avoidance Agreements (DTAA) with a total of 88 countries out of which 86 are presently in force.

What are the details should contains in TRC?

TRC should contain the following details:
– Name of the assessee.
– Status of the assessee (Individual, Firm, Company Etc.)
– Nationality
– Country
– Assessee Tax Identification or Unique Identification number of the relevant Country
– Residential status for the purpose of tax
– Validity Period of the certificate
– Address of the applicant