Foreign Tax Credit - Taxation of Foreign Source Income

What is Foreign Tax Credit?

The foreign tax credit is a type of mechanism that allows the residents of India to reduce their tax liability in India if they have already paid taxes on their foreign income abroad. The main purpose of the foreign tax credits is to protect the taxpayers from double taxation on the same income.

If the taxpayers want to know how to claim a foreign tax credit, then they have to correctly mention their foreign income and foreign taxes paid on it in their Income Tax Return in India. They have to fill out a foreign tax credit form and follow the guidelines given by the Indian tax authorities.

How Does FTC Work?

A taxpayer who is a resident of India has to pay taxes on the income earned in a foreign country. It means he/she has to pay taxes in both countries. The foreign tax credit system allows taxpayers to get a deduction on the tax they have paid in a foreign country.

The taxpayer has to fill out the Form 67 to claim this deduction while filing the ITR before the due date. The Form 67 is used to determine the foreign income, and it also provides an estimate of the total taxation on the foreign income.

How to Claim FTC in India?

If you are a resident of India and have a foreign income, then here are the steps to claim a foreign tax credit:

  • Step 1: Convert your foreign income into Indian Rupees by using the Telegraphic Transfer Buying Rate (TTBR) on the month before the month in which the income is due.
  • Step 2: Consider the foreign income as the domestic income and put it in the category of relevant heads of income, like dividends, salaries, interest, etc. If the income is above the basic exemption limit, then it will be taxable under the old and new tax regimes.
  • Step 3: Look into the DTAA of the country of the income source and then claim the credit for the deduction of TDS in the source country.
  • Step 4: You should get a Tax Residency Certificate (TRC) to get the benefits from DTAA. It clarifies your status of tax residency and ensures the application of the right DTAA.
  • Step 5: Fill out all the details of the foreign income in Schedule FSI of the Income Tax Return.

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