All About Foreign Tax Credit and its Claim in India

Foreign Tax Credit (FTC) is a provision that allows individuals and businesses in India to claim a credit for taxes paid or accrued in a foreign country. The purpose of this credit is to mitigate the double taxation that may arise when income is earned in a foreign country and taxed both in the foreign country and in India.

Here are some important points to understand about Foreign Tax Credit and its claim in India:

1. Eligibility: Any resident individual, non-resident individual, or Indian company that has paid taxes in a foreign country on income that is also taxable in India is eligible to claim the Foreign Tax Credit.

2. Double Taxation Avoidance Agreement (DTAA): India has signed Double Taxation Avoidance Agreements with several countries to prevent double taxation and provide relief through the FTC mechanism. These agreements lay down the rules for claiming the credit and specify the conditions for eligibility.

3. Availability of credit: The credit is available for taxes paid on foreign income, including income from business or profession, capital gains, and other sources. The credit is generally available for taxes paid on income that is also taxable in India. However, certain types of income, such as income specifically exempted under Indian tax laws, may not be eligible for the credit.

4. Calculation of credit: The amount of credit available is the lower of the actual foreign tax paid or the Indian tax payable on the foreign income. The credit is calculated separately for each foreign country from which income is derived. The credit cannot exceed the Indian tax liability on the foreign income.

5. Claim procedure: To claim the Foreign Tax Credit, the taxpayer needs to file their tax return in India and include the details of the foreign income and taxes paid in the prescribed format. The taxpayer must also provide supporting documents, such as a tax residency certificate, foreign tax payment receipts, and evidence of tax payment in the foreign country.

6. Time limits: The claim for FTC should be made within the due date of filing the tax return, including any extensions granted. However, if the taxpayer is unable to furnish all the necessary details by the due date, they may file a revised return later.

7. Documentation: It is important to maintain proper documentation, such as tax payment receipts, tax returns filed in the foreign country, and any correspondence with tax authorities, to substantiate the claim for FTC.

8. Carry forward and carry back: Unused foreign tax credits can be carried forward for a certain number of years, generally up to 8 years, to set off against future tax liabilities on foreign income. In some cases, carryback of credits to the previous year may also be allowed.

It is advisable to consult a qualified tax professional or chartered accountant for specific guidance on claiming the Foreign Tax Credit in India. The tax laws and regulations can be complex, and a professional can provide personalized advice based on the individual’s or business’s circumstances.