What is Foreign Tax Credit and How to Claim It

Once you make income in a foreign country, you may be forced to pay tax in the country (the source country) and in India (the residence country) as well. This is the case of a double taxation and it is against such circumstances that the idea of the Foreign Tax Credit (FTC) is of specific relevance. To obtain this relief in India you have to file Form 67 prior to your regular ITR filing.
We shall know what is Foreign Tax Credit, when it is applicable, how to claim it by filling Form 67 and how it can be included in your ITR filing process.

What is Foreign Tax Credit (FTC)?

1. The Foreign Tax Credit is a tax relief method that enables taxpayer resident in India to make a deduction of his or her Indian tax liability by the amount of tax paid in the foreign country on the same income.
2. The FTC aim is to prevent the twisting of the two taxes; one in the country of the income generation, and another in India.
3. In India, this relief is provided by the Income-tax Act in terms of Section 90 and 91 and the intricate rules in terms of Rule 128 of the Income-tax Rules.
4. E.g. suppose you receive the dividends or interest in a foreign country on which tax is subtracted in that foreign country, then you can report such foreign income in your ITR and claim FTC to ensure you are not taxed on the same income.

Eligibility: Who Can Claim FTC?

1. During the financial year, you should be a tax resident of India.
2. You need to have earned a foreign income to a country not within India and paid or deducted tax in the concerned foreign country on the foreign income.
3. The income should also be subject to taxation in India.
4. In Poland, you cannot claim FTC if the foreign income is exempt.
5. The tax paid in foreign countries is not subject to dispute and in case they have a dispute in the payment of the tax, you cannot claim FTC till the payment has been made.

How Does FTC Integrate into ITR filing?

1. In doing your ITR filing (i.e., ITR 2 or ITR 3), you are required to declare your foreign income under Schedule FSI (Foreign Source Income) and claim relief under Schedule TR (Tax Relief).
2. Prior to or alongside filing of your ITR, you will have to file Form 67 on the e-filing portal of the income tax. In the absence of Form 67, your claim with FTC can be denied.
3. Form 67 should contain the same figures as the figures announced through your ITR any discrepancy may lead to the denial of the credit.

What is Form 67?

1. Form 67 is a form that is filed by a resident taxpayer in order to claim Foreign Tax Credit in India.
2. The rule 128(9) of the Income-tax Rules states that you are required to present Form 67 on or before the due date of the filing of your original return under the Section 139(1). The form includes:

• Part A: includes general information such as your name, PAN, address, details of the assessment year, income details, and the tax credit you are claiming.
• Part B: specifics of any repatriation or re-account of foreign tax.
• Confirmation: Taxpayer self-reports.
• Attachments: Evidence of foreign tax paid or deducted, foreign tax authorities’ certificates, etc.

You are required to submit Form 67 on the income tax e-filing portal, and only after that, you are expected to do your ITR filing.

How to Calculate the FTC?

The credit you can claim is the lower of:

• You must pay duty in India on foreign income
• Paid or deductible tax in the foreign country.
• I.e. in case of multiple countries of revenue, then calculate the credit country-wise and source-wise and combine it.

Multiply the amount of foreign tax paid by the Telegraphic Transfer Buying Rate (TTBR) of the previous day of the month before the month in which the tax was paid or deducted of the Indian rupees.

You cannot claim FTC on any interest, fee, or penalty paid in a foreign country.

Step-by-Step: How to Claim FTC via Form 67 and ITR filing?

 1: Collect information of foreign income and paid tax

• Identify the source, foreign country and nature of income (salary, dividend, interest etc).
• Get a certificate or statement of the foreign tax authority or employer that indicates the amount of tax paid or deducted.
• Maintain records of receipt of payment or deduction.

 2: Foreign income and tax paid to be converted to INR

• Use TT Buying Rate according to the stipulated rule.

 3: Fill 67 form (prior to filling your ITR)

• Go to the e-Filing service of Income Tax Department.
• Go to e-File/Income Tax Forms/File Income Tax Forms/ Select Form 67.
• Complete Part A and B (where applicable), attachments and verify with the help of Aadhaar OTP, EVC or DSC.

 4: File your ITR

• Report foreign income on Schedule FSI.
• Report on Foreign Tax Credit on Schedule TR.
• Make sure that the figures are the same as Form 67.

 5: Keep supporting documents ready

• Evidence of foreign payment of taxes or deduction.
• Exchange rate reference
• You submit and the authorities recognize Form 67.
• ITR filing acknowledgement

Key Deadlines and Pitfalls

1. File Form 67 within the due date of your original filing of ITR under Section 139(1).
2. There is a deadline on the date when you may lose your right to claim the Foreign Tax Credit.
3. Make sure that the information in Form 67 and ITR are the same.
4. You may not assert FTC on any taxation dispute in the foreign country.
5. Claim that lower of Indian or foreign tax on such income.

Benefits of Claiming FTC

• Helps will not pay twice as much tax on the same income.
• Grew your net take-home pay on foreign sources.
• Makes sure that it complies with Indian taxation laws.
• Reduces mistakes or punishment in examination.
• Gives financial transparency to cross-border earners.

Final Thoughts

When you receive foreign income and pay the tax in your foreign country, the Foreign Tax Credit can mean a lot in determining your tax position. Always fill out and submit Form 67 before filing your ITR, keep proper records, and ensure that all figures match. This not only will assist you in keeping in-line but also in maximizing your overall tax position and avoids unnecessary double taxation.

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FAQs

Q1: My foreign income was subject to tax in a foreign country and was paid; however, I did not file the Form 67, May I still claim the Foreign Tax Credit when filling the ITR?

No. You have to submit the Form 67 prior to or with the first time of filing ITR to claim the FTC. Otherwise, authorities will probably ban it.

Q2: My foreign country did not collect tax on dividend income. Can I claim that as FTC in India?

Yes, on condition that the income is taxable in India, and you fill Form 67 with a valid document.

Q3: What happens if I paid foreign tax in a different year compared to the year by which I earned the income in India?

You have to state FTC within the identical assessment year within which the income is provided to tax in India. Timing differences may cause the denial of credit.

Q4: Am I allowed to assert FTC in case there is a dispute over the foreign tax?

You cannot claim FTC until the controversy is settled and you actually pay the tax.

Q5: Does a Double Taxation Avoidance Agreement (DTAA) provide the claim to FTC?

Not always. Under a DTAA, there is a claim to FTC under Section 90, and where none exists, you make a claim under Section 91, with conditions attaching.

Q6: Does ITR filing become any more complex by filing Form 67?

You can handle this additional step. Form 67 and FTC claiming are easy to use after collecting the necessary documents and very helpful.

In case you need any further guidance with regard to online Income Tax , please feel free to contact us at 8881-069-069.

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