Foreign Tax Credit: What is It and How It Works?

A Foreign Tax Credit (FTC) is a relief mechanism that allows Indian residents to offset taxes paid on income earned abroad against their domestic tax liabilities. This provision aims to prevent double taxation of the same income, ensuring taxpayers are not penalised for earning income in foreign jurisdictions. By claiming FTC, individuals can reduce their Indian tax payable by the amount of tax already paid in another country, subject to certain conditions and limits. This system promotes cross-border economic activities and provides relief to taxpayers with global income sources.

How foreign tax credit works

When an Indian resident earns income abroad, that income may be taxed both in the country where it is earned and in India. To mitigate this double taxation, India offers FTC, allowing taxpayers to deduct the foreign tax paid from their Indian tax liability on the same income. The credit is available only if the income is doubly taxed and the taxpayer has included the foreign income in their Indian gross total income.

The amount of FTC available is the lower of the foreign tax paid or the Indian tax payable on the doubly taxed income. For example, if an individual pays Rs. 10,000 as tax in a foreign country on income that is also taxed Rs. 12,000 in India, they can claim an FTC of Rs. 10,000. Conversely, if the Indian tax is lower, say Rs. 8,000, the credit will be limited to Rs. 8,000.

FTC can be claimed against the tax payable under the head 'Income from Other Sources' or any other head of income, depending on the nature of the foreign income. It is essential to note that FTC is not available against interest, fee, or penalty payable under the Income Tax Act. Additionally, to claim FTC, taxpayers must furnish Form 67 before filing their income tax returns, providing details of the foreign income and taxes paid. This ensures transparency and proper verification by tax authorities.

How to claim foreign tax credit

Claiming FTC in India involves a systematic process to ensure compliance with tax regulations. Taxpayers must adhere to the following steps:

1. Determine eligibility: Ensure that you are a resident taxpayer in India who has earned income abroad and paid taxes on that income in the foreign country.
2. Include foreign income in Indian return: Report the foreign income in your Indian gross total income for the relevant financial year.
3. Obtain necessary documents: Secure proof of foreign tax payment, such as tax receipts or certificates from the foreign tax authority.
4. Complete Form 67: Fill out Form 67, providing details of the foreign income, taxes paid, and other relevant information. This form must be submitted online through the e-Filing portal of the Income Tax Department before filing your income tax return.incometax.gov.in
5. File Income Tax Return (ITR): After submitting Form 67, proceed to file your ITR, ensuring that the foreign income and FTC details are accurately reflected.
6. Maintain documentation: Keep all related documents, including Form 67 acknowledgment, foreign tax payment proofs, and income statements, for future reference and verification.
7. Seek professional assistance if needed: Given the complexities involved, consider consulting a tax professional to ensure accurate compliance and maximisation of available credits.

Adhering to these steps will facilitate a smooth process in claiming FTC and help avoid potential issues with tax authorities.

Documents required for claiming foreign tax credit

To successfully claim FTC, taxpayers must furnish specific documents that substantiate the foreign income earned and taxes paid. The essential documents include:

• Proof of foreign income: Documents such as salary slips, employment contracts, dividend statements, or bank interest certificates that confirm the amount and source of foreign income.
• Tax payment receipts: Official receipts or challans from the foreign tax authority evidencing the amount of tax paid.
• Tax deduction certificates: Certificates issued by the foreign entity or employer detailing the tax deducted at source.
• Form 67 acknowledgment: Confirmation receipt of Form 67 submission, which is mandatory for claiming FTC in India.
• Foreign tax returns: Copies of tax returns filed in the foreign country, if applicable, to provide additional proof of tax compliance.
• Challans of tax payment in india: Proof of taxes paid in India on the foreign income to establish the claim for credit.
• Relevant correspondence: Any communication with foreign tax authorities that pertains to the tax payment or assessment.

Maintaining these documents is crucial for a valid FTC claim and serves as evidence in case of any scrutiny by tax authorities.

Conclusion

The Foreign Tax Credit is a vital provision for Indian residents earning income abroad, ensuring they are not doubly taxed on the same income. By understanding the eligibility criteria, following the correct procedure for claiming the credit, and maintaining the necessary documentation, taxpayers can effectively utilise this benefit. Timely submission of Form 67 and accurate reporting of foreign income are essential steps in this process. For complex situations, seeking professional guidance can provide clarity and ensure compliance with all regulatory requirements.

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