Claiming Tax Credit on Foreign Income of a Resident: Tax Return Filing with Tax Credits

People and companies frequently get revenue from several nations in today's interconnected global economy, which results in tax obligations in both the country of residency and the country of origin. If you earned some money while working in a foreign country in the financial year 2024–2025, it might also be subject to Indian taxes. According to income tax regulations, all money generated anywhere in the globe is subject to Indian taxation if you are a resident of India. It's possible that some tax was withheld from such foreign income outside of India. In this article, we will explain the process of claiming tax credit on the foreign income of a resident.

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Table of Content

What is a Foreign Tax Credit?

Determining Your Residential Statu

Rule 128 of Income Tax

Tax Return Filing with Tax Credits: Steps to Claim Credit on Foreign Income

Documents Required to Claim Foreign Tax Credit

Conclusion

Frequently Asked Questions

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What is a Foreign Tax Credit?

Countries impose taxes according to two guidelines:

• Source Rule: This rule states that income, regardless of who earns it, is subject to taxation in the nation where it is earned.

• Residence Rule: This rule states that the nation where the individual receiving the income resides should have the authority to tax them.

There may be instances in which one nation applies the source rule to income tax while another applies the residence rule. It will be double taxation when a taxpayer's income is taxed twice. However, if you have already paid taxes in one nation, you can deduct the amount of the tax from your home country's tax obligations. The tax paid in a foreign jurisdiction will be credited against the tax due in India on the foreign income if you have paid any taxes on it and it is also taxable in India. This credit against Indian tax obligations is essentially a foreign tax credit. When India has a DTAA with a foreign nation, Section 90 is meant to address instances of double taxation. Situations where no such agreement exists are covered by Section 91.

Determining Your Residential Status

The following requirements must be met in order to identify your residence status in India:

• If, during the current fiscal year, you have spent 182 days or more in India, or

• If you spent 60 days or more in India during the previous fiscal year, and 365 days or more during the four fiscal years prior to the previous fiscal year.

Two more requirements must be met in order to be categorised as a resident ordinarily resident (ROR):

• For at least two of the previous ten fiscal years, you have resided in India.

• Over the past seven financial years, you have spent a minimum of 730 days in India.

You will be categorised as a "Resident, Not Ordinarily Resident" (RNOR) if any of the previously listed requirements are not met. You will be classified as a non-resident Indian (NRI) if you don't fit any of the requirements.

Following the determination of your residential status, your income in India is subject to the following taxation:

• Only income earned within India is subject to income tax in India for RNORs and NRIs.

• Nonetheless, income tax is levied on both domestic and foreign earnings for residents and resident ordinarily residents (RORs).

Rule 128 of Income Tax

The majority of the uncertainty regarding getting tax credits was removed with the adoption of Rule 128 and Form 67. Rule 128 governs the Foreign Tax Credit (FTC) in India, and it was implemented on April 1, 2017. The guidelines for claiming FTC on foreign income tax are as follows.

• Only residents who have paid taxes or had taxes withheld from their overseas income in another country are entitled to claim the FTC.

• Only in the year that the foreign income was subject to Indian taxation will FTC be allowed. To put it another way, the assessee is eligible to claim the FTC in the year that the foreign income is submitted for Indian taxation.

• For any amount owed as interest or a penalty, no FTC will be permitted.

• The qualifying FTC is limited to the amount specified by the DTAA in cases where a DTAA has been struck between India and a foreign nation.

• Section 115JB (minimum alternate tax) allows resident Indians to claim a foreign tax credit on their foreign income tax.

• Regarding any foreign tax amount or percentage that the assessee contests in any manner, no credit will be granted.

With the caveat that if the taxpayer provides proof of dispute resolution and proof that he has fulfilled his obligation to pay the foreign tax within six months of the end of the month in which the dispute is ultimately resolved, the credit for the disputed tax will be granted in the year that the income is offered for taxation in India.

• The total of the credit amounts calculated independently for each source of income originating from a certain country will be the foreign tax credit. For example, the FTC must be calculated according to the source of income.

• The credit that can be granted is the lesser of the following: the tax that Indian tax rules require to be paid on that income and the tax that was paid in a foreign country on such income.

Tax Return Filing with Tax Credits: Steps to Claim Credit on Foreign Income

Your total income must include any income received anywhere in the world if you are a resident.

Step 1: To begin with, convert the international revenue using the reference rates into Indian rupees.

Step 2: Next, place this money under the appropriate income head. For instance, place salary income under the "salaries" head.

Step 3: If TDS has been withheld from your income, you can claim credit for these taxes. To receive credit for the foreign tax that was withheld, make sure the appropriate DTAA is used when claiming TDS credit.

Step 4: The Tax Residency Certificate (TRC) should be obtained by the taxpayer. It makes your tax residency status clear so that the appropriate DTAA is applied.

Step 5: The taxpayer must update Schedule FSI of the ITR with information about foreign income, or income received outside of India.

Step 6: The information in Schedule TR (Tax Relief) is filled in after the taxpayer submits information about foreign income in Schedule FSI.

Documents Required to Claim Foreign Tax Credit

The following documentation must be provided by the taxpayer in order to make an FTC claim.

• A declaration or certificate from the tax authority of a foreign nation outlining the type of foreign income and the amount of tax withheld or paid by the assessee, or from the individual withholding the tax or the assessee's signature.

• However, the aforementioned statement from the taxpayer is only deemed legitimate if it is accompanied by evidence of either a tax deduction or an online payment challan.

• To claim the FTC, Form 67 must be submitted through the Income Tax Portal prior to completing the income return.

Conclusion

Your income's tax standards may change based on where you live in India and where your income comes from. The procedure is different for a resident Indian whose foreign income is taxable, even if you may already be aware of how to declare taxes on your income generated in India. If you are an Indian resident, you can use the aforementioned information to claim tax on overseas income. To avoid any problems, it is vital to have all the necessary paperwork and to follow the proper procedures.

Frequently Asked Questions

Q1. What is a foreign tax credit in India?

The idea of deducting or offsetting taxes paid in the country of origin from the tax obligation incurred in the country of residence is known as the Foreign Tax Credit (FTC).

Q2. Who can claim a foreign tax credit?

A person who lives in India and has paid taxes abroad may be eligible to receive a tax credit for those taxes in order to reduce their Indian tax obligation.

Q3. Is tax paid on foreign income in a jurisdiction that does not have DTAA with India creditable?

Yes, it is creditable in accordance with Section 91's rules.

Q4. How is the foreign tax credit calculated?

The credit is determined by subtracting the foreign tax paid on that income from the tax due under the Act. Using the telegraphic transfer buying rate on the day the tax was paid or withheld, the currency of the foreign tax payment will be converted to determine this credit.

Q5. Will the FTC be available if such income is not taxable in India?

No, the FTC won't be accessible in that scenario.

Q6. What if the financial year of the foreign jurisdiction is not the same as the Indian financial year?

In the years that such foreign income is subject to Indian taxation, FTC will be reasonably available.

Q7. Is there any limit on foreign tax credits that can be claimed in India?

Yes, the FTC can be reduced by the lower of the tax paid outside of India; and the tax due on such income in India.