If you are working for a client or company that is based overseas, your income may be taxed not only in the foreign country where it is earned but also in India, depending on your residential status and applicable tax laws.
However, this does not necessarily mean you have to pay tax twice on the same income. Eligible resident taxpayers can claim credit for taxes paid abroad by filing Form 67 with the income tax department, helping them avoid double taxation.
What is foreign tax credit and when do you submit Form 67?
Let’s understand how foreign tax credit works with an example. Let’s say you are an Indian tax resident working remotely for a US-based company and earn $10,000 as salary or professional . A portion of your income will be withheld as tax by the US government before the payment is made to you.
Since you are an Indian tax resident, your global income is taxable in India, which means you must report the entire $10,000 as income while filing your ITR. However, under the double taxation avoidance agreement (DTAA), you can claim a foreign tax credit for the tax already paid abroad.
Residents must submit Form 67 on or before the due date for filing their income tax returns (ITR) to claim credit for foreign taxes paid.
This form also needs to be furnished in case the carry backward of losses of the current year results in the refund of foreign tax for which credit has been claimed in any previous years.
How does foreign tax credit work in India?
Under the Indian tax laws, Sections 90 and 91 of the Income-tax Act govern the foreign tax credit provisions. Section 90 applies where India has entered into a DTAA with another country.
Meanwhile, Section 91 deals with claiming of FTC in scenarios where India has not entered into a DTAA with the country where the income arises for a taxpayer.
Under these provisions, a Indian resident taxpayer who has paid taxes outside India can claim credit for such foreign taxes paid against their tax payable on the same income in India.
Who can claim a foreign tax credit?
Key rules for claiming foreign tax credit have been notified under Rule 128 (effective April 1, 2017):
- FTC can be claimed if India has a with the foreign country.
- If India does not have a DTAA with the foreign country, then the nature of income should be similar to the income taxable in India.
- It can be claimed only in the year in which the corresponding income is offered to tax in India.
- FTC is available against Indian tax, and cess, but not against interest, fee or penalty.
- FTC cannot be claimed for disputed foreign taxes. It can be claimed within six months of the dispute being settled, subject to prescribed conditions.
- FTC is available even against tax payable under Section 115JB (Minimum Alternate Tax).
- FTC is computed separately for each source of income from each foreign country.
- The credit is restricted to the lower of the foreign tax paid or the Indian tax payable on that income.