Foreign Tax Credit under Indian Income-tax Law – Concept and Procedure for Residents and Non-Residents

 

The concept of Foreign Tax Credit (FTC) in Indian tax law is rooted in the principle that the same income should not be subjected to double taxation merely because it arises in one jurisdiction and is taxable in another. India follows the credit method to eliminate double taxation, and the statutory framework is contained in sections 90, 90A and 91 of the Income-tax Act, 1961 read with Rule 128 of the Income-tax Rules.

 

1. Concept of FTC

A Foreign Tax Credit is the mechanism by which a taxpayer in India is allowed to set off the tax paid in a foreign country against the tax payable in India on the same income. The credit is granted when the foreign income is included in the total income taxable in India and the foreign tax has been either paid or deducted at source in accordance with the laws of the foreign jurisdiction.

 

There are two situations in which FTC is available:

                1.            Where India has entered into a Double Taxation Avoidance Agreement (DTAA) under section 90 or 90A, the credit is governed by the provisions of the relevant treaty.

                2.            Where no treaty exists, unilateral relief is provided under section 91 for taxes paid in the foreign country.

 

In all cases, the credit is restricted to the lower of:

(a) the foreign tax paid, or

(b) the Indian tax payable on the same income.

 

2. Eligibility of Resident and Non-Resident Taxpayers

 

Under Indian tax law, the availability of FTC depends on the residential status under section 6.

 

Residents: A resident taxpayer is taxable in India on global income. Consequently, any foreign income that suffers tax outside India also falls within the scope of Indian taxation. Residents are therefore eligible to claim FTC on all such foreign-sourced income that is included in their taxable income in India.

 

Resident but Not Ordinarily Resident (RNOR): An RNOR is taxable only on income received in India, or foreign income from a business controlled or a profession set up in India. FTC is available only in respect of such income that is taxable in India.

 

Non-Residents: A non-resident is taxable in India only on income that accrues or arises in India or is received in India. FTC is relevant to non-residents only in limited cases where income taxable in India has also suffered withholding tax in a foreign country—such as offshore services attributable to India or royalty/FTS taxed both in India and abroad. If the foreign tax is on income that is not chargeable in India, no credit is available.

 

3. Conditions for Claiming FTC under Rule 128

 

Rule 128 lays down detailed procedural and substantive conditions:

The foreign tax must be a tax on income and must have been paid by the taxpayer.

The foreign income on which such tax is paid must be included in the total income in the Indian return.

FTC is not available for interest, penalties or dispute-related payments.

FTC must be supported by a statement in Form 67 along with necessary evidence of payment.

 

4. Filing Requirement – Form 67

 

Form 67 is mandatory under Rule 128 for availing the credit. The form must contain details of the foreign income, the foreign tax paid, the nature of the income and the relevant article of the DTAA where applicable. The CBDT has clarified that Form 67 may be filed on or before the due date of filing the return under section 139(1). Courts have held that a delay in filing Form 67 is procedural and may not defeat the substantive claim, but the prevailing administrative practice requires the form to be filed electronically before or along with the original return.

 

5. Documentation Required

 

The taxpayer must preserve and upload documentary evidence such as:

A certificate or statement from the foreign tax authority,

Proof of tax deduction or payment, and

Relevant statements from the foreign payer.

 

The documentary proof must specify the nature of income, the amount of tax paid and the manner of computation.

 

6. Computation of FTC

The computation follows a step-wise approach:

                1.            The foreign income is first converted into Indian currency at the Telegraphic Transfer (TT) buying rate on the date of payment or deduction of foreign tax.

                2.            The foreign tax is also converted using the same rate.

                3.            The Indian tax attributable to the foreign income is determined by applying the average rate of Indian tax to such income.

                4.            FTC is allowed to the extent of the lower of the foreign tax paid or the Indian tax so computed.

                5.            Where foreign income is taxable at a beneficial treaty rate, the credit is restricted accordingly.

 

If a surcharge or cess applies to the Indian tax on such income, the computation incorporates the same. However, foreign surcharges or penalties are not eligible for credit.

 

7. FTC in Case of Disputed Foreign Tax

FTC is not allowed for taxes under dispute in the foreign country. Once the dispute is settled and the tax is paid, the credit must be claimed in the year in which the payment is made. The rule also provides for carry-forward by way of rectification where the foreign tax becomes final after the Indian assessment is completed.

 

8. Special Situations

Income taxed on accrual basis in India but on payment basis abroad:

Credit is allowable in the year in which the foreign tax is actually paid, even if the income was taxed earlier in India.

 

Multiple foreign jurisdictions:

FTC has to be computed separately for each country and each source of income and then aggregated.

 

Conclusion

 

The scheme of Foreign Tax Credit in India is intended to prevent double taxation while ensuring that relief does not exceed the Indian tax attributable to the foreign income. The procedure has become increasingly system-driven with mandatory filing of Form 67 and detailed disclosures in Schedule FSI and TR. While residents claim FTC regularly on global income, non-residents may claim it only in narrow circumstances where foreign tax is imposed on income that is also chargeable in India.