Did you earn income abroad during the financial year? If so, that income could also be taxable in India! As a resident Indian, the income you earn worldwide is subject to tax in India. However, tax may have already been paid in the foreign country. So, how do you include this foreign income in your Indian tax return? Let’s explore how to handle this situation and claim the Foreign Tax Credit (FTC) to avoid double taxation.
Tax is charged by countries based on two rules:
So, there may be situations where one country charges tax on an income based on source rule, whereas another country charges tax based on residence rule. Won’t it be Double Taxation? Yes, it will be (Double taxation occurs when the same income is taxed twice in the hands of the taxpayer), but if you have paid taxes in a country, you can claim a credit for the tax paid against your tax liabilities in your home country.
If you have paid any tax on a foreign income and such foreign income is also taxable in India, the tax so paid in a foreign jurisdiction shall be creditable against the tax payable in India on such Income, and such credit against Indian tax liabilities is essentially a foreign tax credit.
Section 90 is intended to deal with situations of double taxation in which India has signed a DTAA with a foreign country. Section 91 deals with situations in which there is no such agreement.
Adopting Rule 128 and Form 67 eliminated most 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:
Provided, that the credit for such disputed tax shall be allowed in the year in which such income is offered to tax in India if the taxpayer furnishes 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 from the end of the month in which the dispute is finally settled.
To claim FTC, the taxpayer must furnish the following documents.
If you are a resident, income earned anywhere in the world must be included in your total income.
Step 1: Convert the foreign income into INR as per the reference rates
Step 2: Now, include this income under the respective income head; for example, include salary income under the head ‘salaries’.
Step 3: You can take credit for such taxes if TDS has been deducted from your income. While taking TDS credit, ensure the correct DTAA is applied to take credit for the deducted foreign tax.
Step 4: The taxpayer should add details of foreign income, i.e., income earned outside India, to Schedule FSI of the ITR.
Step 5: Once the taxpayer adds details of Foreign Income in Schedule FSI, the particulars in Schedule TR (Tax Relief) get populated.
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