Summary: Indian residents earning income abroad that is also taxed in India can seek relief from double taxation through the Foreign Tax Credit (FTC) mechanism. Available under Section 90 or 90A of the Income-tax Act, read with Double Taxation Avoidance Agreements (DTAA), or under Section 91 for countries without a DTAA, FTC allows credit for taxes paid in the overseas country. This credit is applicable against income tax, surcharge, and cess payable in India on the doubly taxed income, but not against interest, fees, or penalties. Disputed foreign taxes can be credited later upon final settlement and payment, provided evidence and an undertaking are furnished within six months of settlement. The FTC amount is calculated separately for each income source and is limited to the lower of the tax paid in India or the foreign country on that income. Claiming FTC requires filing Form 67 along with proof of foreign tax payment from the overseas tax authority or deductor, or a self-attested statement with payment evidence, by the due date for filing the income tax return in India. Adjustments and revised Form 67 are necessary if a foreign tax refund is received subsequently.
- Foreign Tax Credit (FTC) is a mechanism to provide relief to the taxpayers to claim credit in India for the taxes paid in overseas country on the doubly taxed overseas sourced income (i.e., taxed in India as well as the overseas country) due to residency and taxation laws of both the countries.
- Therefore, as per section 90 / 90A of the Income-tax Act read with Double Taxation Avoidance Agreement (DTAA) or Tax Treaty of India with overseas country or specified territory, in order to avoid double taxation of income under this Act and under the corresponding law in force in the overseas country by avoiding non-taxation or reduced taxation of income through tax evasion or avoidance, credit of foreign taxes is allowed.
- Additionally, in case of overseas country where no DTAA exists with India, still credit of foreign taxes can be claimed under section 91 of the Income-tax Act.
- Further, as per rule 128 of the Income-tax Rules, an assessee being a Residentof India is allowed credit for the amount of taxes paid in overseas country by way of deduction or otherwise in the year in which corresponding income was offered to tax in India.
- Further, the credit of taxes shall be available against the amount of tax, surcharge and cess payable under the Act but not in respect of any sum payable by way of interest, fee or penalty and no credit of taxes shall be available which are under dispute. However, credit of disputed tax shall be allowed for the year in which such income is offered to tax or assessed to India if the assessee within six months from the end of the month in which the dispute is finally settled, furnishes evidence of settlement of dispute and an evidence to the effect that the liability for payment of such foreign tax has been discharged by him and furnishes an undertaking that no refund in respect of such amount has directly or indirectly been claimed or shall be claimed.
- The FTC shall be computed for each source of income separately and it shall belower of taxes paid in India or the overseas country or territory & which shall not exceed the actual amount of taxes paid in a particular country (India or overseas country).
- Further, the credit shall be determined by conversion of the currency of payment of foreign tax at the telegraphic transfer buying rate on the last day of the month immediately preceding the month in which such tax has been paid or deducted.
- Further, as per Article 2 (Taxes Covered) of DTAA with United States of America (USA), credit of only Federal taxespaid in USAÂ shall be allowed while computing FTC in India and any taxes paid on account of state taxes, accumulated earnings tax, the personal holding company tax and social security taxes are not allowed.
- For the purpose of claiming FTC in India, following documents shall be furnished by the assessee:
- a statement of income from the overseas country or specified territory o9ffered for tax for the previous year and of foreign tax deducted or paid on such income in Form 67,
- certificate or statement specifying the nature of income and the amount of tax deducted therefrom or paid by the assessee-
- from the tax authority of the country or specified territory outside India; or
- from the person responsible for deduction of such tax; or
- signed by the assessee: Provided that the statement furnished by the assessee in clause (c) shall be valid if it is accompanied by-
- an acknowledgement of online payment or bank counter foil or challan for payment of tax where the payment has been made by the assessee;
- proof of deduction where the tax has been deducted
- The statement in Form 67 shall be furnished on or before the end of the assessment year relevant to the previous year in which the doubly taxed overseas sourced income has been offered to tax or assessed to tax in India and the return for such assessment year has been furnished within the time specified under section 139(1) (Original Return) or 139(4) (Belated Return).
- Provided further, in case of return has been furnished under section 139(8A) (Updated Return)Â shall be furnished on or before the date on which such return is furnished.
- Additionally, Form 67 shall also be furnished in a case where the carry backward of loss of the current year results in refund of foreign tax for which credit has been claimed in any earlier previous year or years.
- This refers to a situation in FTC rules where a loss incurred in the current year (say, FY 2024–25) is carried back to an earlier year (say, FY 2023–24), and this carry back reduces the taxable income for that earlier year in the foreign country resulted in tax refund and double non-taxation.
- Therefore, if you receive such a foreign tax refund, you are required to revise the Indian income tax return for the year in which FTC was originally claimed and file a revised Form 67 within the applicable time limits. This ensures accurate tax credit and avoids tax evasion or undue benefit.
- Further, if FTC is claimed in the original Indian return based on actual taxes paid in the overseas country (before filing the foreign tax return), and subsequently, after filing the overseas return, the average tax rate is reduced resulting in a refund of taxes abroad, then the Indian income-tax return should be revised accordingly. A revised Form 67 must also be filed within the prescribed timelines to avoid the risk of double non-taxation and potential tax evasion implications.
| Doubly Taxed Income (INR) | Taxes paid in Overseas Country on Doubly Taxed Income (INR) | Taxes paid in India on Doubly Taxed Income (INR) | Foreign Tax Credit (INR) |
| 2.    50,00,000 | 3.    7,50,000 | 4.    15,00,000 | 5.    7,50,000 |
- Further, Article 23A (Exemption Method) and Article 23B (Credit Method) of Organisation of Economic Cooperation’s (OECD) Model Tax Convention outline the primary methods for relieving double taxation. India typically follows, Article 23B (Credit Method) in its DTAA’s.
