Don’t Pay Tax Twice

There’s a quiet frustration that catches many taxpayers off guard every year. You’ve worked hard, earned income abroad — maybe through a foreign employer, overseas investments, or a stint at an international assignment — you’ve paid taxes in that country, and then you come back to India and realise the Income Tax Department wants a piece of the same income too.

It feels unfair. And to a large extent, the law agrees with you. That’s where the Foreign Tax Credit (FTC) comes in — a provision under Indian tax law that lets you offset the taxes you’ve already paid in another country against your Indian tax liability. Done right, it can save you a significant sum. Done wrong — or worse, ignored entirely — you end up paying tax twice on the same income.

Why Does This Situation Even Arise?

India taxes its residents on their global income. So if you’re a resident Indian who received a dividend from US stocks, worked on a project in Germany, or has a fixed deposit in Singapore — all of that income needs to be declared in your Indian ITR.

The problem? The country where the income was earned has usually already taxed it. Without a relief mechanism, you’d be taxed twice — once by the foreign government, and once by India. To prevent this, India has signed Double Taxation Avoidance Agreements (DTAAs) with over 90 countries. For countries not covered by a DTAA, Indian domestic law (Section 91 of the Income Tax Act) provides unilateral relief. FTC is the instrument through which this relief is claimed in your ITR.

Who Can Claim FTC?

If any of the following apply to you, FTC is likely relevant:

• You are a resident Indian who received income from abroad — salary, dividends, interest, capital gains, royalties, or business income
• You are a salaried employee deputed to work in another country and paid taxes there
• You invest in US stocks or ETFs and receive dividends on which the US withholds tax
• You are a freelancer or consultant working with foreign clients and paying taxes in their jurisdiction
• You are an NRI returning to India who still has income-bearing assets abroad

Important Note FTC is available only to residents and ordinarily residents of India. Non-Resident Indians (NRIs) are taxed in India only on their India-sourced income, so the question of double taxation rarely arises for them in the same way.

The Rule That Governs It All: Rule 128

The detailed procedure for claiming FTC is governed by Rule 128 of the Income Tax Rules, 1962, introduced in 2016. Before this rule existed, the process was ambiguous and inconsistently applied. Now there’s a reasonably clear framework — though it still trips up a lot of taxpayers.

1.  Credit Is Limited to the Indian Tax on That Income

The FTC you can claim cannot exceed the Indian tax payable on that foreign income, computed at the Indian rate. So if you paid 30% tax abroad on income that would attract only 20% tax in India, you only get credit for 20%. The excess 10% is lost — you cannot carry it forward or get a refund.

2.  You Must File Form 67

FTC cannot be claimed just by mentioning it in your ITR. You must separately file Form 67 — a specific form detailing the foreign income, the taxes paid, and the credit being claimed. This form must be filed on or before the due date of filing your return. Missing this deadline has cost many taxpayers their entire FTC claim.

3.  Supporting Documents Are Mandatory

You need a Tax Residency Certificate (TRC) from the foreign country, along with a tax payment certificate or the foreign equivalent of Form 16. Documents must be in English or accompanied by a certified translation.

4.  Income Head Matching Matters

The FTC credit must be claimed against the same head of income under which the foreign income is taxed in India. Foreign dividends go against ‘Income from Other Sources,’ not your salary head. Getting this wrong can result in the credit being disallowed.

A Tale of Two Taxpayers

Scenario 1: The IT Professional on an International Assignment

Arjun, a software architect from Bengaluru, was sent to the Netherlands by his Indian employer for eight months. Dutch income tax was deducted at source by his employer there.

When he returned and filed his Indian ITR as a resident, his entire global income was taxable in India. However, since India has a DTAA with the Netherlands, Arjun was entitled to claim FTC for the Dutch taxes paid.

He collected the Dutch tax payment certificate, filed Form 67 before the ITR due date, and claimed the credit in Schedule FSI and Schedule TR. The credit offset a significant portion of his Indian tax liability. The catch he almost missed: his CA nearly forgot to convert the foreign tax paid into Indian Rupees using the SBI telegraphic transfer buying rate on the last day of the month preceding the month of deduction — the prescribed conversion rate under Rule 128.

Scenario 2: The Retail Investor with US Stocks

Priya, a Delhi-based marketing professional, received $480 in dividends from her US stock portfolio. The US withheld 25% as dividend withholding tax, leaving her with $360.

When she filed her ITR, she declared the entire $480 (pre-tax amount, not $360 — a common error) as income under ‘Other Sources.’ She then claimed FTC for the $120 already withheld.

Under the India-US DTAA, the US can only withhold 15% on dividends. The extra 10% she paid above the DTAA rate was not creditable in India. Her lesson: understand the DTAA rate vs. the rate actually withheld. If excess tax has been withheld by the foreign country, consider filing a refund claim there — or accept that the excess won’t translate into Indian credit.

7 Common Mistakes Taxpayers Make

1. Not Filing Form 67 At All

Many taxpayers claim FTC in their ITR schedule but never separately file Form 67. Tax officers have consistently disallowed FTC claims where Form 67 was absent. The form is separate from the ITR and must be filed on the income tax portal.

2. Filing Form 67 After the ITR Due Date

Even if you file your ITR on time, if Form 67 comes in after the due date, the credit can be denied. The deadline for Form 67 mirrors the ITR due date — July 31 for most individuals, October 31 if you have an audit requirement.

3. Reporting Net Income Instead of Gross Income

If $480 in dividends was paid and $120 was withheld, the income to declare in India is $480 — not $360. Many taxpayers report only the amount actually received, then wonder why their FTC claim doesn’t reconcile.

4. Using the Wrong Exchange Rate

The prescribed rate is the SBI telegraphic transfer buying rate on the last day of the month prior to the month of tax deduction. Using an approximate or average rate can lead to discrepancies that attract scrutiny.

5. Claiming More Credit Than Indian Tax on That Income

The FTC is capped at your Indian tax liability on the foreign income. Claiming more — even if you paid more abroad — will be disallowed and could attract scrutiny.

6. Missing the Source Document Requirement

You need actual proof of tax paid. If your US broker hasn’t given you a 1042-S or equivalent, chase it before filing. Without documentation, the entire claim is at risk.

7. Ignoring FTC Entirely

Many salaried individuals with foreign income don’t know this provision exists and simply double-pay. Over a few years, this adds up to a significant, avoidable loss.

The ITR Schedules You Need to Fill

For those filing their own returns or reviewing them carefully, FTC-related information is captured in three key places:

• Schedule FSI (Foreign Source Income): Declare each stream of foreign income — country-wise, head-wise
• Schedule TR (Tax Relief): Claim the credit, specifying DTAA article (if applicable) or Section 91 for non-DTAA countries
• Schedule FA (Foreign Assets): If you hold foreign assets (not just income), this is separately mandatory — failing to report here can attract steep penalties under the Black Money Act

Form 67 is filed separately on the income tax e-filing portal before or alongside the ITR.

DTAA vs. Section 91: What’s the Difference?

India has DTAAs with countries like the USA, UK, UAE, Germany, Singapore, Australia, and Canada. If the foreign income is from a DTAA country, the relief mechanism and credit limits are governed by the specific treaty.

For countries without a DTAA, Section 91 of the Income Tax Act provides domestic relief. The credit under Section 91 is generally limited to the lower of the Indian tax rate or the foreign tax rate on the doubly taxed income. In practice, the DTAA route is usually more favourable and provides more certainty. But even Section 91 can save you a meaningful amount if claimed correctly.

Quick Checklist Before You File

FTC Filing Checklist

• Have you declared all foreign income (gross, not net) in your ITR?
• Have you identified whether a DTAA applies and which article governs?
• Do you have the foreign tax payment certificate or equivalent?
• Have you converted the foreign tax to INR using the prescribed SBI TT rate?
• Have you filled Schedule FSI and Schedule TR in your ITR?
• Have you filed Form 67 on time (on or before the ITR due date)?
• Is the FTC amount within the cap of Indian tax on that foreign income?

Final Thoughts

The Foreign Tax Credit is not a loophole — it is a legitimate and important relief designed to ensure you’re taxed fairly. The Indian tax system recognises that residents operate globally, and the double taxation that would otherwise result is neither equitable nor conducive to investment.

That said, the process is procedurally demanding. Form 67, document requirements, exchange rate rules, and income head matching all need to be handled precisely. A single missed step — most commonly, the late or absent Form 67 — can result in the entire credit being denied, even if your underlying entitlement is completely valid.

If you have foreign income of any meaningful size, this is worth spending an hour on with your CA before filing season. The potential saving is usually well worth it.

And if you’ve been ignoring FTC for a few years without realising it was available? It may be worth looking at filing a revised return for the years still within the permissible window.Either way, don’t leave money on the table that the law itself says is yours to keep.

[Disclaimer: This article is intended for general informational purposes only. Tax positions can vary based on individual circumstances, applicable DTAA provisions, and the specific facts of your case. Consult a qualified tax professional before making filing decisions. The author can be reached at capriashah.13@gmail.com.]