How to claim a tax credit on the foreign income of a resident?

Ankita Tiwari

04 Oct, 2023

Do you have some income you earned abroad in this financial year? You would have paid tax outside India on such foreign income. If you are an Indian resident, as per the Income Tax rules, your global income is taxable in India. But how is this income included in the income tax return? Let’s find out.

Tax Credit under DTAA

With globalisation, the amount of opportunities abroad has increased. It is doubtful that if a person goes abroad to work in other countries, he or she will return to India soon. Such persons are usually seen in confusion with regard to the tax aspect. Will their income earned outside India be taxed in India again, being a resident of India or not? To avoid such instances, countries sign a mutual agreement in the form of DTAA, which allows them to get relief from taxes paid in other countries.

What is a Tax Credit on foreign income?

Those who pay taxes in a foreign country can claim a credit for taxes paid in their home country, subject to the condition that both countries have entered into a DTAA. Two rules are followed while claiming a tax credit; they are as follows:

Source Rule

As per the source rule, the amount is taxed in the country in which it is earned, irrespective of whether a resident or a non-resident earns the income.

Resident Rule

As per this rule, the right to tax is vested in the country of residence.

If both the regulations apply to the assessee at the same time, there will be double taxation. Double Taxation means the same income is taxed twice in the hands of the assessee. Section 90 of the Income Tax Act is intended to deal with the situation in which India has signed a DTAA with another country. Further, section 91 provides relief in cases where India has not signed any DTAA with another country.

Rule 128 of Income Tax Rules

Adopting Rule 128 and Form 67 removed the majority of the uncertainty regarding obtaining tax credits. In India, the Foreign Tax Credit (FTC) is regulated by Rule 128 of the Income Tax Rules, and it has been in effect since 1^st April 2017. The following conditions are covered under this rule:-

1. Only a resident assessee can claim a Foreign Tax Credit if he paid tax in a foreign country or defined territory other than India.
2. Foreign Tax Credit is granted in the year in which the taxes are levied on the income or have been presented for tax or assessed for tax in India.
3. Tax paid abroad or income deducted is provided for taxation, and an amount equivalent to the income tax in that year will be refunded.
4. Foreign Tax Credit is not allowed for any sum payable as interest or penalty.
5. Where a DTAA is entered into between India and a foreign country, the eligible foreign taxes are those that the DTAA covers.
6. Credit shall not be allowed towards any amount of foreign tax or any segment thereof that the assessee disputes in any way.
7. Subject to such a condition that the credit for such disputed tax shall be permitted for the year in which such income is subject to tax or assessed to tax in India only if the assessee provides evidence of settlement of dispute and evidence to the effect that he has discharged the liability for payment of such foreign tax within six months is finally settled and provides an undertaking that no refund in respect of such amount.
8. Furthermore, the credit for the foreign tax shall be the sum of credit amounts estimated individually for each source of income emerging from a certain nation.
9. The credit permissible is the lesser of the tax payable on such income under the Income Tax Act and the foreign tax paid on such income.

Document Required to Claim Foreign Tax Credit

To claim a Foreign Tax Credit, the assessee is required to furnish the following documents:-

1. Certificate or statement stating the nature of income and the amount of tax deducted or paid by the assessee
2. Issued by a foreign country’s tax authority
3. Issued by the person responsible for deducting such tax
4. The assessee should sign it,
5. Subject to the condition that the statement provided by the assessee in clause (3) above is valid and is accompanied by:
6. An acknowledgement of online payment or bank statement or challan for payment of tax where the assessee has made the payment
7. Proof of deduction where the tax has been deducted.
8. Form 67 should be submitted on the Income Tax Portal.
9. Form 67 must be filled if the carryback of the current year’s loss leads to a refund of foreign tax for which credit was claimed in any previous year or years.

What is the purpose of Form 67?

Individual taxpayers who want to claim Foreign Tax Credit have to fill out Form 67. It is necessary to submit Form 67 by the due date for completing your income tax return under section 139(1) of the Income Tax Act 1961.

For a person to claim double taxation relief, whether under section 90, 90A or 91, the CBDT¹ has provided a Form 67 that is compulsorily filed by the respective assessee online, providing the information in respect of the income during a particular year. The said form must be submitted before such a person files their tax return.

How to Claim Tax Credit on Foreign Income?

For a resident, income received anywhere in the world must be included in your total income.

1. Convert income received outside India into Indian currency as per the reference rates.
2. Then, include this income under the respective income head, including salary income under the head ‘salaries’.
3. If TDS is deducted from your income, you are permitted to take credit for such taxes.
4. Obtain a TRC certificate.
5. While taking TDS credit, ensure that the accurate DTAA is applied to take credit for the foreign tax deducted.
6. The taxpayer should seek details of foreign income, i.e., income received outside India in Schedule FSI of ITR.
7.  Once the taxpayer in Schedule FSI adds details of Foreign Income, the details in Schedule Tax Relief get populated.

Conclusion

In summation, it can be said that DTAA read with section 90/90A/91 of the Income Tax make it easier for the resident Indians earning income in India as well as abroad to claim tax credit of the tax paid abroad. Further, the introduction of Rule 128 and Form 67 has simplified the process even further.

FAQs

1. https://incometaxindia.gov.in/pages/about-us/central-board-of-direct-taxation.aspx