All about the Foreign Tax Credit in India: -Need to Know

What is a Foreign Tax Credit (FTC)?

• A Foreign Tax Credit (FTC) is a provision that allows residents to claim a credit against their Indian tax liability for income taxes paid abroad on income that is subject to double taxation. This credit helps mitigate the impact of double taxation on the same income by providing relief for taxes paid in a foreign country.
• This is particularly significant for non-resident Indians (NRIs) who earn income abroad and are subject to tax in both the foreign country and India. Here’s an overview of the FTC provision and how it works, including the role of Form 67 in claiming this credit.
• The Foreign Tax Credit helps in avoiding the double taxation of income that arises when the same income is taxed in both the source country (where the income is earned) and the residence country (where the taxpayer resides).
• India has entered into DTAAs with various countries. These treaties outline the rules for claiming The Foreign Tax Credit and ensure that taxpayers do not pay tax twice on the same income.
• By claiming The Foreign Tax Credit, taxpayers can reduce their overall tax liability, ensuring that the total tax paid (both in the foreign country and in India) does not exceed the higher of the two rates of tax.

What is significance of the Foreign Tax Credit Provision & Requirements?

• FTC is available to all taxpayers, including individuals, companies, and other entities, who have paid tax in a foreign country on income that is also subject to tax in India.
• The credit is available to the extent of the tax payable on such income under the Indian Income Tax Act, 1961. It is the lower of the tax paid in the foreign country or the Indian tax liability on the same income.
• FTC can be utilized against the tax payable on foreign income included in the total income for the relevant financial year. Key Features of Foreign Tax Credit
  • The FTC aims to prevent double taxation, where the same income is taxed in both the source country (where the income is earned) and the residence country (India, in this case).
  • Residents of India who have paid tax on overseas income that is also taxable in India are eligible to claim the FTC.
  • The availability and extent of the FTC are governed by Double Taxation Avoidance Agreements (DTAAs) that India has with various countries. These treaties outline the rules for claiming FTC and ensure that taxpayers do not pay tax twice on the same income.
  • To claim the FTC, taxpayers must file Form 67 along with their Income Tax Return (ITR). This form provides details of the foreign income, the amount of tax paid abroad, and the country in which the tax was paid.
  • The form must be submitted by the deadline for filing the ITR to claim the FTC for that financial year.

Steps to Claim Foreign Tax Credit

• Determine Eligibility: Verify if the income earned abroad is also subject to tax in India and if a DTAA exists between India and the foreign country.
• Calculate the FTC: The FTC is the lower of the tax paid abroad or the Indian tax liability on the same income. It is important to accurately calculate the amount of credit that can be claimed.
• Prepare Form 67: Collect all necessary documentation, including details of foreign income, the tax paid, and supporting documents from foreign tax authorities. Complete Form 67 with accurate information about the foreign tax paid and attach the necessary proofs.
• File Form 67 with ITR: Submit Form 67 electronically along with your ITR on the income tax e-filing portal by the due date or before the end of the relevant assessment year, as per the latest amendment.
• Maintain Records: Keep copies of all documents and filings for future reference and verification.
• Despite the extended deadline, it is advisable for taxpayers to aim to submit Form 67 as soon as they have all necessary documentation. This minimizes the risk of last-minute issues and ensures timely processing of their FTC claims.

The Foreign Tax Credit provision is a crucial mechanism for residents earning income abroad, ensuring that they do not face double taxation on the same income. By filing Form 67 along with their ITR, taxpayers can claim a credit for taxes paid abroad, effectively reducing their overall tax liability. Staying informed about the latest rules and amendments, such as the extended deadline for Form 67 submission, helps taxpayers comply with regulations and optimize their tax benefits.

Role of Form 67 in Foreign Tax Credit

• Form 67 is the prescribed form under the Income Tax Rules for claiming FTC. It must be furnished online through the income tax e-filing portal before the filing of the income tax return.
• Keep records of the foreign tax payments, including receipts, tax returns filed in the foreign country, and any correspondence with foreign tax authorities.

Details Required in Form 67:

• Information about the foreign income on which tax has been paid.
• Details of the foreign tax paid, including the country, tax identification number, and the amount of tax paid.
• Proof of payment or deduction of foreign tax (such as a tax receipt or a withholding certificate).

Procedure for Filing Form 67:

• The form must be submitted online along with the necessary supporting documents.
• The form should be filed before the due date for filing the income tax return to claim FTC for that financial year.

Steps to Minimize Tax Liability

• Review the specific DTAA provisions between India and the foreign country to understand the applicable FTC rules.
• Ensure accurate reporting of foreign income and taxes paid. Misreporting can lead to disallowance of FTC.
• File Form 67 and your income tax return within the stipulated deadlines to avoid penalties and ensure smooth processing of your FTC claim.

Filing Requirements and Deadlines

• Form 67 must be furnished before the due date of filing the ITR to be eligible for the FTC.  In accordance with Income Tax Rule 128(9), Form 67 must also be provided by the end of the assessment year in order to file the Original Return under Section 139(1) or the Belated Return under Section 139(4), which applies to the Assessment Year 2024–2025. To be qualified to receive the tax credit, Form 67 must be filed by December 31, 2024.
• Taxpayers need to provide proof of payment of the foreign tax, such as tax receipts or certificates from the foreign tax authorities, to support their FTC claim.

New Amendment to the Foreign Tax Credit (FTC) Rule in 2022

• In 2022, India’s Income Tax Department made a significant amendment to the Foreign Tax Credit (FTC) rule, enhancing the flexibility for taxpayers in claiming FTC. This amendment was designed to ease the procedural requirements and extend the deadline for filing necessary documentation to claim FTC.
• The amendment to the FTC rule in 2022 by the Income Tax Department represents a significant step towards easing the compliance burden for taxpayers with foreign income. By allowing Form 67 to be furnished on or before the end of the relevant assessment year, the amendment provides greater flexibility and ensures that more taxpayers can effectively claim FTC without being penalized for missing earlier deadlines. Taxpayers should stay informed about such updates and ensure timely and accurate filing to fully benefit from the provisions.

Key Changes in the Amendment related to Foreign Tax Credit (FTC) Rule in 2022

• Prior to the amendment, the rule required taxpayers to file their FTC claims by the due date of furnishing their Income Tax Return (ITR). This often created challenges for taxpayers who needed more time to gather the required documentation from foreign tax authorities.
• The amendment, effective from April 1, 2022, allows taxpayers to furnish the statements in Form 67 on or before the end of the relevant assessment year (AY). This provides taxpayers additional time beyond the ITR filing deadline to submit the required form and claim their FTC.
• The amendment operates retrospectively, ensuring that its benefits apply to all FTC claims filed during the current financial year. This means that taxpayers who may have missed the earlier deadline can still benefit from the extended timeframe provided by the amendment.

Benefits of the Amendment in Foreign Tax Credit (FTC) Rule in 2022

• Taxpayers now have until the end of the relevant assessment year to submit Form 67, providing ample time to collect necessary documentation and accurately complete the form.
• By extending the deadline, the amendment reduces the pressure on taxpayers to rush their filings and helps ensure that they can provide all necessary information accurately, thereby reducing the risk of errors or omissions.
• The retrospective nature of the amendment ensures that taxpayers who filed their FTC claims late within the financial year still benefit, avoiding potential disallowance of their claims due to missed deadlines.

The Foreign Tax Credit provision is a crucial mechanism for NRIs and other taxpayers with foreign income to reduce their tax burden and avoid double taxation. By understanding the rules, properly filing Form 67, and adhering to deadlines, taxpayers can effectively claim FTC and minimize their overall tax liability. Stay informed about updates and changes to tax laws to make the most of this provision.

Can NRI File a belated income tax Form 67?

Income Tax Act makes no explicit mention of the delayed filing of Form 67, we can infer from certain rulings provided by the Income Tax Appellate Tribunal (ITAT) that Form 67 filing was not required in order to receive the FTC, as per rule 128 of the Income Tax Rules. Thus, if the person delays filing Form 67, the Foreign Tax Credit cannot reject him.

Taking advantage of the Foreign Tax Credit and avoiding double taxation has become simpler with the introduction of Form 67 of the Income Tax Act. It can take some time and be a little tiresome to file Form 67 on your own behalf. schedule a consultation with a our Tax Advisory Service.