How to Claim Tax Credit on Foreign Income of a Resident?

The taxation of your income depends on factors such as the source of the income and your residential status in India. While claiming tax on income earned in India as a resident Indian follows a familiar process, different rules apply when a resident Indian has taxable income from foreign sources.

This quick guide explains what Foreign Tax Credit means and how it can be claimed on income earned outside India.

Meaning of Foreign Tax Credit

If you have paid tax in another country and India has a Double Taxation Avoidance Agreement (DTAA) with that country, you may claim credit for the tax paid there in India. Foreign income refers to income earned from sources outside India or your country of residence.

Foreign Tax Credit is based on two rules:

Source Rule: Under this rule, income is taxed in the country where it is earned. Therefore, the individual may be subject to taxation as a non-resident or as a resident.

Resident Rule: This rule allows the country where the individual resides to levy tax on the income.

To prevent the same income from being taxed twice, Section 90 of the Indian Income Tax Act applies when India has entered into a DTAA with another country.

Section 91, on the other hand, applies when India does not have a tax treaty with the concerned country.

Before understanding the tax treatment, it is important to determine who qualifies as an Indian resident.

How to Determine Your Status as a Resident?

Your residential status in India is determined based on the following conditions:

• You have stayed in India for 182 days or more during the current financial year; or
• You have stayed in India for 60 days or more during the previous financial year and for 365 days or more during the four financial years immediately preceding it.

To qualify as a Resident and Ordinarily Resident (ROR), you must also satisfy both of these additional conditions:

• You have been a resident of India for at least 2 out of the last 10 financial years.
• You have stayed in India for a total of at least 730 days during the last 7 financial years.

If you do not fulfil the required conditions, you will be classified as a Resident, Not Ordinarily Resident (RNOR). If none of the specified conditions are satisfied, you will be considered a Non-Resident Indian (NRI).

Once your residential status has been established, the taxability of your income in India is determined as follows:

• For RNORs and NRIs, income tax in India applies only to income earned within India.
• For residents and RORs, income tax applies to both income earned in India and income earned outside India.

What is Rule 128 of the Income Tax Rules?

Rule 128 of the Income Tax Rules lays down the guidelines for claiming tax credits. Introduced with effect from April 1, 2017, the rule governs Foreign Tax Credit (FTC) in India and covers the following provisions:

• Only resident assessees can claim FTC for taxes paid in a country or specified territory outside India.
• FTC is available only in the year in which the income on which foreign tax was paid or deducted is offered for taxation in India.
• The foreign tax paid or deducted on the taxable income is considered for credit, subject to the applicable income tax for that year.
• Foreign Tax Credit cannot be claimed for any interest or penalty payable.
• Where India has a DTAA with a foreign country, only the foreign taxes covered under the agreement are eligible for credit.
• No credit is available for foreign tax that is under dispute or for the disputed portion of the tax.
• Foreign Tax Credit is calculated separately for each source of income from a particular country.
• The allowable credit is the lower of the tax payable on that income under the Indian Income Tax Act or the foreign tax paid on that income.
• If the assessee provides proof that the dispute has been settled and the foreign tax liability has been paid within six months from the date of final settlement, credit for the disputed tax will be allowed in the year in which the related income is assessed or taxed in India.
• The assessee must also provide an undertaking confirming that no refund has been claimed for the amount for which the credit is being obtained.

How to Claim Tax Credit on Foreign Income?

The following steps should be followed to claim Foreign Tax Credit:

• Convert the foreign income into Indian currency using the applicable reference exchange rates.
• The conversion should be based on the Telegraphic Transfer Buying Rate (TTBR) of the State Bank of India on the last day of the month immediately preceding the month in which the income was earned.
• Report the foreign income in your tax return under the relevant income head, such as the ‘Salaries’ section.
• If tax has been deducted at source from your foreign income, you can claim credit for the tax deducted.
• Obtain a Tax Residency Certificate (TRC) as supporting documentation.
• Apply the appropriate DTAA when claiming credit for foreign taxes.
• Report your foreign income, meaning income earned outside India, in Schedule FSI (Foreign Source Income) of your Income Tax Return (ITR).
• After entering the foreign income details in Schedule FSI, the relevant details in Schedule TR (Tax Relief) will be populated automatically.

Following these steps can help you claim foreign income that is taxable in India while complying with the applicable rules and requirements.

Required Documentation for Claiming Foreign Tax Credit

To claim Foreign Tax Credit (FTC), the assessee needs to submit the following documents:

• A certificate specifying the nature of the income and the amount of tax deducted or paid by the assessee, signed by the assessee. This can be obtained from the tax authority of the foreign country or the person responsible for deducting the tax.

The statement or certificate submitted by the assessee will be considered valid when it is supported by:

• An acknowledgment of online payment, bank counterfoil, or challan for the tax paid by the assessee.
• Proof of tax deduction where the tax has been deducted.
• Form 67, which must be completed and submitted through the Income Tax Portal as part of the FTC claim process.

Form 67 must also be submitted when a current-year loss results in a refund of foreign tax for which credit was claimed in an earlier year.

Conclusion

The information above can help resident Indians understand how to claim tax credit on foreign income. Having the required documents in place and following the prescribed process is essential to avoid difficulties while claiming the credit.

FAQ’s

1. Can a resident Indian claim tax credit for income earned abroad?

Yes. A resident taxpayer in India may generally claim a Foreign Tax Credit (FTC) for eligible taxes paid on foreign income, subject to applicable Indian tax laws and DTAA provisions.

2. What is Foreign Tax Credit (FTC) in India?

Foreign Tax Credit allows a resident taxpayer to reduce their Indian tax liability by claiming credit for eligible taxes already paid on the same foreign income in another country.

3. How do I claim Foreign Tax Credit in my ITR?

You generally need to report the foreign income in your ITR and furnish the prescribed details of foreign income and taxes paid, along with the required foreign tax credit form.

4. Which form is required to claim Foreign Tax Credit in India?

Form 67 is generally used to furnish the statement of foreign income and foreign tax paid for claiming Foreign Tax Credit under the applicable rules.

5. Is Foreign Tax Credit available under a DTAA?

Yes. Where India has a DTAA with the foreign country, relief from double taxation may be available according to the method and conditions specified in the applicable treaty.

6. What documents are required to claim tax credit on foreign income?

You may need documents such as foreign tax payment certificates, tax statements, proof of foreign income, and other supporting evidence showing the amount of tax paid or deducted abroad.

7. Is there a limit on the Foreign Tax Credit that can be claimed?

Yes. The credit is generally subject to prescribed limits and cannot ordinarily exceed the Indian tax payable on the corresponding foreign income.

8. Can I claim credit for foreign tax deducted at source?

Yes, foreign tax deducted at source may qualify for Foreign Tax Credit if it is an eligible foreign tax and the applicable conditions and documentation requirements are satisfied.

9. What happens if I do not claim Foreign Tax Credit while filing my ITR?

If eligible foreign tax credit is not claimed, you may end up paying tax in India without receiving credit for tax already paid abroad. Applicable rules should be checked to determine whether the claim can subsequently be made or revised.

10. Is Foreign Tax Credit available for foreign income from salary, interest, dividends, or capital gains?

Potentially yes. The availability and calculation of the credit depend on the type of foreign income, tax paid abroad, Indian tax treatment, and the applicable DTAA, if any.

11. Can a resident claim Foreign Tax Credit if India does not have a DTAA with the foreign country?

Relief may still be available under the provisions of the Income-tax Act, subject to the applicable conditions and limitations.

12. What is the deadline for claiming Foreign Tax Credit in India?

The prescribed reporting requirements and deadlines should be followed for the relevant assessment year. Taxpayers should ensure that the required foreign tax credit statement and ITR are furnished within the applicable timelines.