How to claim Tax Credit on Foreign Income of a Resident

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.

• To check your Residential Status – click here.
• If you are a Resident, income earned by you anywhere in the world shall be taxable in India and has to be included in your total income. If you are an NRI – click here to read about taxation for NRI.
• Convert income earned outside India into Indian currency – convert your income in foreign currency into Indian Rupees by using the State Bank of India telegraphic transfer buying rate (TTBR) of the last day of the month before the month in which income is due. For example, for converting salary income of December 2020, use the TTBR of the relevant currency for November 2020 and convert your salary into Indian Rupees.
• Now, include this income under the head to which it belongs, for example, include salary income under the head ‘salaries.
• You have to treat this income as any other income which is earned by you locally. Minimum exemption of Rs 2,50,000 is allowed on your total income and the remaining income is taxable as per income tax slab rates.
• If TDS has been deducted from your income, you are allowed to take credit for such taxes. For this purpose, reference has to be made to the relevant Double Tax Avoidance Agreement (DTAA) of the country where such income has been earned. India has entered into DTAAs with several countries. DTAA makes sure that a taxpayer is not doubly taxed for the income earned outside the country of residence. Since income may be taxed at source i.e. from the place it originated and is also usually taxable in the country of residence, the DTAA makes sure that the taxpayer is not adversely impacted. The taxpayer is also allowed to take credit of TDS deducted.
• Taking the benefit of a DTAA involves obtaining a Tax Residency Certificate (TRC) that helps identify and certify your tax residency status to make sure the correct DTAA has been applied. This is in line with the tax laws in India.
• While taking TDS credit, make sure you are referring to the correct DTAA. Under DTAA, there are two methods to claim tax relief – exemption method and tax credit method. By exemption method, income is taxed in one country and exempted in another. In the tax credit method, where the income is taxed in both countries, tax relief can be claimed in the country of residence.
• If no DTAA exists between the 2 countries, you may still be able to get a tax credit on foreign taxes paid. You may need an expert to assist you.
• In the latest income tax return forms, several disclosures have been added for income on which DTAA benefit has been claimed.

If you have earned foreign income on which TDS or any form of tax has been deducted, you may need help from an expert to obtain a TRC and make sure the correct DTAA is applied, so you can take credit for the foreign tax deducted.

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