How to Claim Foreign Tax Credit for Income Earned Abroad
- Rashmita Choudhary
- 6 days ago
- 9 min read
Foreign Tax Credit allows resident taxpayers in India to avoid double taxation on income earned abroad by offsetting tax already paid in another country. The process requires accurate reporting of foreign income, filing Form 67, and submitting supporting evidence before filing the return. Income earned outside India must be declared in Schedule FSI and Schedule TR to compute the eligible credit under Indian tax rules. Each country’s tax payment is evaluated separately, and the credit is restricted to the lower of foreign tax paid or Indian tax payable. Platforms like TaxBuddy simplify this compliance by guiding users through every step.
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How to Claim Foreign Tax Credit for Income Earned Abroad
Foreign Tax Credit ensures that income taxed abroad does not get taxed twice when reported in India. Resident taxpayers earning foreign income—salaries, dividends, interest, capital gains, or professional receipts—can reduce their Indian tax payable by claiming credit for tax already paid overseas. The claim requires Form 67 submission, accurate disclosure in Schedule FSI, and supporting documentation. Each country’s tax payment is evaluated separately, and the allowable credit is capped at the lower of foreign tax paid or Indian tax payable on that specific income source. The process involves compliance with income tax rules, DTAA provisions, and currency conversion norms.
Eligibility to Claim Foreign Tax Credit in India
Foreign Tax Credit is available only when the taxpayer qualifies as a resident under Indian tax law. Tax must be paid or deducted in the foreign jurisdiction for income that becomes taxable again in India. FTC applies whether the income is taxed under a DTAA treaty or under unilateral relief methods. Non-residents and RNOR individuals are not eligible for FTC because income earned outside India is generally not taxable for them. The claim must be made in the same financial year in which the income is included in the total income for Indian tax computation.
Key Documents Required for Claiming Foreign Tax Credit
Taxpayers must collect foreign tax payment proofs before claiming FTC. Accepted documents include foreign salary slips showing tax deduction, tax withholding certificates issued abroad, tax payment receipts, or official statements from foreign authorities. Supporting documents explaining income nature, period of earning, country of source, and tax computation strengthen the claim. In some cases, foreign residency certificates or Form 10FA/10FB may also be required. All documents must match the figures provided in Form 67 and the ITR schedules to avoid mismatches or adjustments during processing.
How to File Form 67 for Foreign Tax Credit
Form 67 must be filed online before submitting the Income Tax Return. The form requires details such as country of income, source classification, foreign tax amount, tax identification number, income category, and any DTAA article applicable. The taxpayer must upload supporting documents such as foreign tax receipts, certificates, or salary statements. Once submitted, Form 67 auto-links with the ITR filing system. If the form is not filed before the return, the claim may be disallowed or reduced, as tax authorities consider Form 67 mandatory for FTC eligibility.
How to Report Foreign Income in ITR (Schedule FSI & TR)
Foreign income must be reported in Schedule FSI with clear classification of income type, country code, amount earned, and foreign tax paid. Schedule TR captures the tax relief claimed for each income source and computes the permissible credit under Indian rules. The system compares foreign tax paid with the tax payable on that specific income in India and allows the lower amount as credit. Ensuring accuracy in these schedules prevents errors that may trigger system-generated adjustments under Section 143(1).
Foreign Tax Credit Rules Under DTAA
India’s Double Taxation Avoidance Agreements specify which country can tax particular income categories and how relief must be granted. Salary, interest, royalties, dividends, and business income often fall under DTAA articles that detail the tax-sharing mechanism. When DTAA applies, the taxpayer must follow treaty rules instead of domestic computation. Where DTAA provides tax exemption or reduces foreign tax liability, FTC is adjusted accordingly. Understanding relevant DTAA articles ensures accurate computation of eligible tax credit.
Currency Conversion Rules for Foreign Tax Credit
Foreign taxes paid must be converted into Indian Rupees using the telegraphic transfer buying rate (TTBR) as on the last day of the month preceding the month of tax payment. This rule applies even if multiple payments are made over the year. Using incorrect conversion rates may reduce or invalidate FTC claims. Banks and authorized dealers publish TTBR rates, and taxpayers must refer to official sources while calculating tax relief.
Limitations and Restrictions on Foreign Tax Credit Claim
The maximum FTC permitted is capped at the lower of: • Foreign tax paid • Indian tax payable on that specific income
FTC cannot be claimed for interest, penalties, or fines imposed abroad. Tax paid on income exempt in India or under concessional tax treatment cannot be considered. Each country’s income and tax must be computed separately, so excess credit from one jurisdiction cannot offset tax from another. FTC is not available if foreign tax is refunded later; any refund must be reported in the year of receipt and credit adjusted.
Common Errors When Claiming Foreign Tax Credit
Frequent mistakes include filing Form 67 after filing the ITR, reporting incorrect currency conversion rates, mismatching income figures between FSI and TR schedules, or using tax receipts that don’t clearly reflect the tax amount. Missing DTAA details or incorrectly categorizing income also leads to tax adjustments. Many taxpayers overlook the rule that FTC cannot exceed Indian tax on that income, resulting in reduced credit claims. Maintaining accurate documentation helps avoid scrutiny or disallowance.
Foreign Income Compliance for Bank Account Forms
Banks often require detailed disclosures when opening NRE, NRO, or resident accounts linked to foreign income. These include FATCA declarations, foreign residency details, PAN, and certified copies of identity and address proofs. Some institutions require foreign tax residency information to comply with global reporting obligations. Completing these forms correctly ensures smooth remittances, proper credit of foreign income, and alignment with income tax filing requirements. Accurate documentation simplifies future FTC claims and avoids mismatches during tax audits.
How TaxBuddy Helps With Foreign Tax Credit Filing
Foreign income reporting, Form 67 filing, and DTAA interpretation require precise documentation and compliance. TaxBuddy streamlines this process by guiding taxpayers through foreign income disclosure, verifying tax certificates, and ensuring accurate credit computation. Its platform helps prevent common filing errors and assists in correctly calculating eligible relief. TaxBuddy experts also support users who handle multiple foreign income sources and require detailed DTAA-based evaluations for correct tax planning and compliance.
Conclusion
Foreign Tax Credit offers essential relief for taxpayers who earn income abroad and face tax deductions in the source country. Accurate documentation, correct filing of Form 67, and proper reporting in ITR schedules ensure the claim is processed smoothly. Understanding DTAA guidelines, currency conversion rules, and income classification helps maximise eligible credit and avoid compliance issues. For streamlined assistance with FTC claims or any aspect of foreign income filing, download the TaxBuddy mobile app for a simplified, secure, and hassle-free experience.
FAQs
Q1. Does TaxBuddy offer both self-filing and expert-assisted plans for ITR filing, or only expert-assisted options? TaxBuddy provides two structured ways to file returns, ensuring flexibility for every type of taxpayer. The self-filing plan is designed for individuals who prefer managing their returns independently but still want the support of automated accuracy checks. Its AI engine extracts data from Form 16, AIS, and TIS to reduce manual effort and improve precision. For taxpayers with more complex situations—such as foreign income, capital gains, business income, or Foreign Tax Credit claims—the expert-assisted plan offers personalised support from trained tax professionals. Every detail is reviewed before submission, helping prevent errors and ensuring compliance with the Income Tax Act.
Q2. Which is the best site to file ITR? The government’s income tax portal remains the official platform for filing ITRs in India. It is suitable for those familiar with form structures and statutory disclosures. However, many taxpayers prefer private e-filing platforms for their convenience and workflow simplification. Platforms like TaxBuddy combine automation, advisory support, real-time validations, and post-filing assistance, making them a strong choice for individuals who want a smoother experience. These platforms reduce the risk of mistakes and help users handle deductions, exemptions, DTAA rules, and foreign income more confidently.
Q3. Where to file an income tax return? Taxpayers can file their returns directly on the Income Tax Department’s e-filing portal or use registered private platforms that follow compliance norms. Most users today choose guided filing services that simplify schedules, automate AIS data import, and assist with complex entries like foreign income or Form 67. Platforms such as TaxBuddy provide both self-service tools and expert-led filing, allowing taxpayers to choose the method that suits their income profile, level of complexity, and comfort with tax forms.
Q4. Is Form 67 mandatory for claiming Foreign Tax Credit? Form 67 is mandatory under Rule 128 for anyone seeking Foreign Tax Credit on income earned abroad. This form must be submitted before filing the ITR and requires details of foreign income, tax paid overseas, and supporting documents. If Form 67 is not filed on time, the tax department may disallow or restrict the FTC claim, even if foreign tax was actually paid. Filing this form ensures that the credit is linked with the ITR and helps establish a record of tax paid outside India for verification purposes.
Q5. What type of foreign taxes qualify for FTC? Only income taxes paid in a foreign country are eligible for FTC. These may include withholding taxes, tax deducted at source on salary or interest, or final taxes paid after assessment abroad. Payments classified as penalties, fines, surcharges, late fees, or indirect taxes do not qualify. The nature of the income must match the category under Indian tax rules, and documentary evidence must clearly show that the foreign tax relates to income included in the Indian ITR.
Q6. Can FTC be claimed without DTAA? Yes. India permits unilateral tax relief even when no Double Taxation Avoidance Agreement exists with the foreign country. This ensures that resident taxpayers are not subjected to double taxation solely because a treaty is absent. The foreign income must be taxable in India and must actually suffer tax abroad. In such cases, the credit is still limited to the lower of foreign tax paid or tax payable in India on that income.
Q7. What happens if the foreign tax is refunded later? If the foreign government refunds any portion of the tax that was originally claimed as FTC in India, the refund must be reported in the year of receipt. The earlier FTC claim must then be adjusted to reflect the reduced foreign tax burden. This can increase the Indian tax payable for that year. Taxpayers should monitor foreign assessments or revised withholding statements to ensure correct reporting during subsequent years.
Q8. Can FTC be carried forward to next year? FTC cannot be carried forward or deferred. It must be claimed in the same financial year in which the foreign income is taxed in India. Even if the foreign tax exceeds the Indian tax liability on that income, the excess amount cannot be claimed in later years. Each year’s FTC computation is independent, and any unutilised credit expires at the end of that assessment cycle.
Q9. Does FTC apply to salary earned during overseas deputation? Yes. When a resident Indian employee is deputed abroad and the salary earned overseas is taxed in the host country, FTC can be claimed in India as long as the income is included in the Indian ITR. The foreign tax deduction must be supported by payslips, tax deduction certificates, or employer statements. DTAA provisions often determine whether salary is taxable in the host country, India, or both.
Q10. How is FTC calculated when income is earned in multiple countries? FTC must be computed separately for each country. The tax department evaluates foreign income country-wise to determine the credit allowed under Rule 128. Excess FTC from one jurisdiction cannot offset tax obligations arising from another. Each country’s tax paid, conversion rate, and Indian tax computation must be individually disclosed in Form 67 and the relevant ITR schedules. This prevents credit mixing and maintains clarity during assessments or reconciliations.
Q11. Does FTC apply to foreign dividends or capital gains? Yes. FTC is available on any foreign income that is taxable in India, including dividends, interest, royalties, and capital gains, provided foreign tax has been paid on that income. Documentary proof is essential, and the income must be reported in Schedule FSI. DTAA relief provisions may further clarify the rate of foreign tax allowed or whether certain incomes are taxable only in one country.
Q12. Why is FTC sometimes reduced during processing? FTC may be reduced when inconsistencies appear in Form 67, Schedule FSI, Schedule TR, or the supporting documentation. Common reasons include incorrect TTBR conversion rates, mismatches between foreign income reported in AIS and the ITR, overstated tax credits, or omission of tax proof documents. Automated CPC checks may also adjust FTC when the claimed credit exceeds the Indian tax payable on that income. Ensuring complete documentation and accurate reporting helps avoid reductions.
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