Understanding Foreign Tax Credit (FTC) for Indian Residents

As per the Indian Income Tax Act 1961, a resident is liable to tax on their global income. This can result in double taxation of income earned outside India. To mitigate this, the provision of Foreign Tax Credit (FTC) is provided under the Indian Income Tax Law (IITL), enabling taxpayers to claim relief for taxes paid abroad.

What is Foreign Tax Credit (FTC)?

The Foreign Tax Credit (FTC) allows Indian residents to offset taxes paid in a foreign country against their Indian tax liability on the same income.

Objectives of Foreign Tax Credit (FTC)

• The FTC helps taxpayers avoid double taxation by relieving them when the same income is taxed in both India and another country.
• Double taxation happens when both the country where taxpayers earn income (the source country) and their home country (the residence country) tax the same income.
• By providing relief from double taxation, the FTC encourages Indian businesses and individuals to engage in cross-border trade and investment activities.
• India applies the ordinary credit method to grant relief for the taxes taxpayers pay in the source country (foreign country).
• In many Double Taxation Avoidance Agreements (DTAAs) that India enters, authorities mention FTC provisions in Article 23.

Eligibility Criteria and Limits for FTC

• Indian residents, including individuals, companies, and other entities, can claim the FTC for taxes they pay on income earned from foreign sources.
• To claim the FTC, India taxes the foreign income under the provisions of the Indian Income Tax Act, 1961; income exempt from tax in India cannot qualify for the FTC.
• The taxpayer must pay taxes on the foreign income in the foreign country where they earn it.
• Authorities limit the FTC to the amount of Indian tax payable on the foreign income. The credit cannot exceed the Indian tax liability, and the taxpayer must calculate the credit based on the lower of the tax they paid in the foreign country or the Indian tax payable on the foreign income.

Documentation Required for FTC

Taxpayers must provide evidence of taxes paid to the foreign tax authority on the income earned from foreign sources. This proof  includes:

• Tax payment receipts issued by the foreign tax authority.
• Foreign tax assessment orders or statements showing the amount of tax paid.
• Certificates of taxes withheld at source, if applicable.
• Certificate/Statement signed by the taxpayer, specifying the nature of income and the amount of tax deducted.

Taxpayers are required to file Form 67 along with their tax return to claim the FTC. This form includes details of foreign income, taxes paid abroad, and other relevant information necessary for computing the credit.

MBG Services for Foreign Tax Credit (FTC)

• Assess clients’ international tax situations, including foreign income, taxes paid, and eligibility for FTC
• Analyze Double Taxation Avoidance Agreements (DTAAs) to identify treaty benefits
• Compute the allowable FTC for clients
• Assist with Form 67 filing to claim foreign tax credit
• File Indian Income Tax Returns for individuals and companies
• Provide international tax advisory for cross-border taxation matters