Can you imagine a situation, when even before receiving your hard earned money in your bank account, government demands tax on such income twice the amount for which you are actually liable? Yes, such a situation can happen when you are having your income from outside India, where you might be required to pay tax twice on the same income to the Indian Government, as well as the government of the country from whom you have earned money.
Taxation Rules of Foreign Income:
Any Nation State, taxes the Income of the persons on the basis of 2 criteria’s:
Let’s take an example: An Indian resident having a house property in UK is desirous of selling it. Now, tax implication on such will be as follows:
- He has to pay tax on capital gains in UK, as per source rule, in accordance with the laws of UK
- Further, since he is resident in India, his world income is taxable in India in accordance with the residence rule. Therefore, while filing his ITR in India, he has to include such capital gain in into account while preparing his computation of Income.
This leads to the situation of double taxation of same income, and therefore shrinking the net disposable income of the persons paying taxes.
To Mitigate such a situation, government enters into various agreements with other/ partner countries to provide relief to its residents, and such an agreement with other nation states is known as Double Taxation Avoidance Agreement (DTAA) covered under section 90 & 91 of the Income Tax Act, 1961.
The government with the aim to provide transparent and justifiable taxation system to its residents, ensures to avoid the double taxation of same income, via:
How can you claim the Foreign Tax Credit (FTC)?
- To avail the benefit of FTC, you need to file form 67 on the Income Tax portal on or before the due date of filing of ITR
- A statement of Computation of Income of that country outside India
- A statement of the foreign tax deducted along with the proof (challan, TDS receipt etc.)
- A certificate or statement specifying the nature of Income and the manner of tax deducted from the tax authority outside India or the person responsible for deduction of such tax.
Other relevant details:
- FTC shall be available against the amount of tax, surcharge, and cess payable under Indian tax laws, but not against interest, fee, or penalty.
- FTC (Foreign Tax Credit) is the sum of the credit amounts estimated separately for each source of income originating in a specific nation.
- FTC shall be available against the amount of tax, surcharge, and cess payable under Indian tax laws, but not against fee, interest, or penalty.
- If the foreign tax is challenged, the FTC will not be available.
- FTC shall be available in the year in which the income corresponding to such tax has been offered or assessed to tax in India.
- Even tax payable under Section 115JB (Minimum Alternate Tax) is eligible for Foreign Tax Credit.
- The lower of the tax payable on such income under Indian tax legislation and the foreign tax paid shall be the FTC (Foreign Tax Credit).
- The Foreign Tax Credit is calculated by converting the currency in which the foreign tax was paid or deducted at the Telegraphic Transfer Buying Rate on the last day of the month immediately preceding the month in which the tax was paid or deducted.
Conclusion
The FTC (Foreign Tax Credit) guidelines have provided relief to worldwide Indian enterprises that derive a large portion of their revenue from foreign sources. The regulations have addressed a number of concerns that needed clarification or might cause undue hardship to the assessee. However, there are some long-standing issues in the foreign tax credit field that have yet to be addressed. Litigation on a variety of other issues is also a possibility.
FAQs on Foreign Tax Credit (FTC) in India
1. What is Foreign Tax Credit (FTC)?
Foreign Tax Credit allows a taxpayer who has paid tax on foreign-sourced income in another country to claim relief in India so that the same income is not taxed twice — once abroad and once in India. It applies when the same income is chargeable to tax both in India and overseas.
2. Who can claim FTC in India?
Any resident Indian taxpayer (individual or entity) who has paid foreign tax on income that is also taxable in India can claim FTC. FTC can be claimed whether or not a DTAA exists with the foreign country.
3. In which year can I claim the foreign tax credit?
FTC can be claimed in the year in which the corresponding income is offered to tax in India. If the income spans multiple years, FTC may be claimed proportionately.
4. How is the amount of Foreign Tax Credit computed?
The allowable credit is the lower of (a) the foreign tax paid and (b) the Indian tax payable on the same income. You must convert foreign tax into Indian rupees using the Telegraphic Transfer Buying Rate (TTBR) on the last date of the month preceding the month in which tax was paid abroad
5. Against which tax liabilities can FTC be claimed?
FTC is allowed against income tax, surcharge, and cess in India. It cannot be claimed against interest, penalties, or fees.
6. What forms and documents are required to claim FTC?
To claim FTC, you must file Form 67 on the Indian income-tax e-filing portal before or along with your ITR for the relevant year. Supporting documents generally include:
- A statement of foreign income and taxes paid/deducted
- Proof of foreign tax payment (tax certificates or challans)
- Tax Residency Certificate (TRC) of the foreign country (especially for DTAA claims)
- Details of the nature of income and calculation of FTC
7. Do I need a Tax Residency Certificate (TRC) to claim FTC?
A TRC helps substantiate your residency and eligibility under a DTAA and is highly recommended when claiming FTC under bilateral relief. However, FTC can still be claimed under unilateral relief (Section 91) even without a DTAA, subject to conditions
8. What happens if Form 67 is not filed on time?
If Form 67 is not filed within the prescribed timeline, the tax authorities may disallow the FTC claim, leading to double taxation. However, some judicial rulings have allowed late filings in specific circumstances — but it’s best to file on time.
9. Can I claim FTC if the foreign tax paid is under dispute?
No. If the foreign tax amount is under dispute, FTC generally cannot be claimed until the dispute is resolved and the tax is finally paid.
10. What are common mistakes taxpayers make when claiming FTC?
Some frequent errors include:
- Not filing Form 67 correctly
- Missing or incomplete documentation
- Claiming FTC for income that isn’t taxable in India or for foreign tax not actually paid
- Incorrect conversion of foreign tax into INR
- These can lead to FTC being denied or scrutiny by the tax authorities.
