Foreign Tax Credit in India: What You Need to Know

India Briefing examines the significance of the Foreign Tax Credit provision and how non-resident Indians can minimize their tax liability burden via Form 67 of the Income Tax Act, 1961. 

In 2022, India’s Income Tax Department publicly notified an amendment to the Foreign Tax Credit (FTC) rule, stating, “The pre-amended rule required the FTC claim to be filed by the due date of furnishing the Income Tax Return (ITR). The amendment operates retrospectively so that its benefit is available to all FTC claims filed during the current financial year.”

The amendment also permits statements in Form 67 to be furnished on or before the end of the relevant assessment year (AY). The amendment came into effect on April 1, 2022.

What is a foreign tax credit?

Under the terms of the relevant tax treaty, residents are entitled to a credit against their Indian tax due for income tax paid abroad on income arising overseas that is subject to double taxation. In order to claim the tax on overseas income in India, the taxpayer must provide Form 67 with their ITR by the deadline.

Income Tax Rule 128

The rule specifies that an individual taxpayer who resides in India can receive a credit for foreign taxes paid in another country or specified territory outside India. This credit can be claimed in the year when the corresponding income is taxed in India. If the income taxed abroad is spread across multiple years, the foreign tax credit will be distributed proportionally across those years based on when the income is taxed in India.

The term “foreign tax” refers to:

• Taxes covered under a double taxation avoidance agreement (DTAA) with a specific country or territory.
• Taxes payable under the law of any other country or territory, similar to income tax.

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This credit can be used against taxes, surcharges, and cess payable under Indian law, but not against interest, fees, or penalties. However, if there is a dispute regarding the foreign tax amount, the credit can still be claimed once the dispute is settled. In such situations, evidence of settlement and payment of the tax must be provided within six months.

The foreign tax credit is calculated separately for each income source from a particular foreign country or territory. It is the lesser of the tax payable in India on that income or the foreign tax paid, converted to Indian currency at the telegraphic transfer buying rate on the last day of the previous month.

To claim the foreign tax credit, the taxpayer must provide documents such as a statement of income and foreign tax paid in the prescribed format. These documents must be submitted before the end of the assessment year in which the income is taxed in India.

Tax Residency Certificate

A non-resident must get a Tax Residency Certificate (TRC) attesting to its residency in the other nation or designated territory in order to claim a tax treaty benefit. In this regard, the Indian government has issued a notification with a specific form that requires the individual to self-declare the necessary information.

Determining residential status

When a resident taxpayer gets income from a foreign state, the tax will be deducted from the income of the foreign state. This may come under double taxation. There are two rules to this:

1. Source Rule: This rule states that income, whether it comes from a resident or a non-resident, is taxed in the nation in which it is earned.
2. Resident Rule: The residence rule applies taxes to an individual who resides in a tax jurisdiction, regardless of where the money was generated. 

A person can be considered a resident Indian if the following conditions are met: 

• An individual has stayed in India for 182 days or more in one financial year
• An individual has stayed in India for 60 days in the last financial year and 365 days or more in the last four financial years preceding the last financial year.

One would be considered a resident ordinarily resident (ROR) in India if they met the following two additional conditions:

• Income received or accrued in India
• Income deemed to be received or accrued in India.

Form 67 filing procedures

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The Central Board of Direct Taxes (CBDT) vide notification no. 9/2017, dated September 19, 2017, has prescribed the procedure for filing Form 67:

• Form 67 is to be prepared and submitted online for taxpayers who are mandated to file their income tax returns electronically.
• This form is available on the e-filing portal of the income tax department in the taxpayer’s account.
• A Digital Signature Certificate (DSC) or Electronic Verification Code (EVC) is mandatory to submit Form 67
• Submission of Form 67 shall precede the filing of the return of income.
• An applicant must be a registered user on the e-Filing portal with valid user ID and password.
• It is recommended to link the PAN and Aadhaar of the taxpayer and the status of PAN should be “Active”

Steps to fill and submit Form 67 through online mode

Step 1: Log in to the e-Filing portal using your user ID and password.
Step 2: On the user dashboard, click e-File > Income Tax Forms > File Income Tax Forms.
Step 3: On the File Income Tax Forms page, select Form 67. Alternatively, enter Form 67 in the search box to find the form.
Step 4: On the Form 67 page, select the Assessment Year (A.Y.) and click Continue.
Step 5: On the Instructions page, click Let’s Get Started.
Step 6: Form 67 is displayed. Fill in all the required details and click Preview. (4 sections)
Step 7: On the Preview page, verify the details and click Proceed to e-Verify.
Step 8: Click Yes to e-Verify
Step 9: At the e-Verify page, the applicant can choose the mode of verification, i.e., receive an OTP on a mobile number registered on the Aadhar Card, verify using a Digital Signature Certificate (DSC) or generate an Electronic Verification Code through net banking, a bank account, or a demat account.
Step 10: After successful e-verification, a success message is displayed along with a transaction ID and acknowledgement number. 

Documents required

• Taxpayers need to keep a full record of their income and taxes paid abroad to claim foreign tax credits in India.
• Form 67 also requires enclosing tax payment acknowledgement, TDS deduction proof, etc., while filing Form 67.
• To submit any tax inquiry later on, the taxpayer should keep all the records, such as TDS Certificate, ITR copy, pay slips, income-generating documents, etc.
• Also, the taxpayer should obtain a TRC from the source country, so that the same can be submitted to the tax authorities in case any questions arise. The TRC helps to make sure that the correct DTAA has been applied for the elimination of double taxation as well as to satisfy other provisions of the tax treaty.

Form 10F: Certificate for claiming relief under an agreement (Sections 90 and 90A, Income Tax Act, 1961)

The assessee must maintain all necessary documents to support the information provided under sub-rule (1) within Section 90 and 90(A). An income-tax authority may request the assessee to furnish these documents regarding any relief claimed by them.

For a resident in India seeking a certificate of residence for agreements referenced in sections 90 and 90A, the applicant must submit an application in Form No. 10FA to the Assessing Officer. After successful verification by the Assessing Officer upon receiving the application, the relevant authority will issue a certificate of residence for the assessee in Form No. 10FB.

READ: Recent Changes to Form 10F: A Guide for Non-Residents Seeking to Claim DTAA Benefits in India

Overseas individual’s tax obligations

When an individual receives income from more than two countries, there are two ways in which the tax deduction can be made:

Economic Double Taxation: This occurs when multiple people pay taxes on the same income. For example, profits and dividends paid to shareholders are the two places where a company’s income is subject to taxation.

Jurisdictional Double Taxation: Also referred to as juridical double taxation, this type of double taxation occurs when an individual is subject to taxes in two distinct nations on the same income.

Tax credit opportunities for NRIs based in tax treaty and non-tax treaty countries

The Income Tax Act of India provides tax relief opportunities for NRIs residing in countries with DTAAs with India, as well as those in countries without such tax treaties in place.

Under Chapter IX of the Income Tax Act, 1961, Section 90, the central government is empowered to negotiate agreements with foreign countries or specified territories for various purposes, such as granting relief in cases of double taxation, promoting economic relations, preventing tax evasion, and facilitating information exchange.

If an agreement exists between India and a foreign country or specified territory, the provisions of the Income Tax Act will apply to the extent that they are more beneficial to the taxpayer covered by the agreement. Additionally, the Act specifies that certain provisions, even if less beneficial, shall still apply in certain circumstances.

For NRIs residing in countries without a DTAA / tax treaty with India, Section 91 of the Income Tax Act provides relief. It allows for deductions from Indian income tax if the taxpayer can prove that they have already paid taxes on their income in the foreign country where it was earned. This deduction is calculated based on the Indian tax rate or the rate of tax in the foreign country, whichever is lower. Similar provisions apply in cases involving income earned in specific countries, like Pakistan, or in cases where non-residents are taxed on their share of income from a registered Indian firm.

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