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

Updated on: Apr 25th, 2023


6 min read

Have you worked abroad during the financial year and earned some income? Some tax may have been deducted outside of India on such foreign income. If you are a resident Indian as per the income tax rules, the income earned anywhere in the world is taxable in India for you. But how should this income be included in an income tax return? Let’s find out.

What is Foreign Tax Credit?

If you have paid taxes in one country, you can claim a credit for the tax paid in your home country if both countries have DTAA. It has two rules, which are as follows:

1. Source Rule: According to this rule, money is taxed in the country where it is earned, regardless of whether the income is earned by a resident or a non-resident.
2. Resident Rule: According to this rule, the right to tax should be vested in the country of resident.

There will be double taxation if both regulations apply to an assessee at the same time. Double taxation occurs when the same income is taxed twice in the hands of the assessee. Section 90 is intended to deal with situations in which India has signed a DTAA with another country. Section 91 deals with situations in which India has not signed any such agreements with another country.

Rule 128 of Income Tax Rules

The adoption of Rule 128 and Form 67 eliminated the majority of the ambiguity surrounding obtaining tax credits. Foreign Tax Credit (FTC) in India is governed by Rule 128 of the Income Tax Rules, which became effective on April 1, 2017. The following conditions are covered under the rule:

1. Only a resident assessee is qualified to claim FTC if he paid tax in a country or defined territory other than India.
2. FTC shall be granted only in the year in which the income subject to such tax has been presented for tax or assessed for tax in India.
3. Foreign tax paid or deducted income is provided for taxation. And a credit equivalent to the income taxed in that year will be provided.
4. No Foreign Tax Credit will be allowed for any sum payable as interest or penalty.
5. Where a DTAA has been signed between India and a foreign country, the eligible foreign taxes are those covered by the DTAA.
6. No credit shall be allowed in respect of any amount of foreign tax or portion thereof that the assessee disputes in any way.
7. Provided, however, that the credit for 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 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 within six months from the end of the month in which the dispute is finally settled, and furnishes an undertaking that no refund in respect of such amount.

9. Furthermore, the credit for foreign tax shall be the sum of the credit amounts estimated separately for each source of income emanating from a certain nation.
10. The credit admissible is the lesser of the tax payable on such income under the Act 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.

1. Certificate or statement describing the nature of income and the amount of tax deducted or paid by the assessee:

  • from a foreign country's tax authority
  • from the person responsible for deducting such tax
  • signed by the assessee

2. Provided, however, that the statement provided by the assessee in clause (3) above is 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.

3. Form 67 must be submitted using the Income Tax Portal.

4. Form No. 67 must also be filed if the carryback of the current year's loss resulted in a refund of foreign tax for which credit was claimed in any previous year or years.

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

2. Now, include this income under the respective income head, for example, include salary income under the head ‘salaries’.

3. If TDS has been deducted from your income you are allowed to take credit for such taxes.

4. Obtain TRC Certificate

5. While taking TDS credit, make sure the correct DTAA is applied, so you can take credit for the foreign tax deducted.

6. The taxpayer should add details of foreign income i.e. income earned outside India in Schedule FSI of ITR

7. Once the taxpayer adds details of Foreign Income in Schedule FSI, the details in Schedule TR (Tax Relief) get populated.

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Quick Summary

Indian residents earning foreign income must include it in their tax returns. Foreign Tax Credit allows claiming taxes paid abroad. It follows Source and Resident Rules to avoid double taxation. Rule 128 of Income Tax Rules covers conditions for claiming FTC. Specific documents are needed to claim FTC. The process involves converting foreign income, including in the tax return, getting TRC certificate, and using the correct DTAA for TDS credit.

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